HCCW 239/2018
[2020] HKCFI 3160
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
COMPANIES (WINDING‑UP) PROCEEDINGS NO 239 OF 2018
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| | IN THE MATTER of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Chapter 32 of the Laws of Hong Kong |
| | and |
| | IN THE MATTER of HSIN CHONG CONSTRUCTION COMPANY LIMITED（新昌營造廠有限公司）(THE “COMPANY”) |
____________
| Before: | Hon G Lam J in Chambers |
| Date of Hearing: | 11 November 2020 |
| Date of Decision: | 29 December 2020 |
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D E C I S I O N
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A. Application
1. This is an application by the Mandatory Provident Fund Schemes Authority (“Authority”) for a validation order under section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“CWUMPO”) in respect of 4 payments received from Hsin Chong Construction Company Limited (“Company”), a company that is now in liquidation.
2. As the Authority is not privy to the operations or finances of the Company or the course of the winding up proceedings, it has not been able to adduce much evidence in that respect. The joint provisional liquidators (“JPL”) of the Company take a neutral stance towards the application and their affirmations only set out relatively limited information that they consider relevant. As the matter turns on the exercise of a discretion by the court in the winding up proceedings, it is appropriate, in my view, and the parties raised no objection when I indicated at the hearing what I proposed to do, that I should review the court file for further information concerning the Company and in particular the carrying on of its business and operations after the presentation of the winding up petition. This is not entirely satisfactory but is in my view inevitable in the circumstances.
B. Relevant provisions of the Mandatory Provident Fund Schemes Ordinance
3. Where the Mandatory Provident Fund Schemes Ordinance (Cap 485) (“MPFSO”) applies, an employee and his employer are each required to make mandatory contributions to an MPF scheme at the rate of 5% of the employee’s monthly relevant income up to $30,000. Hence, the amount of mandatory contributions from each of the employee and the employer is capped at $1,500 per month. Contributions from employees are deducted by the employer from their salaries and paid to the trustee of the MPF scheme. Contributions by the employer must be paid from the employer’s own funds in addition to the relevant income of the employee. Contributions must normally be paid within 10 days after the end of the contribution period.[1]
4. While MPF contributions are ordinarily payable to the trustee of the relevant MPF scheme, under section 18(1) of the MPFSO a mandatory contribution not paid within the required period becomes due upon its expiry to the Authority, a statutory corporation set up under the MPFSO with the function, among others, of ensuring compliance with the MPFSO. The person who is thus liable to pay the contribution is also liable to pay to the Authority a contribution surcharge at the rate of 5%. The Authority may bring proceedings to recover mandatory contributions and any surcharges in arrears as a debt due to the Authority.[2] What the Authority has received or recovered by way of arrears of contribution or surcharge is, of course, not for its own benefit, but is to be paid to the trustee of the relevant scheme for the account of the relevant employee.[3]
5. An employer commits an offence if, without reasonable excuse, it fails to ensure that the required contributions are paid to the appropriate trustee within time,[4] or fails to comply with a court order made in civil proceedings to pay any arrears or contribution surcharge to the Authority,[5] and is liable on conviction to a fine and imprisonment and, in the case of a continuing offence, to a daily penalty. An officer or other person concerned in the management of the company with whose consent, connivance or neglect an offence under the MPFSO is committed by a corporate employer also commits the offence and is liable to be punished accordingly.[6]
C. Background
6. The Company is a Hong Kong company that carried on business as a construction contractor. It is a subsidiary of Hsin Chong Group Holdings Ltd (“HCGHL”), a Bermudan company listed in Hong Kong, which headed a group of companies (“Group”) that was a major construction services provider in Hong Kong. The Company was one of two main entities within the Group directly operating in the construction industry as a contractor, the other one being Hsin Chong Construction (Asia) Ltd. The Company was on the Government’s approved list of contractors for public works (Group C — for any value) and had taken part in a wide range of construction projects in Hong Kong.
7. The Company had been failing to make mandatory MPF contributions since around February 2018. Not only did the Company fail to pay the employer’s portion, it had also deducted the employee’s portion of MPF contributions from the employees’ salaries without making the relevant contributions on their behalf. Prompted by the Authority, the Company had rectified its default in respect of the contributions for February to April 2018, but there was ongoing default from May 2018 again. As a result, there arose, under the provisions of the MPFSO, debts payable to the Authority, who then issued notices requiring the Company to pay to the Authority the outstanding contributions as well as contribution surcharges.
8. In the second half of 2018, the Authority commenced civil actions against the Company in the High Court and the District Court as follows:
Action Number &
Date of Writ | Period to which unpaid contributions related | Total amount of claim | Amount of unpaid contributions claimed[7] | Number of affected employee | Status |
HCA 1969/2018
22‑08‑2018 | March to June 2018 | $4,321,183.04 | $4,115,412.03 | 901 | Default judgment obtained on 04‑12‑2018 in the sum of $4,159,760.84 and costs of $1,645 |
HCA 2321/2018
04‑10‑2018 | March to July 2018 | $2,018,280.87 | $1,922,172.26 | 744 | Default judgment obtained on 12‑11‑2018 in the sum of $2,018,280.87 and costs of $1,645 |
HCA 2540/2018
30‑10‑2018 | August 2018 | $1,870,872.48 | $1,781,783.09 | 709 | Default judgment obtained on 03‑01‑2019 in the sum of $1,870,872.48 and cost of $1,645 |
DCCJ 5585/2018
07‑12‑2018 | September 2018 | $1,373,540.13 | $1,308,133.46 | 533 | Draft default judgment for $1,373,540.13 and costs of $930 approved by the court on 19‑02‑2019 but not yet entered |
9. The winding up petition in these proceedings was presented by a creditor on 27 August 2018. (The petitioner was substituted by another creditor on 14 November 2018, who was in turn substituted by a third creditor in May 2019). After the presentation of the petition, in early September and October 2018, the Company delivered a cheque of its own and a cheque drawn by one Cogent Spring Ltd (apparently a subsidiary of Hsin Chong Construction (BVI) Ltd) to the Authority for payment of arrears of MPF contributions. The Authority did not cash the cheques and returned them after a while.[8]
10. On about 26 November 2018, the Authority received a personal cheque drawn by one Mr Wong Yu Ming (“Mr Wong” and “Mr Wong’s Cheque”) in the amount of $2,019,925.87, for payment of the judgment obtained by the Authority against the Company in HCA 2321/2018. It appears that by an agreement dated 26 November 2018, Mr Wong’s company called Efficient League Ltd acquired a subsidiary of HCGHL,[9] which gave instructions for part of the consideration for the acquisition to be paid to the Authority to settle the Company’s MPF liabilities. The Authority did not immediately present Mr Wong’s Cheque for payment.
11. On 5 December 2018, the Authority wrote to the Company and each of its directors, enclosing a copy of the judgment obtained the day before in HCA 1969/2018 and demanding payment of the judgment debt by 18 December 2018, failing which action would be taken without further notice. The letters pointed out that an employer who failed to comply with a court order to pay to the Authority any judgment debt would commit an offence and that a company’s officer, under certain conditions, was also liable to be prosecuted individually and fined or imprisoned if convicted.
12. On 18 December 2018, the deadline imposed by the Authority, a cashier’s order of that date in the amount of $4,161,405.84 (“1st cashier’s order”) was delivered by one Mr Chung, a staff member of HCGHL, to the Authority for payment of the judgment in HCA 1969/2018 covering the MPF payments for the period of March to June 2018. Two days later, Mr Chung delivered 3 further cashier’s orders to the Authority as follows: (1) a cashier’s order in the amount of $1,870,872.48 (“2nd cashier’s order”) for the Company’s MPF payments for August 2018, which were the subject matter of HCA 2540/2018; (2) a cashier’s order in the amount of $1,373,540.13 (“3rd cashier’s order”) for the Company’s MPF payments for September 2018, which were the subject matter of DCCJ 5585/2018; and (3) a cashier’s order in the amount of $1,055,151.42 (“4th cashier’s order”) for the Company’s MPF payments for October 2018 (collectively, the “4 cashier’s orders”).
13. In light of the winding up proceedings, the Authority did not immediately present any of the 4 cashier’s orders for payment, but waited to see how those proceedings developed. The winding up petition against the Company had first come before a Master on 31 October 2018 and was adjourned to 14 November 2018, and then to 12 December 2018, and again to 9 January 2019. It was first heard before the Companies Judge on 14 January 2019, who adjourned it further to 21 January 2019. At that point, the Authority says, as the accumulated amount of default contributions and the number of affected employees were high and would continue to grow, and the winding up petition had already been adjourned a number of times and appeared unlikely to be resolved within a short period of time, the Authority decided on 17 January 2019 to present the 4 cashier’s orders and Mr Wong’s Cheque for payment into the Authority’s account, which were all honoured.
14. Meanwhile, on 20 December 2018, a creditor of HCGHL[10] had appointed receivers over the entire issued shareholding of and in the Company (which had been charged in favour of that creditor) (“Receivers”). On 27 December 2018, when all the existing directors of the Company resigned, the Receivers appointed a substitute director. They took the view that provisional liquidators should be appointed for the Company.[11]
15. On 10 January 2019, the Company, acting by its new director, applied for the appointment of provisional liquidators for itself but failed at the hearing of the application on 14 January 2019. After the sole director of the Company resigned, on 17 January 2019 the Receivers applied again. On 18 January 2019, the application was granted by Harris J and the JPL were appointed provisional liquidators for the Company in Hong Kong.[12]
16. On 28 January 2019, apparently with the consensus of the parties, the petition was adjourned to 15 May 2019, to allow time for the Company and its creditors to explore the possibility of a private financial arrangement. At the hearing in May, the petition was further adjourned to 19 August 2019, and then again to 2 December 2019.
17. After the JPL were appointed, they retained some of the employees of the Company to carry on its operations. In early June 2019, perceiving an uncertainty as to whether, under the order for their appointment, the court’s sanction was required for the payment of wages and salaries of the retained staff, the JPL made an application to the court on 11 June 2019, on which Harris J made an order authorising the JPL “to incur, authorise and pay expenses, wages, salaries, fees, rents and other payments of any moneys in the ordinary course of the business of the Company out of the Assets” and providing that all payments made pursuant thereto shall not be void under section 182 of the CWUMPO.
18. Meanwhile, criminal proceedings were also commenced against the Company for the default in meeting its MPF obligations.[13] A total of 46 summonses were laid against the Company for offences under the MPFSO[14] in relation to 19 complainant employees[15] in respect of default occurring between May and November 2018. On 8 July 2019, the Company pleaded guilty and was fined a total sum of $131,000.
19. On 19 November 2019, the Authority issued the present summons for a validation order for the 4 cashier’s orders. Pending its resolution, the funds in question have been kept in the Authority’s account and not yet paid to the trustees of the MPF schemes. No validation order is sought in relation to Mr Wong’s Cheque as the Authority has since refunded the amount to Mr Wong.
20. On 20 January 2020, a winding up order was made against HCGHL by the Supreme Court of Bermuda. Shortly before the hearing of the present summons, on 2 November 2020, a winding up order was made against the Company. Consequently, the winding up is taken to have commenced on 27 August 2018, the date on which the petition was presented.[16]
D. Dispositions of the Company’s property
21. Section 182 of the CWUMPO provides:
“ In a winding up by the court, any disposition of the property of the company, including things in action, and any transfer of shares, or alteration in the status of the members of the company, made after the commencement of the winding up, shall, unless the court otherwise orders, be void.”
22. In relation to the source of funds for the 4 cashier’s orders, the limited evidence available is as follows. The Company entered into an agreement with one Build King Construction Ltd (“BK Construction”) on 17 December 2018 pursuant to which the latter would take over the Company’s 65% contractual interest in an existing joint venture between them[17] for a consideration of $53.6 million, of which $20 million would be advanced to the Company as an interest‑free loan, to be discharged when the transfer was completed. According to the management of the Company, the source of funds in the total amount of $8,460,969.87 for the 4 cashier’s orders was that sum of $20 million, paid apparently by BK Construction to Cogent Spring Ltd before it was further disbursed. Without knowing the precise route by which value from the Company was transformed into the cashier’s orders, the Authority is content to accept that, for the purposes of this application, the payment to the Authority via the 4 cashier’s orders are to be regarded as dispositions of the property of the Company.
23. The effect of section 182 on the transaction between the Company and BK Construction itself is the subject of dispute between the JPL and BK Construction,[18] but neither the Authority nor the JPL have suggested that the present application would be affected by the outcome of that dispute or should be adjourned until its resolution.
24. As regards the date of disposition, it may be that the delivery of the 4 cashier’s orders themselves to the Authority constituted dispositions, since they were presumably instruments to which the Company could lay claim and their delivery conferred on the Authority choses in action against the bank.[19] It is however unnecessary to delve into this, since there is no suggestion that anything turns on whether the dispositions occurred on the dates of delivery (18 and 20 December 2018) or on the date of presentation and the crediting of the Authority’s bank account (17 January 2018). The question that arises is whether the court should exercise its power to sanction the dispositions retrospectively.
E. Approach to validation order
25. While the discretion conferred by section 182 of CWUMPO has been said to be “entirely at large”[20] and “not fettered by any statutory criteria”[21], it is well established that the court is guided by the evident purpose of the section that the creditors are generally to be paid pari passu.[22] The court has to do its best to ensure that the interests of the unsecured creditors will not be prejudiced.[23]
26. The application is being made retrospectively for dispositions already made. On such an application it would not be a correct approach merely to compare the position of the unsecured creditors if a validation order is made with their position if the order is not made.[24] Instead the court should ask itself:[25] (1) If a prior validation order had been sought, would it have been granted? (2) Has the disposition had the result, in the events which have happened, of reducing the assets available in the winding up for the unsecured creditors?
27. The Authority submits that as a matter of public policy, employers should be made to pay MPF contributions. The MPFSO does contain various provisions, including criminal sanctions, that seek to ensure prompt payment of MPF contributions by employers. Further, as set out below, there are provisions in the CWUMPO that make unpaid MPF contributions preferential debts in a winding up. In my view, however, there is no overriding public policy that require payments of MPF contributions after the commencement of winding up to be validated irrespective of the circumstances. The present application falls to be determined in accordance with the usual principles.
F. Dispositions in payment of preferential debts
28. A special feature of the present case is that, as explained below, parts of the dispositions in question discharged preferential debts. They are debts that are by law to be paid in a winding up in priority to other debts. To that extent it follows that the fact that the dispositions gave preferential treatment to the Authority over the general unsecured creditors of the Company is not a reason for refusing a validation order. The concern instead should be to ensure that the interests of creditors of the same or higher rank will not be prejudiced.
F1.Extent to which the dispositions discharged preferential debts
29. Section 265 of CWUMPO makes provision for preferential payments in a winding up. The relevant debts are enumerated in section 265(1). They are to be paid “in priority to all other debts”. Among them, subsections (3) to (3B) further specify the hierarchy of priorities.
30. Sections 265(1)(b) to (cj) concern claims relating to employees’ remuneration and benefits. In particular, MPF payments are dealt with in subsections (1)(ch) and (ci),[26] which provide:
“ (ch) any amount of unpaid contribution under, or any amount of unpaid contribution calculated in accordance with, the Mandatory Provident Fund Schemes Ordinance (Cap. 485) which should have been paid by the company being wound up in accordance with the provisions of that Ordinance before the commencement of the winding up:
Provided that where such amount exceeds $50,000 in respect of an employee, 50% of such part of the amount that exceeds $50,000 shall not be paid in priority to all other debts under this subsection;[27]
(ci) any amount deducted by the company being wound up from the relevant income of its relevant employees for the purpose of making contributions in respect of such relevant employees to the approved trustee of a registered scheme within the meaning of the Mandatory Provident Fund Schemes Ordinance (Cap. 485) which have not been paid to that approved trustee.”
31. By section 265(3):
“ (3) The debts specified in subsection (1)(b), (c), (ca), (caa), (cb), (cc), (cd), (ce), (cf), (cg), (ch), (ci) and (cj)—
(a) shall have priority over the debts specified in subsection (1)(d);
(b) shall rank equally among themselves; and
(c) shall be paid in full unless the assets are insufficient to meet them, in which case they shall abate in equal proportions among themselves.”
32. Next in the hierarchy, after the employees’ claims, are statutory debts due to the Government set out in subsection (1)(d). The other preferential debts mentioned in subsection (1)(db) to (1)(f), further down in the ladder of priority, are not relevant to the Company.
33. Section 264(4) provides:
“ Subject to the retention of such sums as may be necessary for the costs and expenses of the winding up, the foregoing debts shall be discharged forthwith so far as the assets are sufficient to meet them.”
The evident statutory policy is that preferential debts not only enjoy right of priority, but should be paid “forthwith” subject to the retention of sums for the liquidation costs and expenses.
34. It is not in dispute that the debts paid by the 1st cashier’s order, to the extent of $4,115,412.03,[28] fell within section 265(1)(ch), since it paid the judgment in HCA 1969/2018 which concerned the “unpaid contributions” for the period from March to June 2018, “which should have been paid … before the commencement of the winding up” (27 August 2018).[29]
35. The 2nd cashier’s order, to the extent of $1,781,783.09,[30] was for the unpaid MPF contributions for the month of August 2018, which straddled the commencement of the winding up. Under section 7A(1) of the MPFSO, the Company was required to make the relevant contribution for each “contribution period”. “Contribution period” is defined to mean each period for which the employer pays or should pay relevant income (ie wages etc) to the employee.[31] The wages of the employees in question all appear to have been payable monthly. The Employee Handbook of the Hsin Chong group, applicable to the Company, provided that the payment date of wages was the 29th of each month. Section 7A(8) requires that contributions are paid to the trustee of the relevant scheme within the period prescribed by regulations, which is the 10th day after the last day of a calendar month within which the relevant contribution period ends.[32] It follows that the Company was required to pay the mandatory contributions for August 2018 on or before 10 September 2018. On this basis, I accept Ms Lam SC’s submission on behalf of the JPL that it cannot be said that these debts should have been paid “in accordance with the provisions of [MPFSO] before the commencement of the winding up”. These debts are therefore not preferential debts under section 265(1)(ch). The same applies to the debts paid by the 3rd and 4th cashier’s orders, to the extent of $1,308,133.46[33] and $1,004,906.11[34], being for the unpaid contributions for the months of September and October 2018 respectively.
36. However, it seems to me that section 265(1)(ci) applies in relation to all 4 cashier’s orders because, as the evidence states, the Company did deduct from the employees’ wages the employee’s portion of MPF contributions, though it did not then pay the money to the trustees. Since the employee’s portion and the employer’s portion are both calculated at 5% of the salaries, one may infer that half of the unpaid contributions due to the Authority fell within section 265(1)(ci).
37. The result is, therefore, that $4,115,412.03 out of the 1st cashier’s order and half of the amounts of $1,781,783.09, $1,308,133.46 and $1,004,906.11 out of the 2nd, 3rd and 4th cashier’s orders respectively discharged debts that have preferential status under section 265(1)(ch) and (ci). The total amount is $6,162,823.36.
F2.Other preferential creditors
38. After the presentation of the petition, the Commissioner for Labour had made ex gratia payments pursuant to section 16 of the Protection of Wages on Insolvency Ordinance (Cap 380) in respect of the wages, untaken holiday pay, wages in lieu of notice and severance pay of numerous employees of the Company in October and November 2019, totalling $22,867,493.95. By section 24 of that Ordinance, all those employees’ rights and remedies with respect to such payments are transferred to and vested in the Protection of Wages on Insolvency Fund Board (“PWIF Board”). The PWIF Board has lodged a proof of debt for that amount.
39. Pursuant to section 265(1)(b)(ii), (c)(ii), (ca), (cc) and (cd) of the CWUMPO, debts due to employees for wages, untaken holiday pay, wages in lieu of notice and severance pay are preferential debts, albeit subject to some fairly low monetary limits[35] (which have apparently remained at the levels fixed in the 1970s and 1980s). It follows that the PWIF Board’s claim enjoys preferential status to the same extent as subrogated claims of the employees.[36] It has not yet been calculated how much of the PWIF Board’s proof consists of preferential debts. The preferential portion of its claim ranks equally with the preferential portion of the debts paid by the 4 cashier’s orders.
40. There may also be employees’ claims that enjoy preferential status under section 265 but which do not qualify for payment out of the Protection of Wages on Insolvency Fund (the main category of which seems to be long service payment, up to $8,000 in respect of each employee).[37] Such claims also have the same priority as the preferential debts paid by the 4 cashier’s orders.
41. In deciding whether to grant a validation order for the preferential portion of the 4 cashier’s orders, therefore, the court should seek to ensure that the preferential part of the PWIF Board’s claim and any remaining employees’ preferential claims are not prejudiced.
F3.Costs and expenses of liquidation
42. The costs and expenses of the winding up have first priority for payment out of the assets of the Company, even before preferential debts. Section 256 of the CWUMPO expressly provides, in relation to voluntary winding up, that all costs, charges, and expenses properly incurred in a winding up, including the remuneration of the liquidator, shall be payable out of the assets of the company in priority to all other claims. Although there is no express provision to this effect for compulsory winding up, the position is the same.[38] Rule 179 of the Companies (Winding‑up) Rules (Cap 32H) makes further provisions for internal ranking among such costs and expenses.
43. Section 265(4) permits a liquidator to retain such sums as may be necessary for the “costs and expenses of the winding up” before paying the preferential debts. The provision came before the court in Re Lawe William (China Trade) Ltd [1994] 2 HKLR 169 where there was sufficient money recovered to pay the preferential creditors but the liquidators wished to retain the money for the purpose of pursuing potential claims against various third parties. Applying that provision, Rogers J ordered that the liquidators be at liberty to retain such sums as were necessary for the costs and expenses of the winding up, and that until such time as they were aware that there would be a surplus of assets available for distribution over and above the cost and expenses of the winding up, they would not be required to pay a dividend to the preferential creditors.
44. The JPL say that, at this early stage of the liquidation, they are unable to ascertain the total amount of liquidation expenses that will be incurred. As at 5 November 2020, the total assets realisation of the Company was approximately $115 million and the liquidation expenses came to around $83 million (not including legal expenses incurred). There are more than 300 different sets of litigation and arbitration proceedings commenced by or against the Company and the associated legal costs would no doubt be very substantial. The JPL submit that, in the event that the assets of the Company available are later found to be insufficient to satisfy the liquidation expenses, validating the dispositions in favour of the Authority now would contradict the prescribed priorities of application of the assets.
45. In these circumstances, it would not be appropriate for the court to sanction the immediate payment of preferential debts or to make a validation order in respect of the preferential portions of the 4 cashier’s orders solely by reason of their preferential status. I can only say that it is to be hoped that the liquidation will not turn out in such a way that the Company (with over $30 million in the banks when the JPL were appointed) ends up not having sufficient assets even to pay the workers’ preferential claims. I do not consider, however, that the Authority’s application should be dismissed outright as this could lead to an unnecessary payment into the liquidation, increasing the ad valorem fees payable. Instead, it seems to me that the application insofar as it concerns preferential payments should be adjourned. If and when it is known that there would be a surplus for distribution in full on these preferential debts, the dispositions should to that extent be validated.
G. Debts incurred after petition
46. The debts paid by the 3rd and 4th cashier’s orders, being mandatory MPF contributions for September and October 2018, accrued after the petition.[39] The Authority appears to contend that a special principle applies to “post‑liquidation” creditors (ie creditors whose debts have arisen after the presentation of petition). Reliance is placed on the eighth proposition in the summary in Denney v John Hudson & Co Ltd [1992] BCLC 901 at 905b that “[d]espite the strength of the principle of securing pari passu distribution, the principle has no application to post‑liquidation creditors”, which seems to be an overbroad generalisation of the following passage in In re Gray’s Inn Construction Co Ltd [1980] 1 WLR 711, 718H-719B:
“ In a number of cases reference has been made to the relevance of the policy of ensuring rateable distribution of the assets … In [In re J Leslie Engineers Co Ltd [1976] 1 WLR 292] Oliver J said, at p 304:
‘ I think that in exercising discretion the court must keep in view the evident purpose of the section which, as Chitty J said in In re Civil Servers and General Store Ltd, 58 LT 220, 221, is to ensure that the creditors are paid pari passu.’
But although that policy might disincline the court to ratify any transaction which involved preferring a pre‑liquidation creditor, it has no relevance to a transaction which is entirely post‑liquidation, as for instance a sale of an asset at its full market value after presentation of a petition. Such a transaction involves no dissipation of the company’s assets, for it does not reduce the value of those assets. It cannot harm the creditors and there would seem to be no reason why the court should not in the exercise of its discretion validate it. …”
47. As pointed out in Express Electrical Distributors Ltd v Beavis & others [2016] 1 WLR 4783 at §43:
“ … it is difficult to see why it should always be assumed that a post‑liquidation transaction should always be validated, as involving no dissipation of the company’s assets. No doubt it often will be appropriate to validate such a transaction, if it is carried out at full value (e.g. if there is sale of an asset at full market value), but whether that is so will depend upon examination of the particular facts.”
48. In fact, in Re Luen Cheong Tai Construction Co Ltd [2004] 1 HKLRD 735, A Cheung J had already qualified the relevant statement in Denney v John Hudson & Co Ltd as follows:
“ 16. Of course, the proposition would be easiest to apply if one were only concerned with an one‑off post‑petition disposal of asset, in which event all that one would be concerned to ensure was that the company should receive sufficient and adequate consideration from the disposal.
17. The proposition would be less easy to apply in case of payments or intended payments of money to keep a contract of the company alive after the presentation of the petition. In that case, I would have thought one would need to enquire not only whether the company would receive sufficient and adequate, or full market value, goods or services from its opposite contracting party under the contract if it was continued and kept alive by the payments after the presentation of the petition. One would also be concerned to find out whether the continuation of the contract would lead to a net profit or some other benefit to the company, because otherwise the unsecured creditors of the company would be worse off by the continuation of the contract even though the company would receive goods or services of full market value from the contract if it was continued. For ultimately the question is whether continuation of payment under the contract post‑liquidation would lead to a reduction and thus dissipation of the company’s assets.”
49. In my view, MPF contributions incurred after the petition are not to be automatically validated simply because they are “post‑liquidation” debts. It is necessary, as part of the general approach, to assess where the interests of the creditors lie.
H. Benefit for the Company
H1. Carrying on of the business
50. The payments in question in this case are MPF mandatory contributions, rather than ad hoc dispositions under a specific transaction. It may be inferred that the debts were incurred by the Company from the employment of staff in the ordinary course of its business. But this in itself is not sufficient to justify a validation order. If an order had been sought prior to the dispositions, the court would still need to be satisfied that the payments were likely to generate a net benefit for the creditors. This would include the conclusion that the carrying on of the business was beneficial to the creditors overall, such as that it was likely to generate net income for the Company.[40]
51. Ms Lam submits that the question is largely academic as the Company has been wound up and has ceased to operate its business. I am unable to accept this submission which seems to me to be a non sequitur. Even where a company is ultimately wound up, it may still be found that the creditors are likely to have benefited from, or at least not to have been prejudiced by, the carrying on of the company’s business after the petition: see eg Denney v John Hudson & Co Ltd; Re Luen Cheong Tai Construction Co Ltd. There are two questions to be addressed: (1) did the continued carrying on of the business of the Company result in a net benefit to the creditors; and (2) were the dispositions causally related to the continuation of the business.
52. It appears that after the petition, the Company had carried on with its business more or less in the ordinary way until December 2018. Even after the appointment of the JPL in mid‑January 2019, the business operations were continued to some extent. There is little evidence on the direct consequences of such continued trading. In the circumstances of this case the court is justified in taking a fairly broad approach to this question, bearing in mind nevertheless that the onus of showing that a validation order should be made lies on the Authority. It would in many cases not be straightforward to show, even with the benefit of hindsight, what would have happened in the hypothetical situation of an earlier cessation of business. The forensic context of an application for validation may not permit or warrant a detailed, comprehensive and exact counterfactual analysis. As was pointed out by Staughton LJ in Denney v John Hudson & Co Ltd (at p 908c‑e), in these situations the court is “entitled not to demand a massive investigation, with hindsight, into what the creditors’ situation would have been” had the business been closed down earlier. He considered it sufficient in that case that the making of the payments, with the result that further supplies of fuel oils were obtained by the company which carried on business as hauliers, was “likely to have been a benefit to the creditors”. Staughton LJ continued (at p 908f‑h):
“ In the Australian case of Tellsa Furniture Pty Ltd v Glendave Nominees Pty Ltd (1987) 13 ACLR 64 at 66, Mahoney JA said:
‘ In the exercise of this power, the court will take into account whether the payment, and the transaction of which it is part, was or was apt to be for the benefit of the creditors in question. It will, in general, see the continuation of the company’s business as in a proper case for their benefit.’
I would regard that as sound common sense. Of course there may be some cases, or even many, where the better course is to close down the company’s business forthwith. But in the absence of any indication that this was the case, a judge is entitled, if he thinks fit, to conclude at least that the transaction was apt to benefit the creditors, even if it is not shown that it did in fact do so. The transaction, in that case as here, included payment for goods supplied before the commencement of the liquidation, in order that further supplies might be obtained.”[41]
53. This reflects the common sense that while the policy of the law is to ensure the rateable distribution of the assets among the creditors, its application should not be approached in such a way that the very fact of a winding up petition being presented would inevitably bring about the collapse of the company as a viable concern.
54. As at December 2018 and January 2019, the Company was engaged in 19 ongoing projects (12 by itself and 7 in joint venture with others), some of them very substantial, such as the M+ Museum Construction Project, the Ocean Park Marriot Hotel Project, the Shatin to Central Link Project, and the Kowloon East Police Regional Headquarters Project.[42] According to the evidence filed for the applications for the appointment of provisional liquidators in January 2019:
(1) The Group had run into financial difficulty as a result of its exposures in property development in Mainland China. Its construction business in Hong Kong, however, remained profitable due to the Group’s reputation as a large and reliable independent “one‑stop” contractor with considerable technical expertise and abilities. The Group’s announcement of unaudited interim results dated 31 August 2018 stated: “While we await the property business to deliver significant revenue contribution to the Group, our Group’s construction business remained profitable”.[43] For the 6 months ended 30 June 2018, there were gross profits of $87 million for the construction business (compared to $85 million for the same period in 2017); EBITDA[44] for the construction business was positive $17 million, whereas it was negative $618 million for property development and investment.
(2) According to the unaudited accounts as at 31 October 2018, there were receivables and prepayments of $177.6 million in current assets much of which probably represented sums due and payable to the Company for work that had already been completed pending certification (usually within a period of 60 days). There were also stocks and contracting work‑in‑progress of $297 million part of which represented income that could be obtained from ongoing projects for work that needed to be done.[45] There were also large sums of retention monies that would be payable to the Company at the end of the projects.
(3) As at mid‑January 2019 there were over 80 employees of the Company still working in the following departments: Accounting, Purchasing, Administration, Commercial, Engineering, Plant & Machinery, Information Technology, Project Director, Tendering & Planning, and Architect. They enabled the Company to continue performing its contracts. If they were to leave, there would, for example, no longer be any “Technical Directors” and “Authorised Signatories” under the Building Department’s requirements which would mean that all construction works had to be stopped, posing substantial operational and safety risks at the unattended sites. The receivables for work already completed and to be certified, and claims for retention monies, would be jeopardised. There would also be no one with the necessary knowledge to continue pursuing the Company’s claims for payment in relation to variation orders, which formed a substantial part of the expected profit for construction projects. No one would be able to know the exact status of the legal cases in which the Company was involved.[46]
55. Where a large construction firm such as the Company is to cease business abruptly, there are likely to be a myriad of adverse consequences. Employers may terminate the construction contracts and re‑enter the sites, possibly forfeiting the materials and partial buildings there, and withhold the release of the retention monies. Motor vehicles, plant and machinery may disappear. Claims will pour in from employers, suppliers and sub‑contractors. It is in my view clear that the continuation of trading, at least to such an extent as to permit an orderly winding down of the business, was likely to have been of benefit to the Company and therefore to its general creditors.
56. It is however not evident that the dispositions in question had the necessary causal relationship with that benefit. There are three points to be made here. First, the dispositions were not made for MPF contributions for the current month of December 2018 or beyond, but for arrears of contributions for the months of March to October 2018. It is true that payments for goods or services already supplied, including those supplied pre‑liquidation, could in a proper case be validated, but this depends on proof that the payments brought a benefit to the creditors: for example, if the payments had been made in order that further supplies might be obtained on credit, and the continuation of such supplies was in the interest of the general body of creditors.[47]
57. Secondly, many employees had left the Company at the end of 2018 or early 2019. The evidence shows that the number of employees of the Company had dropped to below 100 by January 2019.[48] That means that the majority of the employees did not remain despite the payments made to the Authority which included their MPF entitlements.
58. Thirdly, even in relation to the employees who remained, there is no evidence that the 4 cashier’s orders were given to the Authority in order that they would remain so as to enable the Company’s business to continue. MPF contributions accounted only for a small portion of the employees’ salaries and were payable into trust schemes from which the employees could only expect to benefit on their retirement. There is nothing to show, nor can it be readily inferred, that the employees who did remain would not have done so but for the payments made to the Authority, at any rate when their salaries were still being paid. There was some evidence, filed for the applications for the appointment of provisional liquidators, that some remaining employees had not been paid their salaries since November/December 2018 and they were getting “very impatient” waiting for their salaries and could terminate their employment any time,[49] but on that evidence their concern was with their salaries rather than the MPF contributions in arrears which would not anyway reach their hands in the short term.
H2. Benefit of avoiding prosecution and fines
59. There is another benefit from the dispositions in that, by tendering the cashier’s orders, the Company avoided being prosecuted, convicted and fined under the MPFSO. Upon conviction the maximum fine is $450,000 and a daily penalty of $700 per day for a continuing offence.[50] However, successful prosecution depended on the relevant employees testifying in the criminal proceedings. The history shows that not many of them were willing or considered it worth their while to do so, with the result that convictions were only secured in relation to the MPF contributions for 19 employees and fines totalling $131,000 were imposed. Even if there might have been more prosecutions had the 4 cashier’s orders not been paid, it is not possible to say that, from a financial perspective, those payments brought an overall benefit to the creditors.
I. Conclusion and order
60. In summary, the sums of $4,115,412.03, $890,891.55, $654,066.73 and $502,453.06 out of the 4 cashier’s orders respectively were payments of preferential debts under section 265(1)(ch) and (ci) of the CWUMPO. They rank equally with certain other claims of the PWIF Board and employees, in priority to all other debts, and are to be discharged “forthwith” subject to the retention of sums necessary for the costs and expenses of the liquidation. As it is uncertain what the ultimate amount of such costs and expenses might be, the Authority’s application for validation order should, in respect of these 4 amounts totalling $6,162,823.36, be adjourned generally until such time as the JPL or the liquidators of the Company are aware whether there would be a surplus of assets available for payment of a dividend in respect of those preferential debts.
61. While the continuation of the Company’s trading at the material time (at least to the extent of enabling an orderly winding down of the business) was likely to have been of benefit to the creditors generally, the Authority has not been able to show that the dispositions in question brought about, contributed to or were made in order to obtain that benefit. Nor is the Authority able to show any other net benefit for the general unsecured creditors. The non‑preferential part of the dispositions (ie $2,298,246.51)[51] should therefore not be validated. The application is to that extent dismissed. I give liberty to apply as regards any necessary consequential orders.
62. As an order nisi, costs are reserved.
| (Godfrey Lam)
Judge of the Court of First Instance
High Court |
Ms Josephine Tjia, instructed by Mandatory Provident Fund Schemes Authority, for the Applicant
Ms Rachel Lam SC and Ms Tiffany Chan, instructed by Wilkinson & Grist, for the Provisional Liquidators
The Official Receiver was excused from attendance
[1] See MPFSO, sections 7A & 10; Mandatory Provident Fund Schemes (General) Regulation (Cap 485A), section 122.
[2] Section 18(3).
[3] Section 18(5) & (6).
[4] Sections 7A(8) and 43B(1C) of the MPFSO.
[5] Section 43B(3A) of the MPFSO.
[6] Section 44(1).
[7] This amount excludes the contribution surcharges of 5%. The amount may be seen from the statement of claim where available, or worked out by dividing the total amount claimed by 105%. It is necessary to include this column because, as will be seen below, any preferential status applies only to unpaid contributions, not to surcharges.
[8] Cogent Spring Ltd’s cheque is said to be for $161,422.21 and is said to have been returned, but the default judgment in HCA 1969/2018 recited that a sum of $161,422.20 had been paid by the Company since the commencement of the action. The position is not entirely clear but the discrepancy is not material for present purposes.
[9] Namely, Hsin Chong Aster Building Services Ltd.
[10] Namely, Ultimate Achieve Developments Ltd, as an assignee of the original creditor, VMS Investment Group Ltd.
[11] See Affirmation of Mok Wai Tung, a director of the Company, filed on 10 January 2019.
[12] In Bermuda, also on 18 January 2019, a winding up petition was presented by a creditor against HCGHL, the parent company, and provisional liquidators were appointed for HCGHL by the court of Bermuda.
[13] with leave of the court given to the Secretary for Justice between March and May 2019 pursuant to section 186 of the CWUMPO.
[14] Sections 7A(8), 43B(1C)(a) or 43B(1C)(b).
[15] These employees had indicated their willingness to act as prosecution witnesses.
[16] Section 184(2) of the CWUMPO.
[17] relating to the Kowloon East Police Regional Headquarters Project.
[18] On 13 June 2019, DHCJ Le Pichon granted BK Construction a validation order in relation to its acquisition of that contractual interest in the joint venture from the Company. In her judgment she referred to potential problems arising from the evidence that part of the proceeds would be applied by the Company in settling outstanding MPF contributions and employees’ wages in the absence of any prior validation order, though she eventually granted a validation order in favour of BK Construction: [2019] HKCFI 1531, paras 92-97. DHCJ Le Pichon’s decision was upheld by the Court of Appeal: [2019] HKCA 1305, paras 56-62, though the Appeal Committee of the Court of Final Appeal has given leave to appeal: [2020] HKCFA 36. The appeal is to be heard on 2 March 2021.
[19] On the basis that they are bills where the drawer and drawee are the same person, they may be treated by the holder either as bills of exchange or as promissory notes: section 5(2) of the Bills of Exchange Ordinance (Cap 19).
[20] In re Steane’s (Bournemouth) Ltd [1950] 1 All ER 21, 25; In re Gray’s Inn Construction Co Ltd [1980] 1 WLR 711, 717C.
[21] In re Tramway Building & Construction Co Ltd [1988] 1 Ch 293, 305F.
[22] In re J Leslie Engineers Co Ltd (in liquidation) [1976] 1 WLR 292, 304C.
[23] In re Gray’s Inn Construction Co Ltd at 717G.
[24] In re Tramway Building & Construction Co Ltd at 304G‑305G, 309C.
[25] See In re Tramway Building & Construction Co Ltd at 303D; Re Leric International Ltd [2009] 2 HKLRD 238, §38.
[26] Section 265(1)(cj) concerns compensation paid under section 17(7) of the MPFSO and is not relevant in the present case.
[27] Since no unpaid contribution in respect of any single employee exceeds $50,000, the proviso to section 265(1)(ch) does not apply.
[28] See the fourth column in the table at para 8 above — this figure excludes any amount attributable to contribution surcharges and costs.
[29] It has not been suggested that the judgment altered the priority of the debts whether because of the doctrine of merger in judgment or otherwise.
[30] See the fourth column in the table at para 8 above — this figure excludes any amount attributable to contribution surcharges and costs.
[31] See section 7A(10)(a). Section 7A(10)(b) concerns the initial period of the employment and may be ignored for present purposes.
[32] See section 122(1)(aa) and 122(3)(b) of the Mandatory Provident Fund Schemes (General) Regulation (being the regulations made under section 46 of the MPFSO).
[33] See the fourth column in the table at para 8 above — this figure excludes any amount attributable to contribution surcharges and costs.
[34] Calculated as the amount of the 4th cashier’s order, $1,055,151.42, divided by 105% in order to exclude the contribution surcharges.
[35] $8,000 for wages and salary (ss 265(1)(b) & (c) & 265(1B)); $8,000 for severance payment (ss 265(1)(ca) & 265(1B)); one month’s wages or $2,000 (whichever is the lesser) for wages in lieu of notice (ss 265(1)(cc)); $8,000 for long service payment (ss 265(1)(caa)).
[36] But not pursuant to section 265(1)(b)(i) as Ms Lam submits, for that subsection applies in respect of payments made under section 18 of the Protection of Wages on Insolvency Ordinance, being ex gratia payments made without there being a winding up petition presented against the employer.
[37] which has preferential status under section 265(1)(caa) up to $8,000 in respect of each employee.
[38] Re East Asia Manufacturers Ltd [1965] HKLR 985, 990‑991.
[39] The position of the 2nd cashier’s order is more complicated in this regard in that the debt due to the Authority arose by statute after the date of petition, but it covers the outstanding mandatory contributions for August 2018 the majority of which might have accrued on a day by day basis prior to the petition under the relevant employments.
[40] Re Century Group Ltd (HCCW 59/2004, 18 March 2004), §§7‑9; Re First Dragon Fashion (Hong Kong) Ltd [2010] 4 HKLRD 592, §14; Re Bergner (HK) Ltd[2019] HKCFI 1171, §§5-8.
[41] Fox LJ reasoned that in that case, there was no evidence that the continuance of the business was not a benefit to the company, and that it could reasonably be assumed that what was for the benefit of the company would be for the benefit of the general body of the creditors (see pp 906i‑907g). Russell LJ agreed with both Fox and Staughton LJJ.
[42] JPL’s 1st Report dated 21 January 2019, para 16.
[43] See Affirmation of Mok Wai Tung, a director of the Company, dated 9 January 2019, paras 14 & 20.
[44] Earnings Before Interest, Taxes, Depreciation, and Amortisation.
[45] See Affirmation of Mok Wai Tung dated 9 January 2019, para 73.
[46] See Affidavit of Kong Sze Man Simone filed on 18 January 2019, paras 31-48.
[47] Denney v John Hudson & Co Ltd, pp 906g, 907b, 907d‑e, 908h; Express Electrical Distributors Ltd v Beavis & others, at §§30‑31.
[48] The JPL say that of the numerous employees to whom the 4 cashier’s orders relate, only 26 are at present retained by the JPL for maintaining the operation of the Company. However, evidence obtained from the MPF scheme trustees shows that MPF contributions were made by the JPL in respect of 99 employees for January and February 2019.
[49] See Affidavit of Kong Sze Man Simone filed on 18 January 2019, paras 6, 20, 25‑35.
[50] These are the maximum penalties under section 43B(1C)(a) of the MPFSO, under which the majority of the prosecutions were brought.
[51] $8,460,969.87 minus $6,162,823.36.