CHIM KEE MACHINERY CO LTD v. SNE ENGINEERING CO LTD

HCCW 308/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 308 OF 2012

____________________

	IN THE MATTER OF the Companies Ordinance, Cap. 32
	and
	IN THE MATTER OF SNE ENGINEERING COMPANY LIMITED

____________________

BETWEEN
	CHIM KEE MACHINERY COMPANY LIMITED	Petitioner
and
	SNE ENGINEERING COMPANY LIMITED	Respondent

____________________

Before: Hon Harris J in Chambers

Date of Hearing: 24 April 2015

Date of Decision: 6 May 2015

________________

D E C I S I O N

________________

 

1. I have before me an application by the Respondent to strike out the Petitioner’s bill of costs issued in respect of 2 orders for costs made in the proceedings in the same terms, namely, “the costs of the application be paid out of the assets of the company”. The costs orders were made as part of validation orders. Neither application was substantively argued and the second of the orders was made by consent. The Petition was struck out by Recorder Ho SC on 23 May 2013. On 19 June 2014 the Respondent issued a summons seeking to either vary the orders under the slip rule to provide that costs be in the cause or leave to appeal. I heard and dismissed those applications for the reasons explained in my decision of 12 August 2014. On 5 September 2014 the Petitioner commenced taxation of its costs of the applications.

2. The Respondent applies to strike out or permanently stay the taxation on the grounds that the costs order only took effect in the event of a winding-up order being made.  It says this for the following reasons.  The order does not provide that the costs are paid by the Respondent.  The language used is only apposite if a winding-up order is made.  The most natural construction of the order given the circumstances that it was made in is that in the event of the Petition being successful the Petitioner would recover its costs of the applications, along with its other costs, out of the assets of the Respondent in accordance with the priorities provided in Rule 179 of the Companies Winding-up Rules, cap. 32H.  The Petitioner’s construction results in it recovering its costs of dealing with an application that was only necessary by virtue of the presentation of its unmeritorious Petition and it is inherently unlikely that the parties intended the wording of the order to have this effect, which would be unfair.

3. The Petitioner says that the Respondent’s description of how the Petitioner contends the order operates, namely unfairly, is misleading.  The applications were disputed because of the unsatisfactory way in which they were formulated and presented.  It does not follow that an order that allowed the Petitioner to recover its costs of dealing with the validation applications even if the Petition proved to be unsuccessful was unfair or might not have been considered by the parties to be a reasonable compromise.  The language, says the Petitioner, provides that the Petitioner would get its costs.  It contains no qualifications and despite the fact that it does not expressly refer to the costs being paid by the Respondent, this is clearly the import of the language of the order.

4. Two things are clear.  First, that the formulation of the costs order was inapposite.  If the Petitioner is correct the order should have provided that “the Petitioner’s costs are paid by the Respondent in any event”.  This would have allowed it to recover from the Respondent if the Petition were unsuccessful and prove for its costs in the liquidation if a winding‑up order were made.  Given the language that was adopted it should, presumably, also have provided for the Respondent’s costs, although this would be unusual as presumably the Respondent’s solicitors would want to be paid on account and if any order were necessary it would be a validation order in respect of such payment.  If the Respondent is correct the order should have provided that the Petitioner’s costs be “the Petitioner’s costs in the cause” and also dealt in some way with the Respondent’s costs.

5. Secondly, neither party suggests that the wording can sensibly be read as allowing the Respondent to recover its costs from the Petitioner.  To the extent that this is relevant at all it tends to suggest that the costs order reflected some form of common acceptance that given the way the Respondent had gone about the applications for validation it was not entitled to recover the costs from the Petitioner.  This is more consistent with the Petitioner’s construction than that of the Respondent.  Conversely the Respondent suggests that the fact that the Petitioner made no effort to have its costs taxed after the Petition was struck out, and it was only a year late after the application to vary the costs order was made that it did so, indicates that Petitioner understood that the costs order did not entitle it to its costs if the Petition were unsuccessful.

6. It does not seem to me that the circumstances in which the orders came to be made provide much assistance in determining what they mean.  Both parties can advance credible reasons why if the parties were being reasonable they must have understood the order to mean what they contend it means.  It follows that the construction of the orders fall to be determined very largely by reference to their language and the procedural context in which they were made. 

7. The form “costs be paid out of the assets of the company” is used in proceedings commenced in liquidations.  Commonly a company will be a party through the involvement of its liquidators and this form of words reflects the fact that any costs order against a company in liquidation is an order allowing the party who obtains it to prove in the liquidation in accordance with the priorities provided in Rule 179. It is not a form of order that one would normally expect to see made prior to a winding‑up order being made.  It is not, in my view, a rather inelegant way of saying that the company will pay the costs of an application in any event.  It is saying that in the event of a winding up you can recover your costs out of assets available for distribution to unsecured creditors in accordance with Rule 179.  It follows that the Petitioner is not entitled to recover its costs incurred in respect of the validation orders.  I, therefore, will strike out the taxation proceedings and order that the costs of the present application are paid by the Petitioner to the Respondent such costs to be taxed if not agreed.

	(Jonathan Harris) Judge of the Court of First Instance
	High Court

Mr Jose d’Almada Remedios, instructed by Tsui & Co, for the petitioner

Mr Douglas Clark, instructed by Robert Lee Law Offices, for the respondent

HCCW 308/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 308 OF 2012

____________

	IN THE MATTER of SNE ENGINEERING COMPANY LIMITED
	and
	IN THE MATTER of the Companies Ordinance, Cap 32

____________

BETWEEN

	CHIM KEE MACHINERY COMPANY LIMITED	Petitioner
and
	SNE ENGINEERING COMPANY LIMITED	Respondent

____________

Before: Mr Recorder Ambrose Ho, SC in Chambers

Date of Hearing: 24 July 2013

Date of Ruling on Costs: 6 August 2013

___________________

RULING ON COSTS

____________________

 

1.  In the Decision handed down on 23 May 2013 (“the Decision”), I granted the Respondent’s application to strike out the winding-up Petition presented against it on 23 August 2012. Now before me are two applications to vary the costs order nisi:

(i) The Petitioner’s application that there be no order as to costs of the Respondent’s application to strike out;

(ii) The Respondent’s application for an order requiring the Petitioner to pay the costs of the strike out application and the costs of the Petition (including all costs reserved), to be taxed on an indemnity basis.

2.  I do not propose to retrace the history of the dispute.  It suffices for the present purpose to note that the parties were already in dispute over the outstanding payments at least from the first half of 2012.  Despite the fact that some agreement had been reached among the Petitioner, the Respondent and Hsin Chong in May 2012, the dispute over payment was not resolved. 

3.  Matters came to a head when the Petitioner wrote on 3 July 2012 to terminate the contract with the Respondent.  I do not wish to pre-judge the question of liability, but it is a fact that the progress of work at the site had been disrupted since then.  Despite subsequent meetings at the site the parties had not been able to resolve their differences.  The Respondent later resorted to court proceedings to compel the Petitioner to remove its equipment from the site. 

4.  It was against such background that the statutory demand was issued by the Petitioner on 1 August 2012 for outstanding payments which had accrued up to the end of June 2012, totalling over $9 million. 

5.  It is significant to note that the Respondent did not respond to the statutory demand.  The Petitioner therefore proceeded to wind up the Respondent by issuing the Petition on 23 August 2012. 

6.  Mr Remedios (counsel for the Petitioner) submitted that the Petitioner was fully justified in issuing the Petition, especially in light of the fact that the Respondent had completely ignored the statutory demand.  He also submitted that there were special circumstances justifying the Petitioner to continue with the Petition.

7.  Mr Maurellet (counsel for the Respondent) on the other hand contended that it would not have made any difference whether or not the Respondent had responded to the statutory demand.  Having regard to the Petitioner’s conduct throughout the course of this Petition, it was evident that the Petitioner was determined to bring full pressure to bear on the Respondent to pursue payment.  No form of response from the Respondent would have caused the Petitioner to chart a different course or refrain from pursuing the Petition.  Mr Maurellet further submitted that the Petitioner, having adopted a high-risk strategy by invoking the winding-up procedure and failed, should be visited with an order for costs on indemnity basis. 

8.  In this connection I am mindful of Kwan J’s (as the learned judge then was) observation in Re Hyundai Engineering & Construction Co Ltd [2002] 2 HKLRD 71 at §8, that a petition to wind-up a company is not ordinary litigation.  Her ladyship further said:

“The implication of such a petition on a company is tremendous. If the petitioner knows of the basis which makes it improper for the petition to be brought, the petitioner should not be allowed to use ‘high-risk strategy’ without any penalty. …..”

9.  In the circumstances of the present case, as I have remarked in the Decision (as was acknowledged by the Respondent), the Respondent’s challenge to the sums set out in monthly statements, even if upheld, would not have completely extinguished the Petitioning Debt (§22 of the Decision).  The Respondent succeeded in striking out the Petition only because of its cross-claims (§§49, 54 and 57 of the Decision). 

10.  It would therefore be pertinent to ask whether at the time of the Petition, the Petitioner ought to be aware that the Respondent would have substantial cross-claims against it rendering it improper to present the Petition.  What I think should weigh in the balance is that at the time of the statutory demand, there was still little indication from the Respondent of the basis and extent of its cross-claims notwithstanding the fact that the parties were obviously in dispute over payment.  Subsequently there was a further demand by the Petitioner for immediate payment at least of the undisputed portion of the outstanding charges (see letter from the Petitioner dated 17 August 2012).  At that stage, the Respondent would prima facie be indebted to the Petitioner but it had still not properly formulated its cross-claims.  

11.  In these circumstances, I do not think that the Petitioner should be penalised with a cost order in relation to the issuance and presentation of the Petition. 

12.  Since the presentation of the Petition, however, the Respondent had set out the substance of its cross-claims in a series of correspondence (see letters dated 17 and 27 September 2012 from the Respondent, and 4 and 8 October 2012 from its solicitors).  Furthermore, in Mr Matsumoto’s affirmation filed on behalf of the Respondent on 17 October 2012, he set out not only the grounds for disputing the Petitioner’s claim but also the basis of the Respondent’s cross-claims.  At that stage, it would clearly be incumbent on the Petitioner to review whether the continuation of the Petition would be justified, or whether it should first seek to establish its claims for payment through the normal course of an Action, and if appropriate by way of summary judgment.   

13.  Mr Remedios sought to defend the Petitioner’s decision to continue the Petition by pointing, first, to the financial position of the Respondent and argued that since the Respondent was insolvent, the Petitioner was justified in pursuing its winding up.  He next submitted that the Respondent had a propensity for dishonesty as was evidenced by the breach of its undertaking to Hsin Chong in not paying the sum of $3.5 million to the Petitioner upon receipt of the said sum from Hsin Chong.    

14.  I am not persuaded by these arguments.  As Mr Maurellet pointed out, the question of any insolvency was not deployed as a ground in support of the Petition during the strike-out hearing.  The Petition itself also made no reference to matters concerning the honesty or otherwise of the Respondent.  I agree that it would be wholly inappropriate now, in the context of an argument on costs, to embark on a course requiring examination of the evidence which formed no part of the arguments of the strike-out application.

15.  Mr Remedios further relied on the evidence that those controlling the Respondent were apparently transferring business away from the Respondent so as to defeat any judgment against it.  That, with respect, is hardly a justification for maintaining an otherwise improper petition for winding-up.  Had the Petitioner taken the proper course of seeking judgment by an Action, there would be ample interim relief available to the Petitioner to prevent the assets of the Respondent from being improperly dissipated.

16.  Having regard to all circumstances of the case, I am of the view that the Petitioner should bear the Respondent’s costs of the Petition and of the strike-out application incurred after 17 October 2012.  I further consider that this is an appropriate case for such costs to be paid on an indemnity basis. 

17.  Finally, I should also mention that Mr Remedios has invited me to adjourn the issues of costs to await the outcome of the High Court Actions.  I would decline such invitation because with the Petition being now struck out, there seems no good reason to defer the determination of the issues of costs.

Conclusion

18.  The costs order nisi will be varied as follows:

          (1)     There be no order as to costs in respect of the Petition and the strike-out application incurred up to and including 17 October 2012;

          (2)     Costs of the Petition (including any costs reserved) and of the strike-out application incurred thereafter shall be borne by the Petitioner on an indemnity basis.

19.  As for the present applications to vary costs, neither side is a complete winner.  In all circumstances, I think it would be fair to order the Petitioner to bear half of the Respondent’s costs in relation to both summonses on a party-and-party basis, and I so order.

	(Ambrose Ho, SC) Recorder of the Court of First Instance
	High Court

Mr Jose Remedios, instructed by Tsui & Co, for the petitioner

Mr Jose Maurellet and Ms Connie Lee, instructed by Robert Lee Law Offices, for the respondent

HCCW 308/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 308 OF 2012

______________________

 

	IN THE MATTER of SNE ENGINEERING COMPANY LIMITED
	and
	IN THE MATTER of the Companies Ordinance, Cap 32

____________

BETWEEN

	CHIM KEE MACHINERY COMPANY LIMITED	Petitioner
and
	SNE ENGINEERING COMPANY LIMITED	Respondent

____________

Before: Mr Recorder A Ho, SC in Court

Date of Hearing: 6 February 2013

Date of Decision: 23 May 2013

______________

DECISION

______________

 

Background

1.  SNE Engineering Co Ltd (“the Company”) was a subcontractor of Hsin Chong Construction Company Ltd to perform certain pile removal works under the MTR Express Rail Link Contract.

2.  For the purpose of the subcontract work, the Company had since September 2010 contracted with the Petitioner, Chim Kee Machinery Co Ltd, for the supply of various heavy machinery including Rotators, Crawler Cranes, Truck Cranes, Casings and Tools with or without operators and workers.

3.  It was the practice of the Petitioner to render monthly statements of account to the Company.  The statements were compiled from the invoices, and the invoices were in turn issued according to the Work Bill kept by the Petitioner.   

4.  There had been disputes between the Petitioner and the Company with regard to payment.  On 3 April 2012 the Petitioner served a statutory demand on the Company to compel payment of $10,399,066, allegedly as outstanding hiring charges from 30 April 2011 to 29 February 2012.  The Company in turn requested Hsin Chong to make payment to the Petitioner through the Company’s account.   

5.  In the meantime, further charges accrued for the months of March and April 2012.  On 23 May 2012, the Company requested Hsin Chong to advance payments-on-account to enable the Company to pay for the March and April charges pending finalization of the actual accounts between the Company and the Petitioner. On the same day, an arrangement was agreed among the Petitioner, the Company and Hsin Chong whereby Hsin Chong had agreed to make payment on behalf of the Company to the Petitioner for an amount to be certified by the Company or for a reasonable amount to be assessed by Hsin Chong.

6.  Subsequently on 13 June, the Company sent the Petitioner a cheque for $3,841,751 and also paid the Petitioner $3,758,249 through bank transfer.  These two payments totalled $7.6 million.  At the time of payment, the Company also sent two tables to the Petitioner, one of which listed a series of March invoices totalling $3,841,751 and the other listed a series of April invoices totalling $3,355,495.  There was no explanation as to what the $7.6 million was meant to cover.  But as one would see that the amount of the cheque corresponded with the table of March invoices, one could assume that the sum through bank transfer would be treated as payment-on- account for the April invoices. 

7.  The Petitioner did not accept that the March and April invoices had been fully discharged by the payment of $7.6 million.  On 26 June, the Petitioner again demanded payment of the outstanding sums due for those two months.  The Petitioner threatened to terminate its service after 3 July if the outstanding sums were not settled.

8.  The Company responded on 28 June 2012, reiterating that the sums certified for March and April were already paid.  The Company further asked the Petitioner to issue new rental agreements for the period starting 1 June.

9.  The question of outstanding charges was not resolved.  On 3 July, the Petitioner issued a letter to the Company accusing the latter of failing “to provide any commitment on repayment, compensation of damaged equipment and rental period of equipment” and indicated that the Petitioner had “no choice but to terminate [its] service at MTRC 802 job site immediately”.

10.  It appears that since 3 July, Hsin Chong had started using workers other than the Company’s workers to operate the machinery and equipment.  A meeting between the Company and the Petitioner was held at the site on 6 July at which Hsin Chong also attended as an observer.  But as later correspondence shows, the parties even argued over whether they had actually reached any agreement at all for the Petitioner to resume work.  There was also an allegation from the Company that the Petitioner had deliberately operated its machinery at a much slower rate which had adversely affected the progress of the Company’s work. 

11.  Eventually, on 11 July, the Company wrote to Hsin Chong to inform them of the Company’s acceptance of the Petitioner’s termination of service.  The letter was copied to the Petitioner.

12.  Disputes then ensued between the Company and the Petitioner regarding the removal of the machinery from the Site.  The Company eventually obtained an injunction from the court on 24 July to require the Petitioner to remove its equipment. 

13.  In the meantime, the Petitioner issued its July statement of account (“the July Statement”). The July Statement (dated 5 July 2012) was made up to the end of June 2012 and the amount allegedly due from the Company was $9,192,474.50.  This sum was apparently net of the March and April invoices which the Company had listed in the tables when the $7.6 million was paid.

14.  Based on the July Statement the Petitioner issued and served another statutory demand on the Company on 1 August, demanding payment of the said sum of $9,192,474.50.

15.  However, what was due for the months of March and April was still unresolved.  The parties disagreed over whether the $7.6 million payment was meant for settling the March and April invoices or whether part of that sum should be treated as payment-on-account and to be set off against the invoiced amount for the month of May.

16.  In the meantime, further charges for the month of July had accrued.  As will be seen later, these charges were strongly contested by the Company.  The Petitioner issued another statement of account made up to end of July 2012 (“the August Statement”).  The outstanding amount had by then accumulated to $12,501,781 according to the Petitioner.

17.  On 23 August 2012, the Petitioner presented a winding up petition against the Company based on the alleged indebtedness of $12,501,781 (“the Petitioning Debt”).

18.  On the other side of the dispute, the Company had issued proceedings (HCA 1466/2012) against both Hsin Chong and the Petitioner for infringement of the Company’s patent.  For such infringement, the Company claimed damages or an account of profits among other reliefs sought.

19.  Further, by another action (HCA 2025/2012) the Company sued the Petitioner, first, for overpayment of the hire charges for the period from September 2010 to April 2012; secondly, for damages for loss occasioned by the Petitioner’s slow operation of its plants and equipment since 7 July to 12 July 2012, which was provisionally assessed at $4,627,339.20; and thirdly, for damages and loss of profits allegedly arising from Hsin Chong’s withdrawal of subcontract-works from the Company as a result of the Petitioner’s termination of its service on 3 July 2012, which was provisionally assessed at $10,821,213. 

20.  The Company now seeks to strike out, or alternatively, to stay the Petition on the following grounds:

(i)     There is a bona fide and substantial dispute over the Petitioning Debt;

(ii)    The Company has genuine cross-claims against the Petitioner which would exceed the alleged indebtedness;

(iii)   The Company has commenced the two Actions and accordingly the respective claims between the parties should be resolved in those proceedings rather than by way of the present winding-up.

21.  The Company’s contention, primarily, is that its cross‑claims in HCA 2025/2012 alone would have exceeded the Petitioning Debt.  The second and third aspects of that claim amounted to $15,448,552.20 (see §19 above).  In addition, the Company had a substantial claim in damages in the patent action (HCA 1466/2012).  

22.  In addition the Company also challenges the sums allegedly due under the July and August Statements.  The company’s case is that out of the sum $9,192,474.50 mentioned in the July Statement, $1,529,942 is disputed.  And as for the further sum of $3,309,306.50 allegedly accrued in July, only $249,744.92 is admitted and the Company disputes the balance of $3,059,561.58 for that month.  The Company acknowledges that these deductions, even if upheld, would not have completely extinguished the Petitioning Debt. 

Legal Principles

23.  The relevant legal principles are not in dispute.  I would respectfully adopt the following principles set out in two cases decided by Kwan J (as she then was).  In Re Hong Kong Construction (Works) Ltd, HCCW 670 of 2002, the learned judge said, at §6:

“(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. An honest belief in an insubstantial ground of defence is not sufficient to avoid a winding-up order.

(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 unparticularised assertions, especially where particulars and information have been sought by the other side. 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. Even where the company has obtained unconditional leave to defend in an application for summary judgment, the Companies Court is not precluded from examining the evidence and taking a view on whether the debt is disputed on substantial grounds.

(5) …….

(6)        …….”

In Re Sinom (Hong Kong) Ltd [2009] 5 HKLRD 487 the learned judge said, at pp 491 - 492:

“11. As with a petition where there is a bona fide dispute of the debt on substantial grounds (a disputed debt petition), where the company has a genuine and serious cross-claim against the petitioner greater than or equal to the petitioner’s debt (a cross‑claim petition), such a petition may be restrained from proceeding (Re Pan Interiors Ltd [2005] EWHC 3241, paras. 34-39). It is an abuse of the process of the court to make a statutory demand or present a winding-up petition based on a claim to which there is a triable defence (Re Company [1992] 1 WLR 351). A cross-claim petition is regarded in the same way (Southern Cross Group plc v Deka Immobilien Investment GmbH [2005] BPIR 1010, paras. 29‑30; Re Pan InteriorsLtd, para. 35).

12. To successfully resist a cross-claim petition, the company has the onus of establishing that its cross-claim is genuine, serious and of substance. There must be supporting relevant details to demonstrate that the cross-claim is based on substantial ground. The test is very much the same as the test for a disputed debt petition for deciding whether a debt is disputed in good faith and on substantial grounds (Applications to Wind Up Companies (2nd ed., paras. 6.10.7.2 and 6.10.7.3 and the cases there cited).

13. In Re Bayoil SA [1999] 1 WLR 147 at p.154B, Nourse LJ said it was also necessary for the company in a cross-claim petition to show that it has been unable to litigate its cross-claim. In the subsequent decision of Popely v. Popely [2004] EWCA Civ 463 at para. 124, Jonathan Parker LJ (with whom the other members of the English Court of Appeal agreed) said he did not understand Nourse LJ to be intending to lay down an absolute requirement to that effect. Rather, he understood Nourse LJ to be doing no more than indicating that where there has been delay in the prosecution of the cross‑claim, the delay must not be such as to throw real doubt on the genuineness of the cross-claim. Popelyv Popely was applied in Re Pan Interiors Ltd and Marchands Associates LLP v Thompson Partnership LLP [2004] EWCA Civ 878, para. 46.

14. …….

15. Where a cross-claim is raised by the company, it is open to the petitioning creditor to bring in a reverse cross-claim to extinguish the company’s cross-claim. If the reverse cross‑claim, together with the petition debt, exceed the company’s cross-claim, the petition may be allowed to proceed, but not if the reverse cross-claim is disputed on substantial grounds (Montgomery v. Wanda Modes Ltd [2002] 1 BCLC 289, paras. 38-40; Re City Top Engineering Ltd [2006] 2 HKLRD 562, paras. 20-27). In this situation, the approach is to consider the overall relationship between the parties to see whether there is, at the end of the day, an undisputed or undisputable debt that is or will be due to the petitioning creditor (Re Jade Union Investment Ltd(unrep., HCCW 400/2003, [2004] HKEC 306) para. 12). It is not necessary for the reverse cross-claim to be quantified, so long as it is certain to come into existence and its combined effect with the petition debt is of sufficient size to offset the cross‑claim (Re To Kin Wah(unrep., HCB No. 9856/2007, [2008] HKEC 1708) paras. 7-9).”

Deductions

24.  I propose to deal with the deductions first.

25.  The Petitioner issued various invoices to the Company in respect of the charges for work and hire.  As noted earlier, the invoices were prepared according to the Work Bills kept by the Petitioner.  The Petitioner claimed that the Company was bound by these Work Bills as they had been signed by the Company’s foreman at the site.  

26.  The Company contended however that the Work Bills were merely a record that the individual workers had finished work for the day.  The foreman’s signature was not meant to be a certification for payment.  According to the Company, when the invoiced amounts were checked against the site entrance records kept by Hsin Chong’s Palm Print Machines (which recorded the time when each worker entered and exited the site every day), it was revealed that the work-hours were overstated in the invoices. 

27.  Two different figures had been put forward by the Company as being the overstated amounts to be deducted from the invoices, namely $1,529,942 and $1,455,226.50.  The former figure was wholly unsubstantiated and I would therefore not consider the same.  The latter figure was set out in a summary which was prepared by the Company’s quantity surveyor upon checking the Palm Print Records.  However, as pointed out by Mr Wong (counsel for the Petitioner), a section in that summary relating to the April invoices totalling $381,757 was not in fact the subject of the Petitioner’s claim in the August Statement.  Any deduction, therefore, could only amount to $1,073,469.50 at the most. 

28.  Noting the absence of any particular provision in the contractual documents which would render the Work Bills or invoices conclusive records, I think it is at least open to the Company to rely on the Palm Print Records to challenge the invoiced amounts despite the signatures of its foreman on the Work Bills.  I am satisfied that there is a bona fide dispute relating to the pre‑July invoices.

29.  Turning next to the invoiced amount for the month of July.  The Petitioner claimed the sum of $3,309,306.50, primarily on the basis of clause 2 of the General Conditions of Hire which, according to the Petitioner, would enable it continue to charge for the hire in full until the machinery and tools were returned to the Petitioner’s store again, despite its termination of service on 3 July.

30.  The Company on the other hand was prepared only to admit $249,744.92 for the July month after checking the daily site records. According to the Company, because the Petitioner had only performed its service at a much reduced rate, the Petitioner was entitled to only a fraction of each day’s hire for the period between 7 and 12 July.  Thereafter, no further charges accrued because even on the Petitioner’s own case, the parties had ceased to be in any contractual relationship with each other.

31.  The Petitioner, on the other hand, put the blame on the Company for failing to provide a demobilization schedule.  The Petitioner was thus prevented from removing its machinery from the site and the Company had therefore no basis for any deductions against the charges incurred in July.

32.  In my view, the Petitioner’s claim in respect of the July invoices is clearly subject to serious legal as well as factual dispute.  Even assuming (without deciding) that the terms of the General Conditions of Hire were incorporated as part of the contract between the parties, there must be a question whether the terms would continue to be applicable after 11 July when the Company had indicated to Hsin Chong (and copied to the Petitioner) that the Petitioner’s termination of service was accepted by the Company.  If clause 2 of the General Conditions were held not to be applicable, the basis of the Petitioner’s claim, if any, would be wholly different.

33.  Further, it is far from clear on the evidence that the Company was wholly to blame for “the detention” of the machinery and equipment.  On the contrary, I cannot overlook the fact that the Company had to apply for an injunction to compel the Petitioner to remove the machinery from the site. 

34.  Further still, the factual basis relating to the deduction for the alleged reduced rate of service also requires investigation.

35.  Clearly these are factual issues which need to be resolved before any view can be taken as to the Petitioner’s entitlement to the amounts set out in the July invoices. 

36.  Accordingly, I am likewise satisfied that there are bona fide disputes in respect of the claim based on the July invoices. 

37.  However, the aggregate amount of the deductions for the pre‑July as well as the July invoices is still insufficient to extinguish the Petitioning Debt.  It is therefore necessary to consider the Company’s cross-claims for the purpose of the present application. 

Company’s Cross-Claims

38.  I have already alluded to two main aspects of the Company’s cross-claims, that is, the loss allegedly caused by the Petitioner’s deliberate slow-operation of its plants and equipment from 7 to 12 July 2012 (provisionally assessed at $4,627,339.20); and the loss of profits by reason of Hsin Chong’s withdrawal of subcontract-works as a result of the Petitioner’s termination of its service on 3 July 2012 (provisionally assessed at $10,821,213).

39.  In respect of the Company’s cross-claims, the Petitioner first argued that both such claims were premised on the Petitioner’s termination being shown to be wrongful.  The Petitioner maintained that there were still outstanding invoices for the months of March and April, not to mention the overdue invoices issued in May.  Accordingly it was well entitled to terminate its service on 3 July for default of payment.  There was thus no basis on which the Company could rely for its cross-claims.    

40.  The Petitioner, however, did not seriously dispute the proposition that whether non-payment would amount to a repudiation of the contract must depend on the facts of the case.  As the judgment of the Court of Appeal made clear in Creatiles Building Materials Co Ltd v To’s Universe Construction Co Ltd [2003] 2 HKLRD 309, at §§16 & 23, the Court must examine the circumstances to see if the default in payment would show an intention not to be bound by the agreement.

41.  In the present case, as remarked earlier, the question of the outstanding charges for the months of March and April was still not resolved as at 3 July.  The parties were still disagreeing as to whether the earlier payment of $7.6 million was sufficient to fully discharge the certified invoices for those two months: see the exchange of letters between the parties on 26 and 28 June.  The question of the May invoices was not specifically raised in the correspondence at the time. 

42.  In my view the circumstances were not so clear as to enable me to determine summarily at this stage that any non-payment on the Company’s part had indeed amounted to an intention to repudiate the agreement. The Company at least had an arguable case that the Petitioner was not justified in terminating its service on the basis of outstanding payments as of 3 July.    

43.  The Petitioner next argued that the Company’s cross‑claims were not properly substantiated.

44.  The first aspect of the cross-claim had allegedly arisen because the Petitioner’s slow-operation had caused some of the other sub-sub-contractors to experience delays on site.  The Company had set out in some detail the dates, the locations and the number of days where the Cranes and Rotators were lying idle as a result.  The Company also claimed loss for additional hiring and depreciation of other plants and equipment; labour and maintenance costs; and additional storage expenses.

45.  Two broad points were made by the Petitioner in respect of the calculation.  First, the Petitioner questioned the claim for hiring of replacement plants when the July charges were already subject to deduction.  Allowing such claim would be double-counting.    Secondly, there was no substantiation for adding 25% to the various heads as site management and overheads. 

46.  In response, Mr Maurellet (counsel for the Company) accepted in principle that there would be double-counting if the claim had related to replacement plants to perform the work but he submitted that the claim was in fact based on the idling of the various machinery as a result of the Petitioner’s going slow.  He also drew attention to Mr Matsumoto’s evidence (filed on behalf of the Company) where he stated that the basis of the claim was the Company’s inability to carry out its works with other equipment due to interference caused by the Petitioner’s equipment remaining on site, and hence the claim based on idling of the other equipment and labour.  I accept that on face of the Company’s formulation of its claim, it is at least arguable that there is no double‑counting. 

47.  As to the criticism that the cross-claim was not properly substantiated, especially the addition of the 25% of management and overheads, I am prepared to take a broad view of the matter here.  While there is justification to say that not all aspects of the calculation were supported by evidence, I do not believe much will be gained at this stage to delve further to see whether the Company is likely to prove all components of its claims.  As Richards J had remarked in the English Court of Appeal in the case of Tallington Lakes Limited v Ancasta International Boat Sales Limited [2012] EWCA Civ 1712, at §41:

“The practical issue is the extent to which the court must go in determining whether there is a genuine dispute on substantial grounds. The court must, as Oliver LJ put it, take a view whether, on the evidence, there really is substance in the dispute.”

48.  I think in this case it is pertinent to note that Mr Tang (the managing director of the Petitioner) did not seriously dispute that there had been idling or slow operation of the equipment after 3 July.  Indeed, it was the Petitioner’s proposal after termination that the Petitioner could arrange its labour and machinery to attend the site “in a stand-by manner and to provide limited assistance to the [Company] if needed”: see §14 of Mr Tang’s 2^nd affirmation. 

49.  In the circumstances, I am prepared to accept that this aspect of the Company’s cross-claim, though not demonstrated with evidence in every respect, is nevertheless genuine and capable of being substantiated.  While I bear in mind that it is for the Company to establish that its cross-claims are genuine and of an amount at least equal to the Petitioning Debt, taking into account the nature of the cross-claim here I am satisfied that it is a genuine cross-claim arising from the Petitioner’s slow operation of the plants and equipment, and that at this stage this aspect of the claim ought not to be rejected as unsubstantiated. 

50.  Turning to the second aspect of the cross-claim, namely the loss to the Company because of the withdrawal of sub-contract works by Hsin Chong as a result of the Petitioner’s termination of service.  The loss of profits was calculated as the value of the proportionate part of the Company’s contract that had been withdrawn. 

51.  There was no specific objection to the methodology of the calculation.  Mr Wong however made a similar challenge that this aspect of the cross-claim was not properly substantiated, in particular, the Company’s subcontract was not exhibited and there was no evidence to support the component regarding the 15% profit margin. 

52.  I think the Petitioner’s attack should be considered in context.  The value of the subcontract was stated in Mr Matsumoto’s affirmation to be $161,101,100.  Although the subcontract itself was not exhibited, there was nothing to cause me to doubt the contract value as stated.  Furthermore, Mr Tang did not respond to or comment on any specific aspect of the quantum of the Company’s cross-claim in his evidence.  No issue was taken in respect of any particular aspect of the calculations: see §§53 & 54 of Mr Tang’s 2^nd affirmation.  The brevity of Mr Tang’s response was a notable contrast with some other parts of his evidence, for instance, regarding the outstanding invoices.   

53.  The Petitioner, no doubt, had considerable experience itself in the trade.  If an issue was taken in connection with the extent of the proper profit margin, Mr Tang could readily have made reference to it.  I do not mean to say thereby that the burden should be shifted to the Petitioner.  But given the details to which Mr Matsumoto had gone to formulate the quantification of the Company’s claims, I think there certainly is some justification in Mr Maurellet’s complaint that if only Mr Tang had mentioned that there would be an issue concerning the component of the 15% profit margin, evidence could have been adduced to address the point.   

54.  Ultimately, whether or not one takes account of the 15% profit margin, on a broader perspective I am satisfied that the Company has established a substantial and genuine cross-claim arising from the partial withdrawal of its sub-contract by Hsin Chong.

55.  Finally, there is the question about the Petitioner’s reverse cross-claim allegedly arising from the loss of the Petitioner’s Casings.  I have been asked to take the reverse cross-claim into account, estimated to be $4,400,000.  

56.  I think it is fair to say that the evidence concerning the reverse cross‑claim is far from clear.  I have been shown correspondence relating to the disputes about the responsibility for the detention or loss of the Casings.  But on the state of this evidence clearly I am not in a position to form a view with any certainty that the reverse cross-claim will reduce the Company’s cross-claims or indisputably increase the Petitioning Debt.

57.  In summary, I am satisfied that the Company has established that it will have substantial and genuine cross-claims against the Petitioner which will be in excess of the Petitioning Debt.  I note, also, that the Company’s action against, inter alia, the Petitioner for patent infringement will proceed to trial.  I have no doubt that these disputes between the Company and the Petitioner should properly be determined in the respective High Court Actions already commenced.

Conclusion

58.  I would grant the Company’s application and would order that the Petition for winding-up be struck out.  

59.  I would also make an order nisi that the Petitioner should bear the costs of this application.

	(Ambrose Ho, SC) Recorder of the Court of First Instance
	High Court

 

Mr Jonathan Wong, instructed by Tsui & Co, for the petitioner

Mr Jose Maurellet and Ms Connie Lee, instructed by Robert Lee Law Offices and by Gall, for the respondent