RE SAITON ENGINEERING LTD ("SAITON")

HCCW 818/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 818 OF 2005

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AND

HCCW 819/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 819 OF 2005

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D E C I S I O N

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1.  This is another application for a validation order by the Tung On Plumbing Company Limited (“Tung On”) and Saiton Engineering Limited (“Saiton”).  The last validation order was made on 10 April 2006 to enable the companies to pay salary to their staff for half a month.

2.  In the present application, Tung On seeks an order to allow payments be made in respect of one month’s salary of the staff employed in its project in the sum of HK$124,500.00.

3.  In Saiton’s application, it seeks an order to allow payment of HK$236,048.00 for the purchase of materials to be used on its project, HK$385,972.00 to pay one month’s salary of the staff and an amount to pay professional fees of Saiton’s lawyers.  I note that Tung On has not made any application to pay the fees of its lawyers.

4.    I need to be satisfied that these payments sought to be made are in the best interest of the companies and that the interest of creditors is not likely to be prejudiced.

5.  The companies still have ongoing works in relation to two projects, one at No. 33 Ka Wai Man Road and the other at the Four Seasons Hotel.  Both are close to completion.  Regarding the payment sought to be made for the purchase of materials to be used in the project in Ka Wai Man Road, it was submitted that the payment is necessary for Saiton to complete the project.  The current delay for Saiton in completing its work is due to the fact that it does not have funds to purchase the required materials, and the main contractor has refused to continue its previous practice of purchasing materials on behalf of Saiton and deducting the costs from retention monies.

6.  If Saiton is unable to complete its work promptly, it will have to indemnify the main contractor for the losses of the latter.  It is anticipated that upon the purchase of materials, Saiton should be able to complete its work within seven days.  There is some urgency in applying for a validation order for these payments, because Saiton would be vulnerable to a claim from the main contractor if it is solely responsible for any delay.

7.  As for the payment of staff salary for the two outstanding projects, it is essential to allow payment at this stage because the staff have threatened to cease work on both projects if they do not receive a full month’s salary.

8.  For the project at the Four Seasons Hotel, Tung On is required to complete its contracted work on or before 30 June 2006.  If work is not completed on time, Tung On would risk potential breach of contract and the processing of its payment application for work done in the sum of HK$7.8 million odd would be delayed.

9.  The Official Receiver has no objection to the payment of one month’s salary for both companies.  He has adopted a neutral stance on the payment of the purchase of materials.

10.  I understand all financial creditors have been notified of the present applications and no one has raised any objection.  I have considered the balance in the two special bank accounts of the companies after the payments sought in the present summonses are made.  Further, KPMG would continue to monitor the special accounts of the companies.

11.  I see no problem with the payment of salaries and the purchase of materials.  So I will make a validation order in respect of these items.

12.  The remaining item sought is for professional fees of Saiton’s counsel and solicitors.  These are the legal fees incurred in the winding-up proceedings, the attempts at restructuring, and the application for a validation order.

13.  The Official Receiver has not supported payment for professional fees.

14.  I am inclined to agree with the Official Receiver that a validation order should not be made in respect of legal fees in the present situation.  The only ground for opposing the winding up is to allow the companies to explore the possibility of restructuring.  I see no reason why the expenses in opposing the winding up and the expenses relating to restructuring should be paid out of the assets of the insolvent companies at the expense of unsecured creditors.  As for the legal fees incurred in the application for a validation order, I have already ordered on previous occasions that such costs should be in the cause of the winding-up proceedings.  I see no need to make any order to validate the payment of legal fees in this respect.

15.  For these reasons, I have not allowed the application for a validation order in respect of professional fees to Saiton’s counsel and solicitors.  For the costs of these summonses, I order that the costs are to be in the cause of each of the petitions.

HCCW 818/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 818 OF 2005

____________

____________

AND

HCCW 819/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 819 OF 2005

____________

____________

_____________

D E C I S I O N

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1.  This is the adjourned hearing of an application for a validation order in respect of each of two companies, The Tung On Plumbing Company, Limited (“Tung On”) and Saiton Engineering Limited (“Saiton”).  The winding-up petitions were presented against them on 26 October 2005.

2.  In the amended summonses for a validation order, the companies seek to validate the payments in Schedules 2 to 4.  Essentially, this is to enable them to pay 1 month’s salary to the staff, to pay the outstanding operation expenses, and to pay the projected operation expenses capped at the amounts mentioned for January and February 2006.

3.  The payments sought to be validated also include payments to the legal advisers for fee notes rendered for work done, but do not include unbilled work in progress.

4.  The Official Receiver has no objection to the applications.

5.  The companies are jointly and severally liable to all the financial creditors and these liabilities make up 80% of the indebtedness of the companies.  I understand all the financial creditors have been given notice of the present applications.  Various banks have put in writing that they have no objection to the validation orders.  They are the largest unsecured creditor, the Standard Chartered Bank (Hong Kong) Limited, and the Bank of America, Ever-Long Finance Limited and Liu Chong Hing Bank.

6.  It was submitted by Mr Zimmern for the companies that the main consideration here is whether the payments sought to be validated would be in the interests of the creditors.  It is accepted by the companies for the purpose of the present applications that they are insolvent on a cash flow basis, as they cannot pay the debts which are due.

7.  Saiton was established in 1988 and Tung On in 1948, both are well-established building services contractors in Hong Kong. In 1996, a number of directors of Saiton bought all the shares in Tung On.  Since then, the business operations of the two companies are run jointly.  Tung On has only maintained a few administrative staff, and all its staff were transferred to Saiton.  The professional staff members are on the payroll of Saiton and seconded to Tung On on a project-to-project basis.

8.  In 2001, there was a restructuring of the companies in anticipation of a listing which has not occurred.  The two companies became wholly-owned subsidiaries of Saiton Tung On (BVI) Limited.

9.  At the hearing of the winding-up petitions on 3 January 2006, I adjourned the petitions for 3 months to give an opportunity to the companies to explore an offer for restructuring received from China United Enterprise Company Limited (“China United”) on 9 December 2005.  China United has offered to buy 80% of the issued share capital of the parent company of the companies for HK$30 million, of which HK$5 million would be injected as working capital immediately.  The offer is subject to the financial institutions agreeing to their claims being settled out of the HK$30 million injection of funds and the petitions being adjourned for 3 months.  The winding-up petitions were adjourned for China United to conduct due diligence of the companies.

10.  Two main reasons were given by the companies why they seek limited validation orders:

(1)

Saiton’s works at a project at Ka Wai Man Road are scheduled for completion on 24 March 2006.  Tung On has been carrying out outstanding post-completion date variation works and defects repairs regarding its subcontracted works at the Four Seasons Hotel, these works are expected to be completed by the expiry of the post-completion defects liability period at the end of June 2006.  So both projects are close to completion.  Default on either project would incur substantial liabilities for breach of contract which would reduce the amount distributable to the creditors in the event of liquidation, and would be more prejudicial to the interests of the unsecured creditors as a whole than their continuation.

(2)

The continuation of these projects would have an impact on the success of China United’s proposal and the potential use by the companies of the HK$5 million that China United has proposed as working capital, which proposal would, on the face of it, be commercially beneficial to the creditors as a whole.  So the companies seek validation orders for all outstanding liabilities already incurred in the ordinary course of business and those to be incurred in the ordinary course of business up to and including 28 February 2006, being the latest date on which the companies would know if the restructuring proposal of China United would carry sufficient support of the creditors.

11.  Mr Zimmern has also drawn my attention to these matters which are of relevance:

(1)	The employees have not been paid their salaries for November and December 2005 and any continued non-payment of these sums would risk further resignations and default on the projects.  The proposal is to pay 1 month’s salary to most of the staff (not those who are also guarantors) to appease them and to enable the projects to be continued.
(2)	All future expenses sought to be validated relate only to the two projects and no other general business expenses, save for the preservation of assets.
(3)	Special accounts are intended to be set up with the Standard Chartered Bank for each company and all payments would be made and monitored by KPMG, the independent reporting accountants engaged by the companies.
(4)	There are both present and future receivables and collectables for both companies in the event of a continuation of the projects and/or the granting of the validation orders.  Cheques of the companies that have not been presented for payment are in the sum of HK$452,000.00 odd.  In addition, there is HK$784,000.00 which has been approved for payment by the main contractor of Saiton in another project, but withheld until the companies’ bank accounts are unfrozen.  Further, Saiton is currently negotiating settlement payments from the main contractors of Olympic Station, the Four Seasons Hotel and the Ma Wan Island projects, which cover claims by Saiton of HK$13.2 million; this would involve some deductions for early termination.

12.  I am satisfied in the circumstances it would be appropriate for a limited form of validation order to be made.  I make an order in terms of the amended summons in HCCW No. 818 of 2005.  For the amended summons in HCCW No. 819 of 2005, I make an order in terms of the application, save and except for the payment of 1 month’s salary to Madam Hai Ka Yiu in Schedule 2 of the amended summons in the sum of HK$31,000.00.  I propose to adjourn this part of the application relating to the salary of Madam Hai, for Saiton to file further affirmation in support of this part of the application.  In respect of both amended summonses, I order that the costs are to be in the cause of each of the petitions, including the costs reserved by Reyes J on 30 December 2005.