JOINT AND SEVERAL LIQUIDATORS OF HSIN CHONG CONSTRUCTION (ASIA) LTD v. WONG PO KEE LTD AND OTHERS

HCCW 239/2018 and HCCW 316/2018

(HEARD TOGETHER)

[2025] HKCFI 2829

HCCW 239/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 239 OF 2018

_______________________

______________________

______________________

AND

HCCW 316/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 316 OF 2018

____________________

______________________

(Heard Together)

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REASONS FOR DECISION

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1.  At the joint call over hearing on 25 June 2025, the issue that arose was whether the Court should allow the determination of a proposed question of law raised by the respondent, the Bank of East Asia Limited (the “Bank”) in section 182 proceedings to be tried as a preliminary issue. At the conclusion of the hearing, I dismissed the Bank’s application for the reasons below.

Relevant background

2.  Hsin Chong Construction Company Limited (“HCCC”) and Hsin Chong Construction (Asia) Ltd (“HCCA”) are both in liquidation following petitions presented against HCCC on 27 August 2018 (“HCCW 239/2018”) and HCCA on 5 November 2018 (“HCCW 316/2018”). The petitions were gazetted on 12 October 2018 and 23 November 2018 respectively.

3.  The applicants are the joint and several liquidators (“JLs”) of HCCC and HCCA. They seek declarations that payments of approximately $69 million made by the Bank out of HCCC and HCCA accounts maintained with the Bank after the respective dates of the HCCC and HCCA petitions be declared void and for repayment of the same to the JLs.

4.  The JLs identified a total of 406 payments by the Bank out of:

(a)  HCCC’s account(s) with the Bank after 27 August 2018, and

(b)  HCCA’s account(s) with the Bank after 5 November 2018 (collectively, the “Payments”).

5.  On 5 February 2025, the JLs issued summonses pursuant to section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“CWUMPO”) against the Bank (the “s.182 Applications”).

6.  The Payments total approximately $69 million and comprise payments made out of HCCC’s account(s) of over $63 million and payments made out of HCCA’s account(s) of over $5 million.

7.  The Bank obtained several extensions of time but has yet to file its affirmation in opposition. Then, on 3 June 2025, some 4 months after the date of the s.182 Applications, the Bank applied by summonses that the following question of law be tried as a preliminary issue (the “Preliminary Issue”):

“After the presentation of the winding-up petition against [HCCC/HCCA] whether the pro tanto discharge of a debt owed by the [Bank] to [HCCC/HCCA], in the context of the [Bank] effecting a payment to a third party in accordance with [HCCC/HCCA]'s instructions without receiving the benefit of that payment, constitutes a "disposition" of [HCCC/HCCA]’s property within the meaning of section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32)."

Discussion

8.  Ms Rachel Lam SC and Mr John Hui, counsel for the JLs, opposed the Bank’s Preliminary Issue Summonses and considered them to be a delaying tactic.

9.  As earlier noted, the Bank sought and the JLs granted it specific time extensions for filing its affirmations. One would have thought that each time request made was based on its assessment of the time it required to complete the relevant affirmation. Instead, the parties are back to square one in the sense that no affirmation has been forthcoming despite the time extensions. There is also no explanation as to why it has taken the Bank 4.5 months to raise the Preliminary Issue.

10.  Mr Justin Ho, counsel for the Bank, accepted that there is no evidence to explain the delay. Nevertheless, he submitted that the Bank has made preliminary enquiries which show that the 400 odd Payments in question were paid to 1000 odd recipients and that there are fair arguments that a proportion of the Payments would be validated[1] although further investigations will have to be conducted.

11.  These would involve interviewing various bank staff involved in the management of the Bank, and reviewing HCCC/HCCA’s bank account records over a few years prior to the payments in question to ascertain the transaction pattern between HCCC/HCCA and each of the payees[2]. Background and public searches on each of the payees that require the assistance of professional investigators[3] would also be necessary although quite why this is so is not readily apparent.

12.  In short, the Bank’s submissions is that the determination of s.182 Applications would involve considerable costs, not only for the Bank but also the JLs who would have to carry out their own investigations upon receipt of the Bank’s evidence.

13.  The Bank submitted that the determination of the Preliminary Issue if resolved in the Bank’s favour will be determinative of the s.182 Applications. The Bank relies on English and Australian authorities. Their equivalents to s.182 do not enable an insolvent company to recover against banks. They regards the banks as mere agents or intermediaries: when debiting the company’s bank account and making payments in favour of third party payees, the banks are only acting in accordance with the company’s instructions. See Hollicourt (Contracts) Ltd v Bank of Ireland [2001] Ch 555 (at §31); Re Mal Bower’s Macquarie Electrical Centre Pty Ltd [1974] 1 NSWLR 254, 258; and Re Loteka Pty Ltd (1989) 15 ACLR 620, 627.

14.  The Bank’s written submissions[4] state: “the proper resolution of the Preliminary Issue may require a determination at the appellate level” without explaining what that would entail.

15.  In fact, for the Bank to succeed, the Preliminary Issue will have to be resolved by the Court of Final Appeal and not simply by the Court of Appeal. Hong Kong Courts have previously considered but decided not to follow the British and Australian authorities. See The Bank of East Asia, Limited v Rogerio Sou Fung Lam and Ano [1988] 1 HKLR 181; Chevalier (HK) Ltd and Anor v The Joint Liquidators of Right Time Construction Company Limited (in liquidation) [1990] 2 HKLR 223 and more recently, Re AGI Logistics (Hong Kong) Limited [2016] 5 HKLRD 737.

16.  They are all Court of Appeal authorities which are binding not only on the Court of First Instance but also the Court of Appeal

“unless [the Court of Appeal] concludes, after an examination of legal developments, including subsequent comparative jurisprudence, that its earlier decision should now be regarded as plainly wrong”:

see per Li CJ in A Solicitor v The Law Society of Hong Kong [2008] 2 HKLRD 576 at §52.

17.  The consensus of the parties is that the process is likely to take 3 years. As earlier noted, any savings in costs would only arise should the Bank prevail and the CFA decides to follow the British and Australian authorities. Should the Bank not succeed, it will be another 3 years before it can continue to conduct its ‘extensive’ investigations into the Payments and “the Transactions”[5] as to the precise nature of each payment and payee in order to determine whether it ought to be validated.

18.  The Payments were made in the second half of 2018, almost 7 years ago. The difficulties the Bank is already encountering in its investigations are mentioned in §19.1 of Mr Watts’ affirmation. However, there is apparently a need to review HCCC/HCCA’s bank account records “for a few years or more” prior to “the Transactions”. That would involve records from a decade or more ago. To determine the Preliminary Issue first would delay that exercise by another few years.

19.  The Bank submitted that it has a highly respectable argument that the Preliminary Issue can be answered in its favour. However, the Court of Appeal has rejected its argument on 3 occasions. Moreover, the Bank’s criticism of the AGI case in its skeleton submissions appeared to be somewhat opaque.

Conclusion

20.  In the circumstances, I did not accept the Bank’s submission that it would be in the interests of good case management to have the Preliminary Issue determined separately before the s.182 Applications and I dismissed the Preliminary Issue Summonses.

21.  After discussion with the parties, I gave the following directions for the filing of evidence:

1.  Unless the Respondent do file and serve its affirmation(s) in opposition to the s.182 applications by 4:00 pm on 30 July 2025, the Respondent be debarred from doing so.

2.  The Liquidators do file and serve their affirmation(s) in reply (if any) within 28 days thereafter.

3.  The s.182 Summonses and the Preliminary Issue Summonses be fixed to be heard together for substantive argument before a Judge in consultation with Counsel’s diaries with one day reserved.

4.  Costs of the hearing today of the Respondent’s Preliminary Issue Summonses be to the Liquidators with certificate for 2 counsel.

5.  Costs of the s.182 Summonses be in the cause.

Ms. Rachel Lam, SC and Mr. John Hui, instructed by Messrs. Howse Williams for the 1^st and 2^nd Applicants (in both actions)

Mr. Justin Ho, instructed by Messrs. Eversheds Sutherland for the Respondent (in both actions)

Official Receiver (Excused from attendance in both cases)

HCCW 316/2018

[2025] HKCFI 2696

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMI NISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 316 OF 2018

____________________

______________________

________________

DECISION

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1.  On 17 March 2025, I gave a decision (“Decision”) on the application of the Joint and Several Liquidators (“the liquidators”) of Hsin Chong Construction (Asia) Ltd (“the Company”), the main contractor of a development project, for:

-  a declaration that certain payments made by the employer to the Respondents (nominated sub-contractors) after the commencement of the Company’s winding-up were void under s.182 Companies (Winding Up and Miscellaneous Proceedings) Ordinance, and

-  an order that each of the Respondents do return that part of the payments that it has received (“Order”).

2.  The sums which the Respondents have been ordered to return are respectively:

-  R1: HKD8,047,000

-  R2: HKD17,604,000

-  R3: HKD17,779,000.

3.  On 14 April 2025, R1 and R2 lodged an appeal in CACV190/2025 and R3, in CACV191/2025.

4.  This is their application for a stay of execution pending appeal.

5.  I would respectfully adopt the principles set out by Chow J (as he then was) in Astro Nusantara International BV v PT Ayunda Prima Mitra (No.2)[1] which I shall not reproduce here.

6.  First, having read the grounds of appeal in both appeals and the relevant arguments thereon in counsels’ submissions, my preliminary view[2] is that they are arguable but have not reached the threshold of a strong likelihood of success, as:

-  the grounds do not challenge the focus on “relevant property” and “relevant disposition” (which followed the CFA judgment in Hsin Chong CFA[3]);

-  the arguments on construction of the Supplementary Agreement and Direct Payment letters have been rejected for reasons given in the Decision, and there do not appear to be any new insights;

-  the argument on estoppel by convention was rejected applying the public policy underpinning s.182 as stated in Hsin Chong CFA and following Goode on Principles of Corporate Insolvency Law that the section applied even if the liability to make the payment was incurred before the commencement of the winding-up[4];

-  the Respondents had not sought a validation order at the hearing before me[5];

-  the new ground on want of jurisdiction was not taken at the hearing before me, and has been rejected by DHCJ Le Pichon in another case[6].

7.1  I have then considered whether, without a stay, the appeals would be rendered nugatory. The Company is in insolvent liquidation. The Respondents understandably are concerned that if they have to pay the Company now but succeed on appeal, they would then recoup only a pro rata dividend together with other unsecured creditors. Ordinarily that would have been enough for the court to order a stay.

7.2  To answer this concern, the liquidators say that (a) they could ring-fence the sums by earmarking the separate sums received from the Respondents, and refrain from disposing of them until the disposal of the appeals; alternatively, (b) they would be content with payment of the sums into court.

8.1  I note however that no date has yet been fixed for the hearing of the appeals, and the Respondents have adduced evidence that during this uncertain time frame, the payment of the sums now (even if ring-fenced by earmarking or payment into court) would have a serious deleterious effect on their finances[7].

8.2  I have taken into account the points made by counsel for the liquidators that R1 and R2 have, despite the wealth of evidence supplied, not provided their audited accounts, and that R3 has net assets which would be sufficient to pay the sum ordered.

9.1  However, I am satisfied from an overview of the Respondents’ evidence that serious cash flow problems may well ensue if they are required to make payment now of the sums ordered in the current time frame, be it to earmarked accounts, or into court. R1 and R2 are currently involved in respectively 21 and 36 building projects where some of their main contractors are in provisional or voluntary liquidation, meaning that the respondents would have to look to their own resources in the first instance to pay employees, suppliers and sub-subcontractors, resulting in difficulties with cash flow. As for R3, which has provided audited accounts, I note that a substantial part of its net assets comprise of property and plant. I am satisfied that a refusal to grant a stay would have a serious deleterious effect on the Respondents.

9.2  On the other hand, the liquidators have not indicated that they would suffer any prejudice from delayed payment of the sums, apart of course from the fear of not being able to obtain the sums ordered. The fact that they are prepared to ring-fence the sums or accept payment into court shows that they do not need the sums to fund their response to the appeals.

10.1  Doing the best I can in the current circumstances, and in light of the Respondents’ offer to pay $2 million each into court as a “sign of sincerity”, I would order in respect of each respondent that:

(1)  execution of the Order be stayed pending the determination of its appeal on condition of payment into court of $2 million within 28 days from the date of this Decision;

(2)  during the said 28 days, there be an interim stay of the Order;

(3)  by consent, the costs of the application for stay be costs in the cause of the appeal.

10.2  I would also direct that the Respondents proceed expeditiously towards fixing a date for the hearing of the appeals, and in this respect, there be liberty to apply to the court.

Mr Michael Lok and Mr Charlie Liu, instructed by DeHang Law Offices (Hong Kong) LLP, for the Applicant

Mr Jonathan Chang, SC and Mr Martin Ho, instructed by Cocking & Co LLP, for the 1^st and 2^nd Respondents

Mr Jason Wong and Ms Myranda Lai, instructed by Eric Yu & Co, for the 3^rd Respondent

The Official Receiver, attendance excused

HCCW 316/2018

[2025] HKCFI 1020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 316 OF 2018

____________________

______________________

________________

DECISION

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1.  This is an application of the Joint and Several Liquidators (“the liquidators”) of Hsin Chong Construction (Asia) Ltd (“the Company” or “the Main Contractor”) for:

(a)  a declaration that payments in the total sum of HKD54,436,000 (“the Relevant Payments”) made by Capital Court Ltd (“the Employer”) to Wong Po Kee Ltd, Pyrofoe Engineers Ltd and Keio Engineering Co Ltd (collectively the “Nominated Sub-Contractors” or “NSCs”) after the commencement of the Company’s winding up (5 November 2018) were void under s.182 Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap. 32 (“theOrdinance”); and

(b)    an order that each of the NSCs do return that part of the Relevant Payments that it has received.

2.  Section 182 provides, where relevant, as follows:

“Avoidance of dispositions of property, &c. after commencement of winding up

In a winding up by the court, any disposition of the property of the company, including things in action¹, ... made after the commencement of the winding up, shall, unless the court otherwise orders, be void”.

3.  The NSCs do not dispute that the Employer made the Relevant Payments to the NSCs after the date of commencement of the Company’s winding up.  Their defence is that as the result of an arrangement made before 5 November 2018 for direct payment from the Employer to the NSCs, the Company had no right to receive payment from the Employer, and so there was no “property of the company” that was caught by s.182.

Background facts

4.  The background facts may be summarised as follows.

5.  The Employer intended to develop a project, with the Company as the Main Contractor. 

6.  In August 2016, the Company sent a “letter of acceptance” to each of the NSCs stating that it has been instructed by the Architect to accept it as the nominated sub-contractor for specified works for the project.  Although the letter said that the sub-contract documents were being prepared by the consultant quantity surveyor, and drafts were subsequently circulated in February 2017, the sub-contracts were not in fact signed until 18 December 2018, after the commencement of the winding up of the Company.  The drafts were not altered notwithstanding the arrangement effected by the Supplementary Agreement relied upon by the NSCs (discussed below).

Main Contract

7.1  On 5 December 2016, the Employer and the Company had entered into an “Agreement & Schedule of Conditions of Building Contract for use in the Hong Kong Special Administrative Region” (“the Main Contract”).

7.2  Before the Supplementary Agreement referred to later, the normal course under the Main Contract² would be as follows: 

-  the Company as main contractor would apply to the Architect from time to time for certificates of payment for works³ done (including the total value of works done by the NSCs);

-  the Architect would then issue certificates stating the amount due to the Company from the Employer;

-  the amount of the certificates would be the estimated value of the works done, less any amount that may be retained by the Employer (the Employer may retain 10% of the total value of the works but excluding the amounts in respect of the NSCs’ works plus the retention fund held for the NSCs under the sub-contracts)⁴ and less any instalments already paid; 

-  the Employer would pay the Company within 28 days after presentation of the certificates, but it could deduct or set-off sums due from the Company to it.

7.3  Clause 30 of the Main Contract provided:

“(1) At the Period of Interim Certificates named in the appendix to these Conditions the Architect shall issue a certificate stating the amount due to the Main Contractor from the Employer, and the Main Contractor shall, on presenting any such certificate to the Employer, be entitled to payment therefor within the Period for Honouring Certificates named in the appendix to these Conditions. ...” (Emphasis added).

8.  Pausing here, it would be seen that the Employer would pay the Company as Main Contractor for works done, including works done by the NSCs.

9.  Clause 27 dealt with the position of Nominated Sub-Contractors as follows.

27  Nominated Sub-Contractors

...

“(a) Such sums shall be deemed to be nett (no discount allowed) and shall be expended in favour of such persons as the Architect shall instruct, and all specialists or others who are nominated by the Architect are hereby declared to be sub-contractors employed by the Main Contractor and are referred to in these Conditions as ‘Nominated Sub-Contractors’. Provided that the Architect shall not nominate any person as a sub-contractor against whom the Main Contractor shall make reasonable objection, or (save where the Architect and the Main Contractor shall otherwise agree) who will not enter into a sub-contract which provides (inter alia):

...

(viii) that the Main Contractor shall retain from the sum directed by the Architect as having been included in the calculation of the amount stated as due in any certificate issued under clause 30 of these Conditions in respect of the total value of work, materials or goods executed or supplied by the Nominated Sub-Contractor the percentage of such value named in the appendix to the Sub-Contract conditions (or, if there be none, in the appendix to these Conditions) as Percentage of Certified Value Retained up to the total amount specified in the appendix to the Sub-Contract Conditions as Limit of Retention Fund (or, if there be none, up to a total amount not exceeding a sum which shall bear the same proportion to the Sub-Contract Sum as the Limit under the Main Contract bears to the Main Contract Sum excluding all amounts included therein in respect of Nominated Sub-Contract works); and that the Main Contractor’s interest in any sums so retained (by whomsoever held) shall be fiduciary as trustee for the Nominated Sub-Contractor (but without obligation to invest) and that the Nominated Sub-Contractor’s beneficial interest in such sums shall be subject only to the right of the Main Contractor to have recourse thereto from time to time for payment of any amount which he is entitled under the sub-contract to deduct from any sum due or to become due to the Nominated Sub-Contractor; and that if and when such sums or any part thereof are released to the Nominated Sub-Contractor they shall be paid in full”. (Emphasis added).

...

(c) Before issuing any certificate under clause 30 or these Conditions, the Main Contractor shall furnish the Architect reasonable proof that all amounts (less due retentions) included in the calculation of the amount stated as due in previous certificates in respect of the total value of the work, materials or goods executed or supplied by any Nominated Sub-Contractor have been discharged, and if the Main Contractor fails to comply with the same and unless he shall produce to the Architect in writing

(i) reasonable cause for withholding or refusing to discharge such amounts as are due, and

(ii) reasonable proof that he has so informed such Nominated Sub-Contractor,

the Architect shall issue a certificate to that effect and thereupon the Employer may himself pay such amounts to any Nominated Sub-Contractor concerned and deduct the same from any sums due or to become due to the Main Contractor”. (Emphasis added).

...

(f) Neither the existence nor the exercise of the foregoing powers nor anything else contained in these Conditions shall render the Employer in any way liable to any Nominated Sub-Contractor”. (Emphasis added).

10.  Pausing here, it is noted that clause 27(c) which relates to direct payment from the Employer to the NSCs is subject to certain conditions and is couched in discretionary terms.  It has been held that this is an enabling provision, meaning that the employer was entitled, but not obliged, to make direct payments if the conditions were satisfied⁵.

11.  On 27 April 2017, one of the NSCs sent a letter to the Employer in these terms:

“According to our record the recent payment received from Main Contractor is being delayed in the past few months ... and with the news broadcasted of Main Contractor’s recent financial status, in order to protect both Client and our company’s interest, we would like to request your consideration of change the payment of our contract works into direct payment for the forthcoming payment.”

12.  There was no reply from the Employer to that NSC, nor was there any meeting between the Employer and any of the NSCs. 

13.  However, the Employer did discuss with the Main Contractor the question of direct payment to the NSCs.

Supplementary Agreement between the Employer and the Company

14.  On 12 May 2017, a Supplementary Agreement⁶ was entered into by deed between the Employer and the Company which was expressed to vary and supplement the terms of the Main Contract.  It contained the following relevant terms:

“(2) In consideration of the provisions stated in Clause (3) below, the Employer agrees to directly pay to all Nominated Sub-Contractors (commencing from and including the interim certificate No.13 by the Architect) and deduct the sums so paid from any sums due or become due to the Main Contractor (excluding the amounts payable or paid to the Nominated Sub-Contractors) (emphasis added).

(3) In consideration of the provisions stated in Clause (2) above, the Main Contractor agrees the following:

(i) Payment Mechanism

The payments in respect of any works, materials or goods under the Nominated Sub-Contracts shall be made in full amount based on the terms and conditions in the respective Nominated Sub-Contracts without any adjustments for charges, set-off, and the like between the Main Contractor and the Nominated Sub-Contractors.

After the Architect issues an interim certificate stating the amounts due to the respective Nominated Sub-Contractors, the Nominated Sub-Contractors should present the notification to the Employer, together with the written confirmation of payment to be received from the Employer, and be entitled to payment within 28 days from the presentation of the Certificate.

The Main Contractor agrees that the sums paid by the Employer directly to the Nominated Sub-Contractors shall be deemed to have been paid via the Main Contractor and waives any claims against the Employer that he has not received any amount in connection with the payments to the Nominated Sub-Contractors (emphasis added).

(3) ⁷In consideration of the provisions stated in Clause (2) above, the Main Contractor agrees the following : (Cont’d)

Except for the Main Contractor’s obligation regarding payments to the Nominated Sub-Contractors, such direct payment to the Nominated Sub-Contractors by the Employer shall not discharge the Main Contractor from any obligation to the Nominated Sub-Contractors under the Contract (emphasis added).

(4) This Supplementary Agreement shall be deemed to be in full compensation and satisfaction for any loss or injury sustained by the Main Contractor in respect of any matter or thing in connection with the implementation of this Supplementary Agreement ...

(5) Unless otherwise specified or provided by this Supplementary Agreement, this Supplementary Agreement will not affect or extinguish any existing rights of the Employer and the Main Contractor and is entered into by the parties without any prejudice to any of their existing rights.

...

(7) In the event of any ambiguity, discrepancy or conflict between this Supplementary Agreement and the Main Contract, the terms and conditions of this Supplementary Agreement shall prevail”.

Direct Payment letters from the Company to the NSCs

15.1  The NSCs were not parties to the Supplementary Agreement.  However on 15 May 2017, the Company issued letters to the NSCs⁸ headed “Employer’s Direct Payment to Nominated Sub-Contractors (Commencing from and including the Interim Certificate No.13) (“the Direct Payment letters”), which said:

“Further to our recent discussion with the Employer, we hereby write to inform you of the revised payment procedure as agreed and confirmed with the Employer as follows:

1. Starting with the interim certificate No.13, interim payments as certified by the Architect to the Nominated Sub-Contractors (NSCs) shall be made directly by the Employer to the NSCs;

2. After the Architect issues an interim certificate stating the amounts due to the respective NSCs, the NSCs should present the notification to the Employer, together with the written confirmation of payment to be received from the Employer, and be entitled to payment within 28 days from the presentation of the Certificate; and

3. The payments in respect of any works, materials or goods under the Nominated Sub-Contracts shall be made in full amount based on the terms and conditions in the respective Nominated Sub-Contracts without any adjustments for charges, set-off, and the like between the Main Contractor and the NSCs.

Please note that such direct payment to the NSCs by the Employer shall not discharge the NSCs from any obligation to the Main Contractor under the Nominated Sub-Contracts” (Emphasis added).

15.2  The Direct Payment letters were counter-signed “Agreed and accepted by” the NSCs.

16.  The terms of the Supplementary Agreement and the Direct Payment letters are material to the issue whether the Company thereby lost its right⁹ to receive the Relevant Payments from the Employer after the commencement of its winding up, and will be discussed below.

17.  On 2 October 2018, the Company completed construction of the project under the Main Contract.

Commencement of winding up

18.  On 5 November 2018, a winding up petition was presented against the Company, thereby commencing the winding up for the purposes of s.182¹⁰ (the winding up order was made on 1 June 2020).

Sub-Contracts

19.  On 18 December 2018, the NSCs signed the sub-contracts which contained the following provisions.  There was no reference (by incorporation or otherwise) to the Supplementary Agreement or the Direct Payment letters.  The following provisions are relevant.

Clause 11(a) -   the NSCs should provide details of the total value of their work to the Main Contractor, who shall then apply to the Architect for certificates of payment;

Clause 11(b) -   14 days after the Employer pays the Main Contractor, the Main Contractor shall pay the NSCs the total value certified, less Retention Money (ie the proportion attributable to the sub-contract works retained by the Employer in accordance with the Main Contract) and amounts previously paid;

Clause 11(c) -   14 days after the Main Contractor receives the Retention Money from the Employer against a certificate, the Main Contractor shall pay to the NSCs such part of it as is included in the certificate;

Clause 11(h) -   the Main Contractor’s interest in the Retention Money, whether it is included in the amounts retained by the Employer under the Main Contract and held by him or whether it is held by the Main Contractor, is fiduciary as trustee for the Sub-Contractor (without obligation to invest);

Clause 13 -  the Main Contractor shall notwithstanding anything in the Sub-Contract be entitled to deduct from or set off against any money from him to the Sub-Contractor (including any Retention Money) any sum or sums which the Sub-Contractor is liable to pay to the Main Contractor under this Sub-Contract.

Payments by the Employer to the NSCs

20.  Commencing on 7 November 2018 (i.e. after the date of commencement of winding up), the Employer made payments of retention monies and non-retention monies directly to the NSCs under Interim Payment Nos.IP31, 34, 36 and 37, as follows:

NSC	Dates of Payment	Retention Monies	Non-Retention Monies
1st Respondent	7.11.2018 to 30.9.2019	2,449,000	8,047,000
2nd Respondent	7.11.2018 to 17.8.2020	4,966,500	17,604,000
3rd Respondent	7.11.2018 to 17.8.2020	3,590,500	17,779,000

Proceedings

21.1  On 25 July 2023, solicitors for the Company’s liquidators issued letters of demand to the NSCs for return of the sums they received from the Employer after the commencement of the Company’s winding up.

21.2  The NSCs having refused to return the sums, the summons was issued on 10 July 2024.

Discussion

22.  It is clear that under normal contractual provisions, the employer would not make direct payments to NSCs except under the conditions prescribed in clause 27 (c) of the Main Contract, and even then, as a matter of discretion by the employer¹¹.  It was not argued before me by the NSCs that these conditions applied in the present case.

23.  Rather, the NSCs’ case is that the Supplementary Agreement and the Direct Payment letters gave them certain rights (discussed below) which entitled them, as opposed to the Company, to receive the Relevant Payments even though they were made by the Employer after the commencement of the Company’s winding up.  It is noted that the NSCs have not applied for a validation order under s.182.

24.1  Before discussing the NSCs’ submissions, it is important to note the principles underpinning s.182 as set out by the Court of Final Appeal in Re Hsin Chong Construction Co Ltd (“Hsin Chong CFA”)¹².  In that case, after a petition was presented to wind up a company, resulting in the freezing of its bank accounts, it entered into a supplementary agreement with its joint venture partner for the JV partner to acquire the company’s rights under the JV for a sum.  Under the supplementary agreement, the JV partner would pay the sum into an account of the company’s associate company for payment of the company’s staff wages and outstanding MPF contributions.

24.2  The JV partner then applied for, and was granted, a retrospective validation order under s.182.

24.3  The CFA set aside the validation order, holding that:

-  in deciding whether to grant a validation order, the interests of the company’s general body of creditors was of central importance [§32];

-  the court should focus on what was the relevant property which belonged to the company and what was the relevant disposition [§33];

-  the relevant property was the company’s rights under the JV agreement and the conversion of those rights into the sum payable under the supplementary agreement, being a chose in action [§34];

-  the relevant disposition was the performance of the supplementary agreement, the effect of which was that the company lost its right to receive the sum for distribution to its general body of creditors [§38];

-  if, as a result of the payment of the sum under the supplementary agreement, the company’s property was transferred, it did not matter that the transfer was “wrapped in contractual clothing” [§35]. Nor did it matter whether the parties had any ulterior motive or were involved in any breaches of duty before the disposition is rendered presumptively void [§40].  The sum did not go to the company to the prejudice of its unsecured creditors and was thus contrary to the pari passu¹³principle [§38].

25.  The focus is on the relevant property and its disposition.  It is true that in the authority above, the supplementary agreement was entered into after the commencement of the winding up.  However, as stated in Goode on Principles of Corporate Insolvency Law, §8-13:

“ ... the mere fact that a power to pay the sub-contractor has become exercisable prior to the winding up will not be sufficient; once liquidation supervenes, payment cannot be made to one creditor at the expense of others, even if the liability to make the payment was incurred before the commencement of the winding-up”. (Emphasis added)

26.1  This principle was illustrated in the Court of Appeal’s judgment in Chevalier (HK) Ltd and anor v The Joint Liquidators of Right Time Construction Co Ltd (in Liquidation)¹⁴.

26.2  In that case, on 29 April 1987 the main contractor sent a letter to the employer confirming (at the employer’s request), that it (the main contractor) had no objection to the employer paying direct to the NSCs as per an architect’s certificate of the previous day.  On the same day (29 April 1987), the employer drew cheques for two sums in favour of two NSCs.  The NSCs issued receipts bearing the same date.  On 1 May 1987, a petition for winding up the main contractor was presented, and as such was the day on which the winding up commenced.  On 25 May 1987, the cheques were cleared and the funds were received by the NSCs.

26.3  The Court of Appeal¹⁵ held that the payments were void under s.182.  It accepted that the payments to the NSCs had been made with the consent of the main contractor.  However, following the observation of Oliver J (as he then was) in In re Leslie Engineers Co Ltd¹⁶, the court held:

“ ... it is wholly immaterial so long as one is dealing with the company’s property, whether the purported disposition is made by the company or by a third party, or whether it is made directly or indirectly”¹⁷.

26.4  The court focused (as the CFA did in Hsin Chong CFA above) on the relevant property and its disposition. 

“Ignoring for the moment the effect of s.182, when [the employer] (with the authority of [the main contractor]) paid its own money to each [NSC], the position was that [the employer] was entitled to, and no doubt did, in its books, debit the [main contractor] account to the extent of the payments made to each of the [NSCs]. This reduction in the debt owed by [the employer] to [the main contractor] was a reduction made with the authority of [the main contractor] and amounted to a disposition of [the main contractor’s] property within the meaning of s.182.

Furthermore there was also a disposition of [the main contractor’s] property effected when [the employer] made the payments to each of the [NSCs] because, as between [the main contractor] and [the employer] on the one hand and each of the [NSCs] on the other hand, [the employer] has acted, in effect, as the agent of [the main contractor] and paid the sums of money to which [the main contractor] was entitled (under the main contract) to the [NSCs] in partial discharge of [the main contractor’s] debt to each of them.

Section 182 retrospectively renders both these dispositions void ...”¹⁸.

The court held that the liquidators were entitled to claim against the NSCs.

The NSCs’ contentions

27.1  The NSCs contended that even though the Relevant Payments were made after the commencement of the Company’s winding up, s.182 did not apply.  Their arguments can be summarised under the following heads:

(1)    Variation

(2)    Assignment

(3)    Novation

(4)    Estoppel by Convention

(5)    Trust over the Retention Monies.

27.2  I should add that the NSCs had originally argued that they had obtained an enforceable right by virtue of the Contacts (Rights of Third Parties) Ordinance Cap.623.  However, Mr Anson Wong SC¹⁹ clarified at the hearing that this was not a “stand-alone” argument, and only “buttressed” the other arguments.

(1) Variation

28.1  It was submitted on behalf of the NSCs that the Supplementary Agreement had the effect of disposing of the Company’s right to receive payments from the Employer in respect of the Sub-Contract works under the Main Contract.  They argued that this disposition was the result was a tri-partite agreement between the Employer, the Company and the NSCs, as in Golden Sand Marble Factory Ltd v Easy Success Enterprises Ltd and Anor²⁰.

28.2  In that case, after meetings were held in March 1995 among the employer, the main contractor and the NSC, it was agreed that all future payments in relation to the NSC’s works would be paid directly by the employer to the NSC and not through the main contractor.  In June 1996, the main contractor was wound up.  In May 1997, the architect settled the final account due in respect of the NSC’s works (including retention money).  The main contractor’s liquidators argued that they had the right to receive the sum. 

28.3  Findlay J held that the NSC was entitled to the whole sum.  He held that at the meetings of the employer, the main contractor and the NSC, there was an agreement that payments would be made directly to the NSC.

“So, whatever the position may be where there is a unilateral act under clause 27 (c), where there is an agreement such as here the sub-contractor acquires an enforceable right to have the payments made directly to him, and the main contractor loses any right under the main contract it might have had otherwise to insist that payment be made through it. Here, there is no question of the employer exercising a discretion to pay the nominated sub-contractor directly. It is a matter of rights under the agreement on March 1995”²¹. (Emphasis added)

28.4  The judge also held obiter that where an employer acted unilaterally under the main contract and paid an NSC directly and deducted this payment from money due to the main contractor, if the main contractor was liquidated before payment, then on principle, the right to receive the payment was still vested in the company at the time of winding up²².

29.  Findlay J’s decision was grounded on the basis that there had been an agreement among all three parties which he found had been made at the meetings²³.  In the present case however, there is no evidence of a tri-partite agreement.  Unlike the facts in Golden Sand, there were no meetings or evidence of other discussions among the three entities, i.e. the Employer, the Company and the NSCs.  And unlike the facts in Brican Fabrications Ltd v Merchant City Developments Ltd²⁴, there was no extant bilateral contract between the Employer and the NSCs.  The NSCs were not included as parties to the Supplementary Agreement, and apparently were not even aware of its terms as they had not been given a copy of it.

30.  More importantly, the terms of the Supplementary Agreement also do not support the NSCs’ contention that it thereby had the effect of disposing of the Company’s right to receive payments from the Employer in respect of the Sub-Contract works under the Main Contract.

31.1  The NSCs’ first contention was based on the wording in the Supplementary Agreement that [the NSCs] should “be entitled to payment within 28 days from the presentation of the certificate” (emphasis added). 

31.2  However, that must be understood against the rest of the document, in particular the following:

“the Main Contractor agrees that the sums paid by the Employer directly to the [NSCs] shall be deemed to have been paid via the Main Contractor and waives any claims against the Employer that he has not received any amount in connection with the payments to the [NSCs]” (emphasis added).

32.  In my view, the emphasized words preserve the position, as a matter of legal right, that it is the Main Contractor which is entitled to receive the moneys, even though, as a matter of physical mechanism, the moneys did not go through its bank account. 

33.  The “entitlement” of the NSCs referred to the implementation of this mechanism for payment.  This was obviously of benefit to them, as payments so made by the Employer and received by them before the Company’s winding up would directly provide the NSCs with liquid funds. 

34.  The NSCs also asked rhetorically that if the Main Contractor was still entitled as a matter of legal right to payment from the Employer, what then is the variation to the Main Contract?  The answer, in my view, is that it added an alternative route to direct payment, in addition to clause 27(c).  Without these routes, an employer has no right to by-pass a main contractor to make payment directly to sub- contractors²⁵.

35.  The NSCs’ second contention was that the payments ceased to be the property of the Company because it was stated in the Supplementary Agreement that they would be “without any adjustments for charges, set-off and the like between” the Company and the NSCs.

36.1  I do not consider that these words support the NSCs’ case.  On the contrary, they show that the direct payment was simply a mechanism for funds to be paid quickly, as the Employer would not be aware of (or wish to be involved in disputes over) any charges or set-off that the Company had against the NSCs.  Under this payment mechanism, the Employer would simply pay the NSCs the face value of the certificates first, and leave it to the Company to, as it were, “settle accounts” with the NSCs later. 

36.2  To suggest that a company which was in financial difficulty would agree to abandon all its rights of charge or set-off against its sub-contractors defies commercial sense, and the court should be very cautious before accepting any interpretation that would achieve such a result.

37.  The NSCs’ third contention²⁶ based on “the other clauses in Clauses (2) and (3)” of the Supplementary Agreement is not understood. 

38.  Clause (2) states, where material:

“ ... the Employer agrees to directly pay to all [NSCs] ... and deduct the sums so paid from any sums due or become due to the main contractor (excluding the amounts payable or paid to the [NSCs])” (emphasis added).

In my view, this is consistent with the position that the Employer remained liable to pay the Main Contractor.  Otherwise, the Employer would be separately liable to (1) the NSCs and (2) the Main Contractor for two distinct sums.  There would be no question of “deducting” (1) the sums paid to the NSCs from (2) the sums due to the Main Contractor.  In making payment to the Main Contractor, the Employer would exclude the sums payable or paid to the NSCs, otherwise the Employer would be paying twice for the same works.

39.  Clause 3(i) states, where material:

“The Main Contractor agrees that the sums paid by the Employer directly to the [NSCs] shall be deemed to have been paid via the Main Contractor and waives any claims against the Employer that he has not received any amount in connection with the payments to the Nominated Sub-Contractors ...”.

40.  Again this is consistent, in my view, with the position that the Employer remained liable to pay the Main Contractor for sub-contract works.  If the Employer had entered into a separate obligation to pay the NSCs, with the Main Contractor simply “dropping out of the picture”, it would not have been necessary to expressly specify that the sums so paid should be treated as having been paid through the Main Contractor, and the reference to “waives any claims” presupposed that the Main Contractor would have claims for the sums. 

41.  The NSC’s fourth contention was based on the context from which the Supplementary Agreement arose. 

42.  The NSCs submitted that the Employer wished to ensure that the NSCs would carry on works at the project as usual. That is a reasonable assumption, but it does not lead to the conclusion that the Employer thereby entered into a new, direct contractual relationship with the NSCs, with the Main Contractor abrogating its rights under the Main Contract.  As mentioned earlier, with the implementation of the direct payment mechanism, the NSCs did benefit from the direct payment of funds from the Employer.  This lasted for 18 months before the commencement of winding up. The liquid funds satisfied the commercial objective of ensuring the sub-contract works would proceed, as in fact they did.

43.  The NSCs’ fifth contention was based on the Third Party Ordinance.  This ordinance deals with the right to sue.  In light of the clarification by their leading counsel that this was not a stand-alone point, and as I have found that the other four contentions are insupportable, I will not further lengthen this Decision by discussing this fifth contention.  

(2) Assignment

44.  The NSCs argued that the Direct Payment letters had the effect of an assignment by the Company to the NSCs of its rights to payment from the Employer. 

45.1  In my view, there was no assignment in the present case.  A mere mandate or authority is not enough²⁷.  For there to be an assignment, it must be plain that the assignor (the Company) intends to divest itself of the chose and vest it in the assignee (the NSCs).  For the reasons discussed above in the section on Variation, it is clear from the terms of the Supplementary Agreement that the Company did not intend to divest itself of the right to payment from the Employer.  What it intended to effect was a “payment mechanism”, as per the specific heading of the Supplementary Agreement, or a “revised payment procedure”, as per the Direct Payment letters, and that was what the NSCs were only “entitled” to. 

45.2  ReFrench’s (Wine Bar) Ltd²⁸ does not assist the NSCs, as in that case, there was an unconditional, specifically enforceable contract entered into between the company and the purchaser of the wine bar, for which the deposit was paid, and the purchaser let into possession, all before the presentation of the petition for the company’s winding up.

(3) Novation

46.  This can be dealt with shortly.  It is accepted by the NSCs that a novation occurs only where there is consent by all three parties.  Again for the reasons discussed under the section on Variation, it is clear there was no intention on the part of the Employer and the Company that the latter’s right to payment from the former under the Main Contract (the Company’s chose) would be extinguished, and replaced by a newly created right acquired by the NSCs against the Employer, between whom there were not even discussions, let alone an agreement.

(4) Estoppel by convention

47.  The NSCs also argued that the Company is estopped from arguing that it has the right to the Relevant Payments made after commencement of the winding up.

48.  This argument ignores the public policy underpinning s.182 as explained by the CFA in Hsin Chong CFA and illustrated in Chevalier.  When a statute is enacted on grounds of general public policy, an estoppel cannot be asserted against it, at least not in circumstances where a validation order would not be granted²⁹.  As noted above, the NSCs have not sought a validation order in the present case.

49.1  In conclusion (subject to the discrete issue of Retention Monies discussed below), applying the principles set out by the CFA in Hsin Chong CFA and by the Court of Appeal in Chevalier to the present case, it is clear that the making by the Employer of the Relevant Payments to the NSCs after the commencement of winding up is caught by s.182.

49.2  The relevant property was first, the right (a chose in action) that the Company had to receive money from the Employer, including money for works done by the NSCs, which right was converted into the funds in the Relevant Payments.  

49.3  The relevant disposition was the making of the Relevant Payments to the NSCs at a time when the Company’s winding up had commenced.  The fact that the Company had authorised it before the commencement of winding up³⁰, that it may have been made under contract³¹, and the Company’s motive when so agreeing³², were immaterial.

(5)  Retention monies

50.  As noted above, the liquidators sought the return from the NSCs of both Retention Monies and Non-Retention Monies paid by the Employer. 

51.  The NSCs contended that, irrespective of their other arguments, the liquidators were not entitled to the return of the Retention Monies, as the Company’s interest in “any sums so retained (by whomsoever held) shall be fiduciary as trustee for the [NSC]” as stipulated in clause 27(a)(viii) of the Main Contract and clause 11(h) of the Sub-Contracts.

52.1  In Re Tout & Finch Ld³³a company which was the main contractor went into voluntary liquidation.  The sub-contractors made an application to the court to determine first, to whom the employer should make payment, and secondly, whether the main contractor company was trustee of the retention money, so that when the retention money became payable, it should be paid directly to the sub-contractors, or if it came to the liquidator’s hands, he was bound to immediately pay it over to the sub-contractors.

52.2  The court held that on the construction of the contract documents, which were similar to those in the present case, the main contractor company had an interest in the retention money held by the employer which it (the company) could make the subject of a valid equitable assignment, and such an assignment had been effectively made by clause 11(h) of the sub-contract³⁴.  Accordingly the company was a trustee and was bound to pay the retention money over to the sub-contractors.

52.3  The court held that a trust existed notwithstanding the provision in the sub-contract that the main contractor shall be entitled to make deductions or set-offs from any sums, including any retention money, which he may be liable to pay to the sub-contractor.  It was held to be

“a perfectly normal and perfectly sensible provision to make, namely, that against what the company may owe to the applicant [sub-contractor] as trustee, the company may set off moneys which may be owing by the sub-contractor to the company”³⁵.

53.1  This analysis was followed by the Court of Appeal in Re Hsin Chong Construction Co Ltd (Provisional Liquidators: Application for Directions) (“Hsin Chong CA”)³⁶.  In that case, the employer engaged a company as main contractor to construct some buildings.  The company entered into sub-contracts with NSCs.  The terms of the main contract and sub-contracts were not identical to those in the present case.

53.2  A winding up petition was presented against the main contractor company, after which the architect issued final certificates stating a final sum was due from the employer.  The liquidators applied for directions from the court as to whether they should make any payments to the sub-contractors out of funds received from the employer.

53.3  The Court of Appeal held, adopting the trust analysis in Re Tout and Finch Ld, that the retention monies should be released to the NSCs and the non-retention monies were part of the company’s estate for distribution to unsecured creditors³⁷.  The question arose “whether the retention monies had been sufficiently segregated such that a trust had been created”.  This was rejected for the reason (among others) that the employer had adopted a stringent project accounting system, the retention monies having been set aside in the payable account since the commencement of the project, and the retention monies could be easily ascertained.  There was no question of any NSCs’ money being mixed with the company’s money.

54.1  In the present case, the liquidators have again argued that no trust arose because they were informed by the Company’s retained staff that:

“Where the Company received funds of a construction project that consist of (i) retention monies that may be held by the Company on behalf of sub-contractors and (ii) non-retention monies, the Company would not segregate the fund accordingly (by separating the two of them into separate bank accounts or otherwise). As such, the respective amounts of retention monies and non-retention monies received by the Company would not be ascertainable solely with reference to bank records”³⁸.

54.2  On that basis, the liquidators argued that since the practice of the Company was not to segregate retention monies when received from the Employer, there were no identified assets impressed with the trust, such as to constitute a separate trust fund prior to insolvency.

55.  I do not think that the evidence of the Company’s practice when it used to receive moneys (including retention monies) in its bank accounts assists the liquidators in the present case.  Here, the Retention Monies were retained by the Employer and paid to the NSCs. The monies did not pass into the Company’s bank account where it might have been commingled with its own funds.  There is no evidence that the Employer had commingled funds.

56.  Having said that, I note that the liquidators claim that the Company is entitled to set-off against the Retention Monies a portion of the liquidated damages and contra-charges claimed by the Employer in respect of works done by the NSCs³⁹. 

57.1  In Mr Arab’s 8^th affirmation, he said the Company was not yet in a position to ascertain and finalise the quantum of set-offs due to “technical and practical difficulties in ascertaining the exact amount of the set-offs” but he said that, based on existing estimations made by the Company’s retained staff, “the estimated quantum of set-offs (which is as high as HK$61 million in total) has well exceeded the total amount of Retention Monies (i.e. around HK$11 million)”.⁴⁰

57.2  In the affirmation filed on behalf of each of the NSCs, the deponent said he was not able to “consider and respond to the liquidators’ assertions” as Mr Arab did not break down the alleged liquidated damages and contra charges as between the respective NSCs⁴¹.

57.3  Mr Arab said in his affirmation in reply that the exact quantum of the set-off may crystalize only after the final account for the project are finalised between the liquidators and the Employer⁴².  He did not indicate an approximate date.

58.  As noted above, it is well-established that as a matter of principle, a trust may co-exist with a trustee’s right of set-off ⁴³. In the present case however, the amount of set-off remains to be determined. In the circumstances, I think the proper order to make is as follows.

Order

59.  (1)    A declaration that the payment to:

-  the 1^st Respondent of HKD8,047,000

-  the 2^nd Respondent of HKD17,604,000 and

-  the 3^rd Respondent of  HKD17,779,000

made by Capital Court Ltd after the commencement of winding up of Hsin Chong Construction (Asia) Ltd were void under s.182 Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap. 32;

(2)    An order that each respondent do pay to the applicants its respective sum above within 28 days⁴⁴ from the date of the Order herein;

(3)    An order that within 28 days of the date of the Order,

-  the 1^st Respondent do pay the sum of HKD2,449,000

-  the 2^nd Respondent do pay the sum of HKD4,966,500 and

-  the 3^rd Respondent do pay the sum of HKD3,590,500

to the applicants to be held by the applicants in a separate trust account for each respondent pending finalization of the final account between Capital Court Ltd and Hsin Chong Construction (Asia) Ltd in respect of the Hong Kong Ocean Park Marriott Hotel project and any consequential set-off;

(4)    Liberty to apply.

60.  Finally as to costs, the parties have agreed that costs should follow the event.  As the applicants have succeeded on most of the issues, I would order that the respondents pay 75% of the costs to be taxed if not agreed.  The parties have agreed that there should be certificate for two counsel.

Ms Audrey Eu, SC and Mr John Hui, instructed by DeHeng Law Offices (Hong Kong) LLP, for the Applicant

Mr Anson Wong, SC and Mr Paul Law, instructed by Deacons, for the 1^st to 3^rd Respondents

HCCW 316/2018

[2024] HKCFI 3310

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 316 OF 2018

____________________

____________________

____________________

DECISION

____________________

Introduction

1.  There are 3 summonses before the Court:

(A) A summons dated 5 June 2024 (the “Liquidators’ Summons”) taken out by the Applicants who are the Liquidators of Hsin Chong Construction (Asia) Limited (the “Company”) for

(1) a declaration that payments totalling HK$11,295,350 (the “Relevant Sum”) made by Capital Court Limited (the “Respondent”) after the commencement of the winding up to Cogent Spring Limited (“Cogent Spring”) were void pursuant to section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (the “CWUO”); and

(2) an order that the Respondent do return and/or pay the Relevant Sum to the Applicants within 7 days from the date of the Order to be made.

(B) A summons dated 24 September 2024 (the “section 186 summons”) taken out by the Respondent in the event that the Applicants are successful in this hearing for leave pursuant to section 186 of the CWUO to commence an action against the Company in terms of the draft Statement of Claim (“draft SOC”) attached thereto seeking damages of an amount equal to the Relevant Sum;

(C) A summons dated 16 October 2024 (the “Further Evidence Summons”) taken out by the Respondent for leave to file the 3^rd affidavit of Lee Tze Yan Ernest (“Lee 3”) in opposition to the Liquidators’ Summons.

Relevant background

2.  Ocean Park Corporation appointed the Respondent, a subsidiary of the listed Lai Sun Group, to build and operate the Ocean Park Marriott Hotel.

3.  The Company was the main contractor under the Main Contract dated 5 December 2016 carrying out the construction work (the “Project”) for an estimated sum in excess of $2 billion. Payment by the Respondent was based on interim certificates (“ICs”) issued by Aedas Limited (the “Architect”).

4.  The Architect certified practical completion of all construction phases on 2 October 2018, with the defect liability period expiring on 2 October 2020.

5.  The Architect issued 3 interim certificates (ICs 31-33) on 13 October 2018, 4 and 10 December 2018 respectively for final payments totalling $12,295,350.

6.  Pursuant to IC 31, the Company issued an invoice to the Respondent on 1 November 2018 for $3,853,350. The Respondent issued 5 cheques on 2 November 2018 totalling that amount. The Company issued official receipts on 5 November 2018. However, the Company only cashed one of those cheques in the sum of $1 million (“the 1^st cheque”).

7.  On the same day, 5 November 2018, one of the Company’s creditors presented a winding up petition (the “Petition”).

8.  On 8 November 2018, Hsin Chong Group Holdings Limited (“HCG”) issued a public announcement titled “Inside Information: Winding Up Petition in Relation to a Subsidiary” informing the public that the Petition had been presented against the Company. It was the subject of news articles published on 8 and 9 November 2018.

9.  By letter dated 12 November 2018 (the “1^st letter”), the Company requested the Respondent to arrange for all further payments to the Company to be made to Cogent Spring, a wholly owned subsidiary of HCG, with the effect that such payments “shall represent full settlement for work done by [the Company]” under the Main Contract and formal receipts would be provided upon receipt of payment.

10.  The 1^st letter was followed by another letter the following day, 13 November 2018, returning the 4 uncashed cheques previously issued for IC 31 and requesting that they be replaced by 6 cheques[1] (the “Replacing Cheques”) with the same total amount but payable to Cogent Spring.

11.  The Company’s representatives collected the Replacing Cheques and at the same time returned the 4 uncashed cheques on 16 November 2018, providing 6 official receipts to the Respondent for the payment.

12.  A week later, on 23 November 2018, the Petition was gazetted and advertised in 2 local papers.

13.  When IC 32 was issued on 4 December 2018, the Company invoiced the Respondent the same day for $6,442,000. The Respondent paid Cogent Spring and the Company issued official receipts on 6 December 2018.

14.  After IC 33 was issued on 10 December 2018 for $2 million, the Respondent paid that sum to Cogent Spring.

15.  The Applicants’ investigation confirms that the Company never received any part of the Relevant Sum.

16.  The Liquidators’ Summons is supported by the 7^th and 9^th Affirmations of Osman Mohammed Arab filed on 5 June 2024 (“Arab 7”) and 7 October 2024 (“Arab 9”) respectively.

17.  The Respondent’s evidence in opposition is the affidavit of Lee Tze Yan Ernest filed on 12 August 2024 (“Lee 1”).

Applicable legal principles

18.  Section 182 of the CWUO (“section 182”) which lies at the heart of these proceedings provides follows:

“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.”

19.  Section 184 (2) of CWUO provides that the winding up of a company by the Court shall be deemed to commence at the time of the presentation of the petition for winding up.

20.  The policy underlying those sections is twofold: (a) to preserve a company’s assets as at that date of the petition for the general benefit of its creditors; and (b) to ensure that the statutory scheme of pari passu distribution can be implemented: see Company Law in Hong Kong - Insolvency, 2023 at §9.030.

21.  As Buckley LJ explained in Re Gray’s Inn Construction Co Ltd [1980] 1 WLR 711, 717 (in relation to the virtually identical English provision), it should be understood as giving effect to:

“… [a] basic concept of the law governing the liquidation of insolvent estates, whether in the context of bankruptcy or under the companies legislation, that the free assets of the insolvent at the commencement of the liquidation should be distributed rateably amongst the unsecured creditors as at that date.”

22.  The Court of Final Appeal (“CFA”) cited and adopted the rationale set out in that passage in Hsin Chong Construction Company Limited v Build King Construction Limited (2021) 24 HKCFAR 98 at §28.

23.  Section 182 renders such a disposition void subject to validation orders (if any) granted by the Court. Void means void for all purposes related or incidental to the administration of the winding up of the company and as between the company and a person dealing with the company.

24.  The invalidation of a disposition of the company’s property and the recovery of the property disposed of, are 2 distinct matters. The section says nothing about recovery; it merely avoided dispositions. What is the appropriate remedy in respect of the invalidated disposition is a matter not regulated by the statute and that has to be determined by the general law: see per Oliver J in In re Leslie Engineers Co Ltd [1976] 1 WLR 292 at 298B-D.

A. The Liquidators’ Summons

25.  Ms Audrey Eu SC and Mr John Hui, counsel for the Applicants submitted that payment of the Relevant Sum by the Respondent to Cogent Spring was clearly a disposition of the Company’s assets within section 182. They relied on the general principles enunciated in the joint judgment of Ribeiro and Fok PJJ[2] in Hsin Chong Construction Company Limited v Build King Construction Limited (supra) (hereinafter referred to as “Build King”), the facts of which are briefly outlined below.

26.  In that case, Hsin Chong Construction Company Limited (“HCCC”), (a sister company of the Company) and Build King were parties to a joint venture agreement (the “JVA”). Build King had an option under clause 17 of the JVA to exclude HCCC from the joint venture management and takeover its benefits in certain circumstances. In the event of clause 17 being triggered (which occurred), HCCC would retain benefits contingently claimable at the end of the Project upon a final accounting (“the residual rights”).

27.  Negotiations ensued culminating in the parties entering into a supplemental agreement (the “JVSA”). Its effect was that Build King acquired HCCC’s residual rights for an amount payable to Cogent Spring to bypass HCCC’s frozen accounts. The funds were then used for payroll, MPF and expenses involving HCCC and other group entities.

28.  Build King applied for a retrospective validation order to confirm that the JVSA should not be avoided under section 182. It succeeded at First Instance on the basis that Build King’s payment discharged Build King’s obligations under the JVSA and was not a disposition of HCCC’s property. The Court of the Appeal (“CA”) upheld the First Instance decision. It referred to clause 5(e) of the JVSA which it took to mean[3] that Cogent Spring “was designated as the Company’s agent to receive the consideration from BK on the Company’s behalf.”

29.  The CFA allowed the appeal, and set out important general principles regarding section 182.

30.  §21 of the Applicants’ skeleton submissions summarised the principles of law they derived from Build King as follows:

“(a) Whether a disposition has taken place is one of substance and not form, judged by the impact on the value of a company’s asset resulting from the transaction in question. A disposition falling within the purpose of Section 182 occurs when there is destruction or reduction in value of a company’s property right, causing an immediate and equivalent accrual in value to another party. In such a case, the asset would no longer be available to the company’s liquidator for statutory purposes, with its value accruing to another person, even if that person does not necessarily become the owner of the same property: §§36-37.

(b) It is a non sequitur to suggest that because payment is made to a third party in accordance with a contractual provision which deems such payment a discharge of the payor’s obligation, this somehow prevents that payment from being a Section 182 disposition. If as a result of that payment, the company’s property is transferred or dissipated so that the interests of the general body of creditors are prejudiced, it matters not that the transfer or dissipation is wrapped in contractual clothing: §35.

(c) In deciding whether to grant a validation order under Section 182, the Court regarded the interests of the company’s general body of creditors as of central importance. The Court must do its best to ensure that their interests are not prejudiced. Validation orders may be made where the applicant shows that the disposition is likely to be or actually has been for the benefit of the general body of creditors: §31.”

31.  The Respondent did not comment on the principles set out in §30 above which, in my view, encapsulated the CFA’s judgment.

Whether the payment to Cogent Spring is void

32.  Applying the Build King principles, the Applicants submitted that the Respondent’s payment of the Relevant Sum to Cogent Spring is a disposition of the Company’s property caught by section 182. The Company was entitled to be paid the Relevant Sum based on ICs 31-33 but the money was never received by the Company to form part of its free assets and thus was not available for the benefit of the general creditors.

(a) Disposition of property and agency

33.  The submissions of Mr Timothy Parker, counsel for the Respondent, were premised on what he understood to be ‘common ground’, namely, that section 182 does not displace the general law of agency.

34.  Mr Parker referred to §32 of Build King which reads:

“32. The concern of s. 182 is with the disposition of a company’s property made after commencement of the winding up. If the transaction amounts to a disposition, it is void unless the Court otherwise orders ... in deciding whether to validate the disposition, the court regards the interests of the general body of creditors as of central importance.”

35.  Focusing on the 2^nd sentence of §32, Mr Parker submitted that it is necessary first to consider whether, on the facts, the transaction is a “disposition”.

36.  The Respondent referred to §38 of Build King where the CFA found that the value of the 1^st instalment of $20 million never accrued to (and was never intended to accrue to) the HCCC but went entirely to Cogent Spring to be dissipated in favour of various 3^rd parties to the prejudice of the HCCC’s unsecured creditors and the pari passu principle. The CFA then stated as follows:

“Thus, invocation of the principle of agency law that payment to an agent conferred with authority to receive money on behalf of his principal is deemed receipt by the principal is of no assistance to Build King here. Such a doctrinal deeming cannot obscure the fact that, in terms of substance and value, none of the $20 million reached the Company to be available for distribution to the general body of creditors.”

37.  The Respondent described Build King as a tri-partite situation involving a recipient of the payment who was never intended by the parties to act as agent of the company[4], contrasting that with an agency situation where A agrees with B to pay C who is agent for B. The Respondent submitted that if an agency agreement is in place and the elements of agency are present, the transaction is not a disposition within section 182. Put differently, payment to a properly authorised agent of an insolvent company is not a disposition.

38.  Mr Parker distinguished the present case from Build King on the basis that the Respondent had no obligation to pay Cogent Spring. He submitted that, when properly analysed, the Respondent’s payment of the Relevant Sum to Cogent Spring did not amount to a disposition so as to engage the issue of validation.

39.  In reaching this conclusion, he relied on the November Letters, the official receipts issued by the Company to the Respondent as well the Architect’s Cost Consultant’s Valuation/Certificate dated 4 December 2018, certifying the sum of approximately $6.4 million to be due for IC 32.

40.  He further submitted that even if Cogent Spring did not have authority, the Company’s ratification of receipt of the Relevant Sum created the agency. Thus, as a matter of form and substance, the Relevant Sum was received by Cogent Spring as agent for the Company.

41.  Ms Eu disagreed with the Respondents analysis and submitted that while the Respondent attached considerable significance to the fact that Build King was contractually obliged to pay the $20 million to Cogent Spring, in substance it was part payment for HCCC’s residual rights in the JVA which was HCCC’s property. As explained in the opening part of §38 of Build King[5], HCCC’s property was dissipated to 3^rd parties to the prejudice of its unsecured creditors and the pari passu principle.

42.  In the present case, unlike the 1^st cheque[6] (which was cashed and paid into HCCC’s account), the Relevant Sum actually went to Cogent Spring. The official receipts and the cost consultant’s certification relied on as well as ratification are nothing more than other aspects of “doctrinal deeming” considered in §38 of Build King. There is no evidence to show that the Relevant Sum reached the Company to be available for distribution general body of creditors.

43.  In evaluating whether the transaction in question is a “disposition” within section 182, regard should be had to the policy underpinning section 182 set out in §§20-21 above. In the present case, payments under ICs 31-33 (the Relevant Sum) made after the date of the Petition unquestionably constituted property of the Company at the date of its liquidation. As such, the Relevant Sum should have been available for pari passu distribution to the Company’s general creditors. It was not.

44.  Accordingly, payment of the Relevant Sum to Cogent Spring was presumptively a “disposition” for the purposes of section 182 and so void. The burden falls on the Respondent to demonstrate why the Court ought to make a validating order: Build King at §18.

45.  There is no cross summons by the Respondent for a validating order. Rather, it seeks leave to commence an action against the Company along the lines of the draft SOC in the event of the Court holding that the payment of the Relevant Sum to the Respondent is a disposition within section 182.

46.  The litmus test for granting a validating order is whether the disposition in question is beneficial[7] or prejudicial to the unsecured creditors. That is apparent from the following extracts from Build King at §§31 and 35 which state:

“31. The interests of the general body of creditors are determinative in deciding whether a disposition of the company’s property after commencement of the winding up should be validated: the court must do its best to ensure that their interests are not prejudiced.

…

35. … it is a non sequitur suggest that because the payment is made to a third party in accordance with the contractual provision which deems such payment a discharge of the payor’s obligation, this somehow prevents that payment from being a s.182 disposition. If as a result of that payment, the Company’s property is transferred or dissipated so that the interests of the general body of creditors are prejudiced, it matters not that the transfer or dissipation is wrapped in contractual clothing. It is still a disposition which attracts s.182 and its prejudicial effect on the unsecured creditors prevents the transaction from being validated. The great majority of dispositions for which validation refused in the reported cases will have been made pursuant to contractual or other legal arrangements.[8]”

47.  In my view, the Respondent would not have obtained a validating order based on the evidence adduced had it applied for a validating order.

48.  As matters stand, I have no hesitation in finding that the payment of the Relevant Sum to Cogent Spring is a disposition that is within section 182 and therefore void. It follows that the Applicants are entitled to the declaration sought in §1 of the Liquidators’ Summons.

Jurisdiction to grant payment order

49.  The Liquidators’ Summons also seek a payment order of an amount equal to the Relevant Sum to the Company.

50.  The Respondent submitted that the Court has no jurisdiction to grant a payment order because (1) section 182 merely avoided dispositions, leaving recovery to be determined by the general law; and (2) the Company only parted with the right of action against the Respondent, hence, the remedy is confined to restoring that right and not immediate payment.

51.  As earlier noted, Leslie Engineers, Oliver J held (at 298B-D) that

“… the invalidation of a disposition of the company’s property and the recovery of the property disposed of, are 2 logically distinct matters. Section 227 says nothing about recovery; it merely avoids dispositions …

What is the appropriate remedy in respect of the invalidated disposition is a matter not regulated by the statute and that has to be determined by the general law.”

52.  It has been followed in subsequent cases in both the Hong Kong and English Courts of Appeal: see Chevalier (HK) Ltd & Anor v The Joint Liquidators of Right Time Construction Co Ltd (In Liquidation) [1990] 1 HKC 35, at 40D; and Officeserve Technologies Limited (in compulsory liquidation) and anor v Annabel’s (Berkeley Square) Limited and others [2018] EWHC 2168 (Ch) at §22.

53.  McPherson & Keay’s Law of the Company Liquidation, 5^th ed., 2021 similarly states as follows (at §7-011):

“Notably, the provision merely indicates whether a disposition is void or not, and it does not provide for any remedy for the liquidator where a disposition is avoided. Whatever the appropriate remedy is a matter for the general law.”

54.  The Applicants submitted that while section 182 does not state the precise legal principles for determining the relief to be granted, it does not mean that there is no jurisdiction under section 182 to grant substantive relief after the appropriate relief has been ascertained by applying the general law.

55.  They relied on 2 authorities where the Court made immediate payment orders. In Re AGI Logistics (Hong Kong) Limited [2016] 5 HKLRD 737, the CA affirmed the judge’s decision to grant an immediate payment order under section 182 concerning tax refunds diverted away from the company.

56.  In that case, the Commissioner of Inland Revenue (“CIR”) sought to argue that a new claim under section 79 of the Inland Revenue Ordinance (“IRO”) was necessary before a taxpayer can recover a tax refund and that section 79 was the exclusive means of making a claim.

57.  After citing an extract from the judgment of Tang VP (as he then was) in Weson Investments Ltd v Commissioner of Inland Revenue [2007] 2 HKLRD 567[9], the CA held at §37 of AGI as follows:

“Thus, says the CIR, absent a new claim for repayment within the time period specified in s.79 (1) regardless of whether or not the original payment to Careship was void there is now no entitlement to payment. We disagree. This argument only arises for consideration once it has been determined that the payment to Careship was a disposition of the Company’s property and that the disposition is void. It is artificial to suggest that recovery now should be viewed not as correcting the wrongful disposition of the Company’s property, but a new claim for excess tax paid for tax year 2008/9 and provisional tax for the following year. We also reject this ground of appeal.”

58.  The Applicants emphasised that the payment order granted was for “correcting the wrongful disposition of the Company’s property”, and not for a “new claim” such that the section 79 requirement does not apply.

59.  The Respondent sought to explain the CA’s order for payment on the basis of the finding in the court below that the section 79 requirement was already met and the payment by CIR to the 3^rd party (Careship) had been declared void, so that CIR’s obligation to pay pursuant to the section 79 claim was “enlivened”. I do not agree.

60.  In my view, the payment order had nothing to do with section 79 of the IRO. It was granted to correct the “wrongful disposition” made to the 3^rd party. I accept the Applicants’ submission that AGI is authority that the Court has power to order an immediate payment.

61.  In that connection, Leslie Engineering should also be mentioned. In that case, the respondents had done some work for the company totalling £1050. After the date of the petition, the controlling director made a payment of £250 on the company’s bank account to the respondents who had no knowledge of the petition. Oliver J held the payment of £250 a void disposition and (at 304G-H) ordered the respondents to repay that amount to the liquidators.

62.  AGI and Leslie Engineering are thus clear authorities that the Court has jurisdiction to grant an immediate payment order.

63.  Whether the Court should exercise its discretion to grant an immediate payment order is another matter which is considered below.

The section 186 summons

64.  The section 186 summons is before the Court for directions only.

65.  The causes of action in the Respondent’s proposed action are put on the basis of the “mutual intention” of the Company and the Respondent that payment of the Relevant Sum to Cogent Spring is to be deemed to be payment made under the Main Contract. In other words, that Cogent Spring received the Relevant Sum as agent for the Company. Further or in the alternative, the Respondent relies on estoppel.

66.  The Respondent submitted that its proposed claim is relevant to the relief the Applicants seek in §2 the Liquidators’ Summons for an immediate payment order in that if the Respondent does have a valid cause of action against the Company, it has a set-off that would extinguish the Liquidators’ entitlement to payment under §2. The Respondent therefore requested that no order be made on §2 pending the determination of the section 186 summons.

67.  The Respondent’s objection to an immediate payment order is based on its submission that the proposed claim can be set off against the relief granted under section 182. It was said that if an immediate payment order were made, the Applicants would distribute the same to the creditors and that it would not be right, nor fair, nor just, to make an immediate payment order and deprive the Respondent of its opportunity to set off.

68.  Insolvency set-off only applies where the cross-claims are mutual: that they must exist “between the same people in the same capacity”: per Lord Hoffmann in Secretary of State for Trade and Industry v Frid [2004] 2 AC 56 at §19, and Fletcher on The Law of Insolvency (5^th ed) at §23-021. I therefore accept the Applicants’ submission that a set-off is not applicable in the present case for want of mutuality.

69.  There is a fundamental distinction between assets of a company and rights conferred upon a liquidator in relation to the conduct of the liquidation[10]. The right to obtain relief section 182 is an incident of the office of liquidator whose functions are to secure that the assets of the company are got in, realised and distributed to the company’s creditors[11]. In the present case, there is clearly no mutuality for any set-off to take place.

70.  The Respondent’s proposed claim is contingent on the Applicants succeeding in their section 182 application and the Court granting consequential relief pursuant to the Liquidators’ Summons. Without such an order, the Respondent cannot plead loss and damage. Although no such loss and damage would have occurred had the Respondent applied for and succeeded in obtaining a validation order, as explained above[12], based on the evidence before the Court, no such validation order would be granted.

71.  Moreover, the effect of acceding to the Respondent’s request to defer making an immediate order for payment would be to provide it with some form of security before it even starts the action which cannot be correct.

72.  In the circumstances, I consider that an immediate payment order is appropriate.

73.  Although the parties have made some submissions on the Respondent’s proposed claim, I do not propose to comment on them as the hearing of the section 186 summons is only for directions. The Applicants have indicated that the section 186 summons would be hotly contested[13] and they should be given leave to file evidence.

74.  The Respondent may wish to reconsider the proposed claim in light of this Court’s reasons for granting the relief sought in the Liquidators’ Summons. Until the Respondent has had an opportunity to consider this Decision and the way forward (whether or not to pursue the proposed claim with or without making amendments to the draft SOC), it would be premature for the Court to give directions for the further conduct of the section 186 summons.

75.  In my view the better course is to adjourn the directions hearing sine die, with liberty for either party to restore the same.

The Further Evidence Summons

76.  The Respondent seeks leave to file Lee 3.

77.  The Applicants oppose the admission of Lee 3 into evidence. Lee 3 was sent to the Applicants’ solicitors in the afternoon of the day before the Applicants’ skeleton was due. That effectively deprived the Applicants of the opportunity to respond by evidence before lodging their skeleton submissions.

78.  The Respondent’s skeleton suggests[14] that the purpose of Lee 3 is to respond to Arab 9 (filed on 4 October 2024) which was said to imply that Mr Lee’s evidence in Lee 1 is false.

79.  The Respondent referred to §5 of the order dated 2 July 2024 (“the July order”)[15] and submitted that there was no delay in that the filing of the Further Evidence Summons complied with the time limit therein stated.

80.  Due to changes in administrative personnel, directions were given for the lodging of the parties’ respective skeletons on 11 July 2024 seemingly without knowledge of the July order. The potential timing difficulty was never brought to this Court’s attention.

81.  The Applicants submit that the lateness of the Further Evidence Summons is prejudicial because they are effectively asked to forego the “last word” in the filing of evidence. While delay itself can be a ground for dismissing a late application[16], in the circumstances, I am prepared not to take delay into account. Nevertheless, I accept that it had the effect of the Applicants having to forego the “last word” in the filing of evidence.

82.  Having perused Lee 3, I agree with the Applicants that it essentially repeats the evidence in Lee 1, adds nothing to it and reaffirms that neither Mr Lee nor the Respondent was aware of the Petition or the Company’s financial difficulties. While it notes ‘deficiencies’ in Arab 9, those are properly the subject matter for submissions.

83.  Given the nature of the new evidence considered in §82 above, and the fact that it is of no or minimal probative value, Lee 3 is not to be admitted into evidence. The Further Evidence Summons is dismissed.

84.  As regards the costs of Further Evidence Summons, while Applicants seek indemnity costs, I do not consider this to be an appropriate case to order indemnity costs. Costs should follow the event.

Conclusion and Orders

A. The Liquidators’ Summons

85.  The relief sought in §§1 and 2 of the Liquidators’ Summons[17] is granted save that the Respondent be given 14 days to make the payment set out in §2.

86.  At the hearing, the Applicants asked for interest on the amount payable by the Respondent to the Applicants from 17 November 2023 (the date of the Applicants’ letter to the Respondent demanding payment of that amount) until payment.

87.  As I understand it, the Applicants seek interest for “righting a wrong” under the Court’s ‘inherent jurisdiction’. This claim was not pleaded and surfaced first time at the hearing. Unsurprisingly, the Respondent objected because it was not part of the relief sought in the Liquidators’ Summons.

88.  It is singularly unhelpful for a claimant to raise a new claim or seek additional relief, seemingly, not after mature consideration but as an afterthought and unsupported by authority.

89.  In the circumstances, I am not persuaded that the Court has jurisdiction to make the order sought or that the circumstances warrant the making of any such order. Accordingly, the Applicants’ application for interest is dismissed.

B. The section 186 summons

90.  §1 of the section 186 Summons be adjourned sine die with liberty to apply; and §2 thereof be dismissed.

C. The Further Evidence Summons

91.  The relief sought be refused.

D. Costs of the Summonses

92.  I make an order nisi of costs in favour of the Applicants with certificate for two counsel, such costs to be taxed if not agreed.

93.  I also direct that an agreed draft order be submitted for approval within 7 days of this Decision.

Ms Audrey Eu SC and Mr John Hui, instructed by Messrs. DeHeng Law Offices (Hong Kong) LLP, for the Applicants (Joint and Several Liquidators of Hsin Chong Construction (Asia) Limited (In Liquidation))

Mr Timothy Parker, instructed by Messrs. Woo, Kwan, Lee & Lo, for the Respondent (Capital Court Limited)

The Official Receiver, attendance be excused