Hip Hing Construction Company Ltd v. Hong Kong Airlines Ltd

HCCT 107/2022

[2023] HKCFI 1430

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 107 OF 2022

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BETWEEN

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D E C I S I O N

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Background

1.By its Originating Summons issued in these proceedings on 23 November 2022, the Plaintiff seeks from the Court: a declaration that the Defendant holds $56,321,000 as retention money on trust for the Plaintiff, pursuant to clause 32.5 of the General Conditions of the Standard Form of Building Contract (2005 Private Edition) (“GCC 32.5”), which clause was incorporated into the contract made between the Plaintiff and the Defendant on 22 March 2017 for the construction of the Hong Kong Airlines Aviation Training Center at Chek Lap Kok (“Declaration”); for accounts to be taken; and an order for the Defendant’s payment of all sums found due to the Plaintiff and transfer to the Plaintiff all assets found to be held on trust and/or accountable to the Plaintiff.

2.On 29 November 2022, the Plaintiff applied by summons for interlocutory relief pending trial of this action (“Summons”), which relief includes a mandatory injunction to compel the Defendant to pay the sum of $56,321,000 being retention monies into a separate bank account, and thereafter to stand possessed of such sum in such account as trustee, in accordance with the trust specified in GCC 32.5 (“Trust”); an order that the Defendant forthwith cause to be opened a separate bank account; and an injunction restraining the Defendant from applying the trust monies in the separate account otherwise than in accordance with the Trust.

3.This is the decision made on the Summons.

4.The Summons was issued under Order 29 rule 1 RHC, section 21L of the High Court Ordinance, and invoking the inherent jurisdiction of the Court. It is trite, that in an application for an interlocutory injunction, the test is whether there is a serious question to be tried on the Plaintiff’s claim, and whether on a balance of probabilities, the Court should grant the interlocutory orders sought on an interim basis (American Cyanamid Co v Ethicon [1975] AC 396). The key principles are as set out in para 29/1/9 Hong Kong Civil Procedure and it is not necessary to repeat those undisputed principles here. Counsel for the Plaintiff has highlighted that the Court must be satisfied that the claim made “is not frivolous or vexatious”. As explained in the decisions in Yifung Properties Ltd & Ors v Manchester Securities Corp and Ors (unreported) CACV 258/2015, 9 September 2016 and Toyota Boshoku Europe NV v Hong Kong Longshenyuan International Trade Ltd [2022] HKCFI 1328, if the opposing party seeks to argue that there is no serious question to be tried, the threshold is high, as it would be necessary to demonstrate that the claim should be struck out. For a claim to be struck out, it must be plain and obvious that the claim is obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed (para 18/19/4 Hong Kong Civil Procedure 2023).

Parties’ relationship

5.The Plaintiff (“HH”) was the Main Contractor engaged by the Defendant (“HKA”) for the construction of the Hong Kong Airlines Aviation Training Center at Chek Lap Kok (“Center”). The Main Contract between HH and HKA made on 22 March 2017 incorporated the General Contract Conditions (“GCC”) of the Standard Form of Building Contract (2005 edition), as amended by various Special Conditions agreed between the parties. GCC 32.4 provides for “calculation of Retention” and allows HKA to retain a percentage of the payments due to HH and its nominated subcontractors, pending completion of the project. “Retention” is defined in the GCC as the sum calculated in accordance with GCC 32.4 “and retained by (HKA) from the gross calculation of (HH’s) work in progress included in an Interim Certificate”.

6.Specifically, GCC 32.5 (1) states as follows:

“The Retention shall be held upon trust by the Employer for the Contractor and for any Nominated Sub-Contractor or Nominated Supplier (without obligation to invest) subject to the rights of the Employer to have recourse to it for payment of any amount which he is entitled to under the Contract or at law or to deduct from it any sum owed to him by the Contractor, provided that the Employer gives notice to the Contractor in accordance with clause 32.1 (6).”

7.Under the provisions of GCC 32, the Architect of the project is to issue an Interim Certificate for payment of half of the Retention held in respect of the works, or a section thereof as the case may be, 14 days after substantial completion of the whole of the works or relevant section or part. An Interim Certificate will be issued by the Architect for payment of all the remaining Retention within 14 days after the issue of the Defects Rectification Certificate for the whole of the works. Adjustments to and deductions from the contract sum will be made after the final accounts are prepared, and the Final Certificate issued by the Architect will state the final contract sum, and the amount payable by the employer to the contractor, or by the contractor to the employer, as the case may be.

8.The payment terms under the Main Contract were revised by a Supplemental Agreement on 29 November 2018. Under the Supplemental Agreement, the agreed final contract sum due under the Main Contract together with interest was to be paid by HKA to HH, in accordance with a revised payment schedule. Specifically, all the remaining balance of the contract sum including the retention monies were agreed to be paid within 90 days from the issuance of the occupation permit for the Center.

9.According to Interim Certificate No 19 which was issued by the Architect of the project on 17 December 2018, the amount of the retention monies held by HKA was $56,321,000 (“Retention Monies”).

10.The project was completed and on 12 February 2019, the occupation permit for the Center was issued. Substantial Completion Certificate was issued on 26 of February 2019. Pursuant to the agreement between the parties, HH issued an undertaking letter to HKA on 4 June 2019, undertaking to complete all outstanding works and effect rectification works for the project. Between 25 November 2019 and 30 June 2021, HKA made payments to HH totaling $160 million, which on HKA’s case was to partially discharge its obligation to pay the Retention Monies.

11.HKA defaulted in payment of the contract sum due in accordance with the Supplemental Agreement. HH commenced legal proceedings against HKA by HCA 692 of 2021 (“HCA 692”) and on 10 March 2022, summary judgment was entered against HKA for payment of $192 million, with leave granted to HKA to defend the balance of HH’s claim for $21 million.

12.On 4 March 2022, a winding up petition was presented against HKA. On 14 December 2022 and 9 December 2022 respectively, the Hong Kong Court and the English Court sanctioned a scheme of arrangement (“Scheme”) and a restructuring plan (“Plan”) proposed for HKA. Following the sanctioning of the Scheme and the Plan, the winding up petition against HKA was dismissed on 16 January 2023. The Scheme and the Plan were to become effective on their terms on 26 April 2023 (“Restructuring Effective Date”).

13.After the commencement of the winding up proceedings, HH demanded HKA to pay the Retention Monies to it before any of the assets of HKA are distributed to its creditors in any potential winding up proceedings. In its reply on 12 August 2022, HKA claimed that it had not set aside any monies on account of the Retention Monies under its contract with HH, and that it was not holding any monies on trust for HH. HKA asserted that the previous payments which had been made to HH were, in part, from the Retention Monies.

14.In light of HKA’s stance, HH commenced these proceedings by its Originating Summons on 23 November 2022, to seek a declaration that HKA held the Retention Monies upon trust for HH. It also issued the Summons for the interim orders sought.

15.There is no dispute that HKA had not in fact set aside any money on account for the Retention provided for under GCC 32. The issue in dispute between the parties is whether there is a trust created over the Retention Monies in favour of HH, and whether HH is entitled now to an order from the court compelling HKA to pay the Retention Monies, or an amount equivalent thereto, into a separate bank account, in the interim and pending determination of the Originating Summons. HKA denies that any trust can have arisen in respect of the Retention Monies, and claims there is no serious question to be tried at all with regard to any trust asset having been identified, such that no interim relief should be granted as sought by HH. HKA further claims that no order should be made against HKA now to set up any alleged trust fund when HKA is insolvent, and that as a result of the Scheme, HH’s unsecured claim against HKA has been discharged.

Whether trust money and whether segregation of funds is necessary condition

16.On behalf of HKA, Counsel relied on Rayack Construction Ltd v Lampeter Meat Co Ltd (1979) 12 BLR 30 to submit that GCC 32.5 only imposes a personal obligation on the employer/HKA to set aside money to establish a trust. Unless and until that has been done, HKA argued that no trust will come into existence over any specific asset. Rayack has been followed in cases such Concorde Construction Co Ltd v Colgan Co Ltd (No 1) [1984] HKC 241 and Chatwin Engineering Ltd v Expert Glory Development Ltd, unreported, HCMP 1898/1998 27 November 1998.

17.The clause considered in Rayack states:

“The amounts retained by virtue of sub-clause (3) of this Condition shall be subject to the following rules: (a) the Employer’s interest in any amounts so retained shall be fiduciary as trustee for the Contractor (but without obligation to invest) and the Contractor’s beneficial interest therein shall be subject only to the rights of the Employer to have recourse thereto from time to time for payment of any amount which he is entitled under the provisions of this Contract to deduct from any sums due or to become due to the Contractor.”

There is no express provision for a trust created, or to be set up.

18.The passage in the judgment in Rayack upon which reliance is placed by HKA is as follows:

“The (retention clause), construed in the context of the articles of agreement as a whole, does impose an obligation on an employer to appropriate and set aside as a separate trust fund a sum equal to that part of the sum certified in any interim certificate as due in respect of work completed which the employer is entitled to retain during the defects liability period. Unless (the retention clause) is construed as imposing such an obligation, it cannot, as I see it, have any practical operation. Further, (the retention clause) refers to ‘the Contractor’s beneficial interest therein’, and the predicated beneficial interest could only subsist in a fund so appropriated and set aside.” (emphases added)

19.In Concorde Construction Co Ltd v Colgan Co Ltd (No 1), the Court considered that the principle in Raynack commends itself as good sense which produces a fair result which should be followed in Hong Kong, and that an injunction should be granted to compel an employer to set up a trust fund of the retention monies. The Court observed that the attraction of granting an interim mandatory injunction for the purpose of setting up a trust fund where the retention clause applies is that it forestalls the risk of injustice to the main contractor if the employer becomes insolvent, while at the same time protecting the employer against the defaults or insolvency of the main contractor through the device of retention money.

20.Counsel contended for HKA that on the authorities, the fact that HKA had not set aside any money nor paid any sum representing the Retention Money into a separate account meant that in the absence of segregation, there is no certainty of subject matter and the creation of any trust is negated in the circumstances.

21.The effect of a retention clause, and the authorities relied upon respectively by HH and HA, have in fact all been considered by the Court of Appeal in Re Hsin Chong Construction Co Ltd (Provisional Liquidators: Application for Directions) [2021] 5 HKLRD 212. The exact GCC 32.5 was contained in the Main Contract considered in Re Hsin Chong, which provided that the retention “shall be held upon trust by the Employer for the Contractor” subject to the rights of the Employer to have recourse to it for payment of any amount which he is entitled to deduct from any sum owed to him by the Contractor under the Contract. In his judgment, Cheung JA referred to Re Tout and Finch Ltd [1954] 1 All ER 127, where the English Court considered the effect of a provision for set-off (clause 13) on a provision for a trust of retention money (“clause 11 (h)”). Clause 11 (h) provided that “if and to the extent that the amount retained by the employer in accordance with the main contract includes any retention money the contractor’s interest in such money is fiduciary as trustee for the sub-contractor”. The clause further stated that “if the contractor attempts or purports to mortgage or otherwise charge such interest”, the contractor shall “thereupon immediately set aside and become a trustee for the sub-contractor of a sum equivalent to the retention money and shall pay the same to the sub-contractor on demand”. In Re Tout, Wynn-Parry J held, on the construction of clause 11 (h):

“On the face of it there are clear words used which are apt to create a trust which will operate by way of an equitable assignment of assets described as the contractor’s interest in the retention money. It is said, first, that on a true construction of the document, which, of course, must be read as a whole, there is no trust, and nothing more than a running account. In support of that argument there is prayed in aid, for instance, clause 13 of the sub-contract, which provides that the contractor shall be entitled to make certain deductions or set-offs from any sums, including any retention money, which he may be liable to pay to the sub-contractor. But such a clause as that appears to me not to affect the matter one way or another. It cannot, in the least, be decisive, because it appears to me to be a perfectly normal and sensible provision to make, namely, that, against what the company (ie the main contractor) may owe to the applicants (ie the subcontractors) as trustee, the company may set-off monies which may be owing by the applicants to the company.”

22.Cheung JA then referred to what was said to be the contrary view held in Yew Sang Hong Ltd v Hong Kong Housing Authority [2008] 3 HKLRD 307, as to whether a trust fund can exist when there is a set-off provision providing for the right of the employer to deduct amounts against the retention monies. At paragraph 35 of his judgment, Cheung JA explained:

“… Like Re Tout and Finch Ltd the contracting parties here are CUHK and the Company only and the only sums that CUHK can deduct are those due from the Company. This is so even though the sums may arise from works carried out by the NSCs because of privity of contract, the debt is that of the Company. Further, GCC 83 does not impose any trust on the retention money, hence Yew Seng has to rely on a Quistclose trust. In the present case, cl 32.5 expressly provides for a trust and one must give some meaning to these words. In our view, the proper reconciliation is, as proffered by Re Tout and Finch Ltd, that the provision for deduction does not affect the trust and the two co-exist side by side. The issue of certainty of subject matter of the trust as argued by Ms Eu simply does not arise. We do not regard the provision for equitable assignment carries the matter further.

In our view, Re Tout and Finch Ltd remains to be the authority in this area where the contract provides for the trust. Read properly in its context, the judgment of Reyes J on set-off is not intended to abrogate the existence of the trust which is expressly provided for in a contract.” (Emphases added)

23.What is clear from Re Hsin Chong is that the Court did not consider that a set-off provision in favour of the employer can affect the certainty of the trust created under the relevant retention clause. It is to be observed here, that the retention clause in Re Tout and Finch Ltd provided that the contractor’s interest in the retention money is “fiduciary as trustee for the sub-contractor”. GCC 32.5 in this case states that the “Retention shall be held upon trust by the Employer for the Contractor and for any Nominated Sub-Contractor”.

24.The Court of Appeal in Re Hsin Chong dealt specifically with the segregation question from paragraphs 39 to 61 of the judgment, with Cheung JA stating as follows:

“39. The Provisional Liquidators submitted that the Judge failed to take into account the conflicting authorities on whether and to what extent segregation of funds was a necessary pre-condition to a trust.

40. Ms Eu submitted that according to the orthodox authorities, in order to create a trust, the 3 certainties must be satisfied, namely there must be certainty as to the purported settlor’s intention to create a trust, certainty as to the objects of that trust, and certainty as to subject matter: see Lewin on Trusts (20^th ed) at para 5-003.”

25.His Lordship then referred to a line of cases, including Lehman Brothers International (Europe) (in administration) v CRC Credit Fund Ltd [2012] Bus LR 677, Underhill & Hayton: Law of Trusts and Trustees (19^th ed) at para 8.7, Rayack Construction Ltd v Lampeter Meat Co Ltd (1979) 12 BLR 30, MacJordan Construction Ltd v Brookmount Erostin Ltd [1994] CLC 581, and Yew Sang Hong Ltd v Hong Kong Housing Authority [2008] 3 HKLRD 307. At paragraph 51, Cheung JA observed:

“On the other hand, there are authorities to the effect that so long as the entitlement to trust assets can be clearly identified, setting aside trust monies in a separate account is not strictly required.”

26.His Lordship referred to Re Kayford Ltd [1975] 1 All ER 604, quoting the passage in the judgment of Megarry J where it was held:

“Payment into a separate bank account is a useful (though by no means conclusive) indication of any intention to create a trust, but of course there is nothing to prevent the company from binding itself by a trust even if there are no effective banking arrangements.” (Emphasis added)

27.The case of Hunter v Moss [1994] 1 WLR 452 was also referred to at paragraph 52 of His Lordship’s judgment. In that case, the defendant had orally declared himself a trustee for the plaintiff of 5% of the company’s issued share capital, and the 1^st instance judge and the Court of Appeal both rejected the submission that such a trust must fail for want of appropriation of any specific shares out of the defendant’s holding to satisfy the plaintiff’s beneficial interest. It was held that a person can declare himself trustee of 50 of his ordinary shares in a company, and that is “effective to give a beneficiary proprietary interest to the beneficiary under the trust”.

28.Cheung JA cited R v Clowes (No 2) [1994] 2 All ER 316, where Watkins LJ held:

“As to segregation of funds the effect of the authorities seems to be that a requirement to keep money separate is normally an indicator that they are impressed with a trust, and that the absence of such a requirement, if there are no other indicators of a trust, normally negatives it. The fact that a transaction contemplates the mingling of funds is, therefore, not necessarily fatal to a trust.”

29.After referring to the decision in Qimonda Malaysia Sdn Bhd v Sediabena Sdn Bhd [2012] 3 MLJ 422, Cheung JA highlighted the importance of context, pointing out that on the facts of Re Hsin Chong, CUHK as the employer had adopted a stringent project accounting system, the retention money can be easily ascertained, and there is no dispute that the provisional liquidators of the main contractor had received from the employer the exact amounts of final accounts payable to the main contractor and all the nominated subcontractors. There was accordingly no question of any nominated subcontractor’s money mixed with the money of the main contractor in the sense of unidentified assets.

30.On the cases considered, Cheung JA concluded (at paragraph 61 of the judgment) that the 1^st instance judge was correct in her view that the requirement of segregation only applied in the context of the company holding the trust monies which had been put into liquidation, which was not applicable to CUHK, but even if there was any basis to argue that segregation was required, it was clear that the employer had not mixed the retention monies with its own funds or the monies to which the main contractor was entitled.

31.From the decision in Re Hsin Chong, it cannot be seen that the Court had dismissed the correctness of the decisions or the approach of the courts in Re Tout and Finch Ltd, Hunter v Moss, R v Clowes (No 2) and Qimonda. That line of authorities show that despite the absence of payment of the money into a separate account, if there is sufficient evidence of the parties’ intention to create a trust and that the funds can be clearly identified, the trust may still be upheld. To determine whether there is sufficient evidence of the parties’ intention, and whether on the facts, the retention money can be easily traceable and ascertained, fact and context specific inquiries are required and these are matters for the substantive hearing. On behalf of HH, it has been pointed out that the Retention Monies in this case have been separately valued and are clearly identified in the payment certificates issued by the Architect, and that the accounting records of HH clearly show the payments made by HKA.

32.The fact that Qimonda has been overruled by the Malaysian Federal Court in SK M&E Bersekutu Sdn Bhd v Pembinaan Legenda Unggul Sdn Bhd [2019] 3 MLJ 281 does not, in my view, render the Plaintiff’s case unarguably bad, fictitious or vexatious, such that there is no serious question to be tried. This is particularly so when the clause in question which was construed in Qimondo did not specify or provide for any trust in the money, only stating that the employer could deduct and retain a sum of money from the amount certified as payable to the contractor.

33.As Counsel for the Plaintiff highlighted, GCC 32.4 expressly provides that the retention money “shall be held upon trust” by HKA for HH and its nominated subcontractors. As Cheung JA pointed out in Re Hsin Chong (at paragraph 36 of the judgment), where the contract provides for a trust, Re Tout and Finch Ltd remains to be the authority, that the words used in clause 11 (h) were sufficient to create a trust, and that the trust coexists with any provision for deduction by set-off, and there is no issue of certainty of subject matter of the trust.

Whether insolvency permits trust to be established

34.The principle in Rayack Construction Ltd v Lampeter Meat Co Ltd is that if the employer is to be treated as a fiduciary of the retention monies, it is under a duty to set the retention monies aside in a separate account, and the contractor/beneficiary is entitled to seek from the Court a mandatory order requiring the employer to set aside as a trust fund a sum equal to that part of the sum certified in any interim certificate as being retention money.

35.The objection made by HKA is that where the employer is insolvent, the relief open to the contractor ceases to be available on the commencement of liquidation, as the Court would not enforce the employer’s obligation to set up a trust fund to the detriment of its unsecured creditors (Mac-Jordan Construction Ltd v Brookmount Erostin Ltd [1992] BCLC 350). This, it was argued, reflects the long-standing policy that it is not the Court’s role to alter the statutory insolvency priority, to turn a plaintiff from being an unsecured creditor to a trust beneficiary.

36.This objection is premised on the argument that without segregation, there is no trust and HH has no equitable or beneficial interest in the Retention Monies. On that basis, HKA contends that HH’s claim against HKA in these proceedings is for relief in respect of HKA’s breach of its contractual personal obligation under the Main Contract, as amended by the Supplemental Agreement, to set aside the Retention Monies. On such bases, HKA claims that when the Scheme becomes effective on 26 April 2023, it discharges all the claims of HH, which as a creditor will only be eligible to receive the Restructuring Consideration in accordance with the terms of the Scheme, and in full and final settlement, and HKA would no longer have any obligation to set up any trust in accordance with GCC 32.4. Under clause 15.3 of the Scheme, each Scheme Creditor irrevocably and fully waives, discharges and releases all Scheme Claims and all its rights, title and interest in and to its Scheme Claims, as from the Restructuring Effective Date.

37.According to HKA, prior to its insolvency, HH only had the right to demand HKA’s personal compliance with the obligation to set up a separate account for the Retention Monies, but once HKA is insolvent without any separate account having been set up, the Court will not order a new trust to be established as HKA’s assets should be generally available to all unsecured creditors. HH’s claims are governed by and to be dealt with in accordance with the rules of the Scheme.

38.HH’ stance is that segregation is not required before the trust it asserts can subsist, that the trust was already in existence upon execution of the Main Contract and before HKA became insolvent, as it was expressly provided for in GCC 32.5, and the retention money was expressed specifically to be held on trust. On behalf of HH, Counsel further pointed out that under the Scheme, “Scheme Claim” is defined to mean “any Unsecured Scheme Claim”, and this definition excludes any “Excluded Claim”. The Scheme defines “Excluded Claim” to include the secured portion of the claims of any secured creditor. Counsel contended that the Scheme, and the settlement and waiver of claims thereunder, only extend to claims against the unsecured assets of HKA, and cannot include HH’s proprietary claims in respect of or against the Retention Monies, which HH claims are its beneficial property, and not the assets of HKA at all.

39.Distinction was made between HH’s proprietary claims to the Retention Monies and HH’s contractual claim for payment and damages by reason of HKA’s breach in the performance of the Main Contract as amended. Counsel argued that the latter claims for damages and sums due were included in HCA 692, and summary judgment was entered for part of the sums claimed.

40.On reviewing the Statement of Claim filed in HCA 692, and the Decision dated 10 March 2022 when summary judgment was entered in favour of HH for HKA’s payment of part of the amount claimed, it seems clear that HH’s claim in HCA 692 was for the outstanding contract sum stated to be due and payable under the Supplemental Agreement, with interest. As HKA was quick to point out, there was no assertion of any proprietary interest on the part of HH. On HH’s behalf, Counsel explained that when HCA 692 was commenced, it was not anticipated that HKA would become involved in winding up proceedings, and there was no necessity for HH to advance a proprietary claim to the Retention Monies portion of the entire sum claimed under the Main Contract and Supplemental Agreement. It was only when a winding up petition was presented against HKA that it became necessary for HH to assert its proprietary right over the Retention Monies, to prevent the trust monies and HH’s property from becoming part of the liquidation fund, for distribution to the unsecured creditors of HKA.

41.Perhaps the more correct distinction to be drawn between any claim for damages, and a proprietary claim by way of contrast, is that HH’s claim to the Retention Monies portion of the contract sum due under the Main Contract and the Supplemental Agreement is (on HH’s case) proprietary in nature, expressed to be trust money under GCC 32.5, and representing the contract sum due for works completed, subject only to what HKA can establish to be properly deductible in respect of payments due to HKA from HH in respect of any defective works carried out, and also subject to HKA’s set-off in respect of the damages and loss suffered by reason of the allegedly defective works carried out by HH or for which HH is responsible.

42.Pertinently, at this stage, the Court only has to be satisfied that there is a serious question to be tried, that HH’s claim for the Retention Monies is not discharged under the terms of the Scheme, namely that such claim is not frivolous or vexatious. Having considered the relevant terms of the Scheme and the nature of HH’s claims to the Retention Monies as made, in my judgment, HH has discharged such onus. How HH argued its case at the initial hearing for the injunction, and whether its case is on all fours with Concorde or is different in the factual context, makes no material difference at this stage, so long as HH can establish that there is a serious question to be tried on its claim.

Miscellaneous objections

43.There are other minor arguments raised in the evidence, but were not pursued by Counsel for HKA at the hearing. Dealing briefly with these points, there is clearly no clear and unequivocal representation from HH that it had waived its right to a trust under GCC 32.5, or that it will not enforce or exercise its legal rights. The payments which had been made by HKA to HH between November 2019 and June 2021 were made by bank transfers or by cheques. HKA never specified what the payments were for when they were made, and did not state that the payments should be appropriated towards the release of the Retention Monies. I accept the arguments made for HH, that in the absence of any appropriation by HKA, HH was entitled to apply the payments towards debts owed to it by HKA, and as evident from HH’s accounting records, the payments made by HKA were credited to the Total Receivables Account and the Total Job Income Account, rather than the Retention Receivables Account. This supports HH’s case that the payments from HKA were appropriated towards the discharge of the general outstanding sums for the project, rather than for the discharge of the Retention Monies.

Balance of convenience

44.Once it is accepted that there is a serious issue to be tried on HH’s proprietary claim to the Retention Monies, the balance of convenience favors the preservation of trust assets pending trial or the substantive hearing of the Originating Summons (Concorde Construction Co Ltd v Colgan Co Ltd (No 1) [1984] 1 HKC 241. I am satisfied that it is just and convenient to grant the injunction to restrain HKA from dealing with or disposing of the trust money as part of its assets, pending the final determination by the Court of HH’s claims.

45.In this regard, it is pertinent that HH’s claim for a declaration, that the Retention Monies are held on trust pursuant to GCC 32.5, will only be determined at the substantive hearing of the Originating Summons. Pending that hearing, HH only seeks an interim mandatory injunction for HKA to pay the sum of the Retention Monies into a separate bank account, until after trial of the action or further order.

46.Whether HH is ultimately entitled to payment of the full or any part of the Retention Monies will depend on the outcome of the trial in HCA 692. If HKA can establish that it is entitled to set-off against the Retention Monies any sum due to HKA by reason of HH’s defective work or breach of the Main Contract, HKA will be entitled to set-off such sum against the Retention Monies held in the separate bank account.

47.I do not agree that there is no co-relation between the final relief sought in the Originating Summons and the interlocutory order which is sought to support the final declaration. The Summons seeks an interim injunction to restrain HKA from dealing with and disposing of the Retention Monies, and a mandatory injunction to compel HKA to pay the Retention Monies into a separate bank account, pending the Court’s determination at the substantive hearing of the Originating Summons as to whether the Retention Monies are indeed trust monies in which HH has proprietary interests, as opposed to such Retention Monies being assets of HKA for distribution to its creditors. The Summons was issued in the light of HKA’s refusal to accept HH’s right to have the Retention Monies kept in a separate account, or that it had any obligation in relation to the Retention Monies, for preservation of the disputed funds pending determination of the final relief sought by the Originating Summons.

48.On balance, the course which involves the least injustice in this case is to grant the mandatory injunction in the interim to compel HKA to set up the account, in order to preserve and ringfence the funds. For that purpose, orders in terms of paragraph 2 and 3 of the Summons are made, as I am satisfied to the requisite high degree of assurance that at trial, it will appear that the mandatory injunction was rightly granted.

Disposition

49.The injunctions and orders in terms of paragraphs 1, 2 and 3 of the Summons are granted, with costs in the cause, together with certificate for Counsel.

Mr Jonathan Chang SC and Mr Eugene Kwan, instructed by Norton Rose Fulbright Hong Kong, for the plaintiff

Mr Patrick Fung SC and Mr Look-Chan HO, instructed by Latham & Watkins LLP, for the defendant