PENTA-OCEAN CONSTRUCTION CO LTD v. TREASURE PROPERTIES LTD

HCA 3717/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3717 OF 2003

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J U D G M E N T

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1. This is an application by the provisional liquidators of the Defendant company (the Company) for an order that there be a permanent stay of all proceedings in the action pursuant to s. 255 Companies Ordinance, Cap. 32 (the Ordinance).

2. The Plaintiff's claim is for monies due under certain settlement agreements reached between the parties in settlement of disputes between them, arising from the construction of residential houses by the Company for the Plaintiff. The Company counterclaims in the proceedings alleging that the Plaintiff was in breach of both of the Settlement Agreements sued upon because it failed to carry out its obligations under the Settlement Agreements, in particular in making good repairs and the prevention of future water damage. It is sufficient to say that there are significant issues between the parties as to whether or not the Company is entitled to the sum claimed in the counterclaim, or must pay a sum to the Plaintiff.

3. The writ was issued in October 2003 and the defence was filed in December 2003. By an order dated 21 April 2004, the Master ordered that unless the Company filed and exchanged a list of documents by 4 p.m. on 12 May 2004, the Plaintiff would be entitled to enter judgment against the Company.

4. On 11 May 2004, the Company passed a resolution of its directors, pursuant to s. 22A of the Ordinance, that it should be wound up. Professional accountants from Messrs Ferrier Hodgson have been appointed the provisional liquidators. On their appointment, the provisional liquidators have made the present application for a stay of the action.

5. The law is clear that upon the voluntary winding up of a Company the court has a discretion to stay or restrain the continuation of proceedings against the Company. The general principle is that proceedings against the Company should be stayed to avoid the judgement creditors getting priority over other creditors, see Yuen J. in Re Flour City Architectural Metals (Asia) Ltd unreported 28 November 2001, HCCW 104 of 2001.

6. The provisional liquidators intend to dispute the claim, although they acknowledge that they have no funds in the Company to do so. The usual rule where the claim is in dispute is to allow the litigation to proceed and the court to resolve dispute, see Re Thurso New Gas Company [1998] 42 Ch D 486 at 491. It is the provisional liquidators' position that the company has insufficient funds to properly undertake the discovery of documents, and for that reason the Company failed to exchange its list of documents by 4 p.m. on 12 May 2004. The Plaintiff is accordingly in a position to enter judgment pursuant to the "unless" order of the Master.

7. Mr Lam for the liquidators says that that rule should not apply in the present case because the Company has a counterclaim and, having failed to complete discovery, it is exposed to judgment being entered intermediately, not on the merits, but by reason of the unless order. That, he said, will disadvantage other creditors because the Company will have had no opportunity to argue its counterclaim. He said that it will be sufficient if the Plaintiff proves its debt in the winding up and, if the debt is not accepted completely by the liquidators, the Plaintiff has a right of appeal against their decision. He was obliged to acknowledge however, that that right of appeal involved litigation, but, he said, without any justification being explained, that would be a less expensive procedure.

8. It is right that a judgment will now be entered, were there are not to be a stay, and that judgment would not be on the merits thereby applying the Company of pursuing its counterclaim. But, while that may be to the disadvantage of the other creditors it seems to me that where the provisional liquidators insist on disputing the debt, the usual rule should apply. If the litigation proceeds and the Company elects not to, or is simply, as here, unable to make discovery and judgement is entered as a consequence of an unless order, then so be it. That is simply part of the litigation process. It seems to me that impecuniosity on the part of the defendant Company should not be a reason for depriving the Plaintiff of its right to enforce an unless order.

9. Counsel for the Plaintiff accepted that it would not be appropriate for the Plaintiff to proceed to execution and acknowledged that a stay of execution ought to be ordered. I am satisfied that there should be no stay on the Plaintiff proceeding to judgment but that there should be a stay of all proceedings in the action following the entry of judgment.

10. There will be an order that the Plaintiff shall have its costs on the application to stay.

Representation:

Mr Lawrence Ng, instructed by Messrs Kwok & Partners, for the Plaintiff

Mr Douglas Lam, instructed by Messrs Sidley Austin Brown & Wood, for the Defendant

HCA3717/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3717 OF 2003

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REASONS FOR RULING

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1. The plaintiff applied for the continuation of the Mareva injunction granted ex parte by order of Suffiad J on 20 February 2004, and varied inter partes by order of Reyes J on 27 February 2004. The plaintiff had also taken out a summons for ancillary disclosure. The defendant applied for discharge or variation of the injunction. Having heard argument, I allowed the defendant's application for discharge and dismissed the plaintiff's application for continuation and ancillary disclosure. I now give reasons.

2. The plaintiff is a building contractor. The defendant is the developer of houses forming part of the Greenfields development at Shatin. The parties had a contract for the plaintiff to build houses for the defendant. The plaintiff took possession of the works on about 20 January 1997, but by a letter from the architect dated 17 November 1998 the employment of the plaintiff was terminated.

3. Thereafter the parties went to arbitration but then they entered into a settlement agreement dated 23 August 2000. This provided for various payments by the defendant to the plaintiff and the charging of House W of the development as security. The defendant did not pay in terms of the agreement, nor did it create a charge in respect of House W.

4. On 30 April 2002 the parties entered into a second settlement agreement. This recited the admission by the defendant of its failure to comply with the terms of the first settlement agreement and in particular to pay $15,609,600.00 on 14 July 2001 and to arrange the charge of House W. It provided inter alia for the payment of $14,009,600.00 by 14 December 2002. But the defendant again only made minor payments. So by the Statement of Claim herein the plaintiff claims the sums of $767,733.59, $13,829,662.00, interest and costs.

5. The defendant's case is that the plaintiff was in repudiatory breaches of contract because of its failure to comply with Clause 8 of the first settlement agreement concerning rectification of water leakages and Clause 1.03 of the Specification of Waterproofing/Roofing in the original contract concerning a guarantee in the joint name of the plaintiff and its roofing and waterproofing contractor. The plaintiff however says that any such breach would only sound in damages and the water leakage defence has been manufactured by the defendant with a view to delaying or avoiding payment.

6. In February 2004 the plaintiff discovered from a newspaper report that the defendant had sold the remaining six houses in the Greenfields Development. It applied ex parte for a Mareva injunction, and on 20 February 2004 Suffiad J made an order prohibiting the defendant from removing from Hong Kong and dealing with so as to diminish the value of the defendant's assets up to the value of $14,597,395.59. The injunction extended inter alia to the proceeds of sale of the last six Greenfields houses, i.e. Houses A, B, J, P, K and L which the defendant was then in the course of selling.

7. On 27 February 2004 the summons came before Reyes J inter partes and an order was made on agreed terms varying the order of Suffiad J so as to permit the defendant to complete the sales of the six houses and certain carpark spaces, and to make repayment of existing mortgages and pay agent's fees. The summons was further adjourned to 5 March 2004 when it came before me.

8. The plaintiff must show that it has a good cause of action on which it has a good arguable case; that the defendant has assets within the jurisdiction; that there is a real risk of dissipation of assets; and that it has complied strictly with the duty of full and frank disclosure.

9. It is not in dispute that there the plaintiff has a good arguable case. As to the duty of full and frank disclosure, it is not in dispute that the plaintiff failed to disclose its status as a Japanese company; but given that it has been in Hong Kong for many years and apparently has adequate assets within the jurisdiction that would make little difference; if continuation of the injunction had been appropriate a fresh injunction could have been made subject if necessary to fortification of the undertaking.

10. What was mainly in dispute was the risk of dissipation of assets. The plaintiff relied in particular on the defendant's persistent failure to comply with the terms of the settlement agreements; its feeble excuse that it could not pay because of the "ongoing economic situation... and unexpected difficulties"; the sale of the houses; the failure to create a charge over House W as agreed and its sale without notice to the plaintiff; the failure to comply with provisions in the settlement agreements as to golf debentures; the late mention of water leakage as a ground for avoiding the settlement agreements (it was only advanced in the pleadings) and the weakness of that case in any event. The plaintiff argues that the defendant's behaviour constitutes solid evidence of risk of dissipation. In support of this is advanced the opinions in Gee, Mareva Injunctions and Anton Piller Relief, 4th Ed., 1998 at pp.195-196 and the case of Standard Chartered Securities Ltd v. Lai [1993] 1 HK 375.

11. The plaintiff originally adverted to the fact that evidence advanced by the defendant that the proceeds of sale of the six houses were required to pay off mortgages thereon was unsupported. It is true that the defendant's annual return for the year to March 2003 states that the total amount outstanding on all mortgages and charges was $22.9 million. However, this was explained by the defendant's director, Irons Sze, in his second affirmation. He said that the figure of $22.9 million was secured by a first mortgage; but the total sum actually outstanding was about $193 million. Of that, about $170 million was due to the bank from the defendant's parent company, Hang Tung Resources but had been secured by a second mortgage of the houses. The figure given in the annual return had come about because of misunderstanding of the reporting requirements.

12. It does not seem to be in dispute that the proceeds of sale of the houses are not in fact available to satisfy any judgment which the plaintiff may obtain. Nor does it seem to be in dispute that the sale transactions in respect of them were in the ordinary course of the defendant's business.

13. The defendant's argument is that the Mareva application was improper and abusive in that it was only made when the plaintiff knew that the houses were to be sold; it was aimed specifically at blocking the sales.

14. So far as the defendant's conduct goes, it is argued that this is indicative only of breach of agreement and the risk of dissipation cannot be inferred. Unlike the Standard Chartered Securities case there is no evidence of dishonesty and no evidence of previous dissipation; previous sales were in the course of business and the proceeds were used in payment of outstanding mortgages. There must be solid evidence of the risk of dissipation; see Ninemia Maritime Corporation v. Trave Schiffahrts GmbH & Co. KG (The Niedersachsen) [1983] 1 WLR 1412. While a pattern of evasiveness may be, in the words of Gee, "of assistance to the plaintiff" it is not necessarily sufficiently solid evidence. The proceeds of sale are not available to satisfy any judgment which the plaintiff may obtain, there is nothing on which the Mareva injunction can bite.

15. It is true that the defendant's behaviour is that of an evasive debtor; it made but did not honour settlement agreements and it produced a defence in its pleadings which had not been advanced before. This kind of behaviour is very common but it does not go so far as to indicate either past dissipation or obvious dishonesty. In fact it seems that steps were in fact taken by the plaintiff to rectify water leakage so the defence is probably not without foundation.

16. Even if the defendant has not got much of a case at the end of the day, per Kerr LJ in The Niedersachsen at 1422C, the Mareva jurisdiction cannot be invoked for the purpose of providing plaintiffs with security for claims, even where these appear likely to succeed. The real question is whether there is indeed solid evidence of the risk of dissipation.

17. It is true that the defendant is a "vehicle" company, but it is the vehicle of a substantial group, the Hang Tung Group. It is not some kind of offshore company, obviously set up to assist its owners in evading liability.

18. It seemed to me that once it was established that payments made by the defendant were made by it in the ordinary course of business and in satisfaction of indebtedness to a bank it could not be found that there had been any past dissipation. The defendant's conduct in this case while indicating an unwillingness to pay the debt does not go so far as to infer that there is a real risk of future dissipation of assets; and there is a colourable defence. There is no evidence of any such conduct in respect of other creditors. The fact that the assets which the plaintiff sought to secure, by the injunction, would not in any event be subject to the injunction is also relevant to the question of future risk. Because of all these factors I was not satisfied that there was a real risk of dissipation of assets. Realistically, once the question of the proceeds of sale of the houses had been disposed of the injunction would be in place to provide security for the plaintiff's claims rather than against the risk of dissipation.

Representation:

Mr T. Lee, instructed by Messrs Kwok & Partners, for the Plaintiff

Mr R. Beresford, instructed by Messrs Sidley Austin Brown & Wood, for the Defendant