Joint and Several Liquidators of Hsin Chong Construction (Asia) Ltd v. Wong Po Kee Ltd and Others
Read the full judgment text of HCCW 316/2018 on BabelCite. This High Court CFI judgment was delivered on 17 March 2025.
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:
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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 ____________________
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________________ DECISION ________________ 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:
2.Section 182 provides, where relevant, as follows:
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 7.1On 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”). 7.2Before the Supplementary Agreement referred to later, the normal course under the Main Contract2 would be as follows:
7.3Clause 30 of the Main Contract provided:
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.
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:
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:
Direct Payment letters from the Company to the NSCs 15.1The 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:
15.2The 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.
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:
Proceedings 21.1On 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. 21.2The 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. 24.1Before 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. 24.2The JV partner then applied for, and was granted, a retrospective validation order under s.182. 24.3The CFA set aside the validation order, holding that:
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:
26.1This 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. 26.2In 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. 26.3The 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:
26.4The court focused (as the CFA did in Hsin Chong CFA above) on the relevant property and its disposition.
The court held that the liquidators were entitled to claim against the NSCs. The NSCs’ contentions 27.1The 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:
27.2I 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 28.1It 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. 28.2In 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. 28.3Findlay 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.
28.4The 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. 31.1The 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). 31.2However, that must be understood against the rest of the document, in particular the following:
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. 36.1I 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. 36.2To 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:
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:
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. 45.1In 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 Re French’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. 49.1In 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. 49.2The 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. 49.3The 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. 52.1In Re Tout & Finch Ld 33a 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. 52.2The 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. 52.3The 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
53.1This 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. 53.2A 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. 53.3The 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. 54.1In the present case, the liquidators have again argued that no trust arose because they were informed by the Company’s retained staff that:
54.2On 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. 57.1In Mr Arab’s 8th 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 57.2In 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. 57.3Mr 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:
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 1st to 3rd Respondents 1 Also known as “choses in action”. 2 Containing Special Conditions of Contract SCC-22 and SCC-23. 3 For simplicity, the term “works” includes materials and goods supplied. 4 Clause 30(3). 5 B Mullan & Sons Contractors Ltd v Ross 54 Con LR 163, 185. 6 This was actually the second of three Supplementary Agreements entered into between the Employer and the Company, but the other two are not relevant to the issue in the present proceedings. 7 This is the second clause bearing the number “(3)” in the document. 8 Copied to the Employer and the Architect among others. 9 A “thing in action” covered by s.182. 10 By virtue of s.184(2) of the Ordinance. 11 Mullan, 185. 13 That is, an insolvent company’s free assets as at the date of commencement of winding up should be distributed rateably among its unsecured creditors as at that date: Re Grays’ Inn Construction Co Ltd [1980] 1 WLR 711, 717. 14 [1990] 2 HKLR 223. 15 Cons VP, Clough and Power JJA. 16 [1976] 1 WLR 292, 297. 17 At 228E. 18 At 229 D-F. 19 For the Respondents, leading Mr Paul Law. 20 [1999] 2 HKC 356. 21 At 360I - 361A. 22 At 360H. 23 As noted by the Singapore Court of Appeal in Hitachi Plant Engineering & Construction Co Ltd and anor v Eltraco International Pte Ltd and anor [2003] SGCA 38, §35. 24 [2003] BLR 512, where there was a bilateral contract between the employer and the sub-contractor which was not superceded by the terms of the main contract or the sub-contract. 25 Keating on Construction Contracts 11th ed. §13-051 26 Skeleton Submissions of the Respondents, §26. 27 Snell’s Equity 24th ed. §3-015 28 [1987] BCLC 499. 29 Re MKG Convenience Ltd (in Liq) [2019] EWHC 1383, §§67-70, declining to follow the obiter dictum in Officeserve Technologies Ltd v Annabel’s (Berkeley Square) Ltd [2019] Ch 103. 30 Chevalier, 228E. 31 Hsin Chong CFA §35. 32 Hsin Chong CFA, §40. 33 [1954] 1 WLR 178. 34 At p.189. 35 At p.186. 37 §§35-36. 38 Osman Mohammed Arab, 8th aff §32(2)(b). 39 Arab, 8th aff §§32(3) - 33. 40 Arab’s 8th aff §33. 41 Wong Chung Hei Haze, Lee Chi Ming, and Ng Hok Wai’s affs, §24(3). 42 Arab’s 12th aff, §20(5). 43 Re Tout and Finch Ld and Hsin Chong (CA). 44 As requested at the hearing by Mr Wong for the respondents, with no objection from the applicants. |
Cases cited in this judgment
Further hearings and rulings under HCCW 316/2018