Wong Wai Kuen t/a Mei Tak Decoration and Engineering Co. v. Polygon Contracting Ltd.

HCSD000028/2001

HCSD 28/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE STATUTORY DEMAND
NO. 28 OF 2001

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Coram: Yuen J.A.in chambers (sitting as additional judge of the Court of First Instance)

Date of hearing and decision: 14 May 2002

Date of Reasons for decision: 15 May 2002

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REASONS FOR DECISION

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1.This was an application by Wong Wai Kuen ("the Applicant") to set aside a statutory demand served on her by Polygon Contracting Ltd ("the Respondent"). At the end of the hearing, I set aside the statutory demand with costs to the Applicant and said I would reduce the reasons for my decision into writing to be handed down.

Background facts

2.The Applicant was the woodworks sub-contractor of the Respondent in relation to two construction projects, at Tseung Kwan O and Siu Sai Wan.

3.The parties entered into written contracts, with the contract sums and the terms of payment agreed. These terms included the retention of 10% of the contract sums as retention moneys.

4.Apart from the works stipulated in the written contracts, the parties also agreed upon the undertaking by the Applicant of additional works.

Applicant's claims against Respondent

5.The Applicant sought payment from the Respondent for the contract works and the additional works by way of various invoices presented between February 2001 and July 2001.

6.Although some payments were made by the Respondent, according to the Applicant's evidence, a sum of $280,873 remains due by the Respondent to the Applicant in respect of the Tseung Kwan O project, and a sum of $1,254,754 remains due by the Respondent to the Applicant in respect of the Siu Sai Wan project. There was no evidence before me as to whether the retention periods have lapsed. However, even if it is assumed against the Applicant that 10% of the sums claimed can be retained by the Respondent as retention moneys, that would still leave a sum of $152,085 ($1,287,873 total sum claimed x 90% - $1,007,000 paid) allegedly due in respect of the Tseung Kwan O project and a sum of $1,037,278 ($2,174,754 x 90% - $920,000 paid) allegedly due in respect of the Siu Sai Wan project.

High Court actions

7.On 9 October 2001, the Applicant issued HCA No. A4408/01 against the Respondent for the sum of $1,535,627 being the sums allegedly due without making the deduction for retention moneys set out above.

8.However, a day before, on 8 October 2001, the Respondent had issued (but not served) HCA No.A4389/01 against the Applicant for damages for breach of contract in failing to complete works contracted, and in supplying unmerchantable goods and services. The sums of damages claimed (as now amended) are $513,878, $100,500, $153,435, and $15,000, alternatively damages to be assessed.

9.In respect of these two actions, a master has ordered that they should be heard together. The trial has not taken place yet.

Employees' claim against Applicant

10.Meanwhile, the Applicant had failed to pay her employees' wages. The Applicant has deposed on affirmation that this was due to the failure by the Respondent to settle the full amount of the invoices on time.

11.There was no evidence before me to contradict that assertion. As a matter of completeness, I should add that the Respondent sought to introduce a "Respondent's bundle" at the hearing. Most of the documents in that bundle had not been exhibited and they were not agreed by the Applicant. The Applicant objected to the introduction of that bundle and the Respondent did not seek leave to file and serve any affirmation to produce the documents in that bundle. In the circumstances, the Respondent withdrew the bundle.

12.Returning to the employees' claim, on 16 October 2001, the Labour Tribunal awarded a total sum of $227,200 to the employees. The Applicant has not in the present application denied liability for those wages.

13.Of those wages so awarded, the Respondent paid the employees $113,600 on 22 October 2001. Apparently, the Respondent has also since then paid the balance of the award.

Statutory demand

14.It is not disputed by the parties that under s.43F Employment Ordinance cap. 57, if a principal contractor (the Respondent) paid to an employee any wages under s.43C, the wages so paid shall be a debt due by the employer (the Applicant) of that employee to the principal contractor.

15.On the basis of that payment of wages, on 31 October 2001, the Respondent served the present statutory demand against the Applicant in the sum of $113,600.

Application to set aside statutory demand

16.The Applicant applied to set aside the statutory demand on the ground that she has a counterclaim, set-off or cross-demand which equals or exceeds the amount of the debt specified in the statutory demand (pursuant to rule 48(5)(a) Bankruptcy Rules). She also contends that in light of the high court actions, the Respondent's conduct in serving a statutory demand was an attempt to stifle her genuine claim, and that the court should set aside the demand pursuant to rule 48(5)(d) BR.

17.In respect of the first ground, the Applicant has submitted that the sums allegedly owed to her by the Respondent clearly exceed the debt specified in the statutory demand. Indeed, even if the sums claimed in the Applicant's action are reduced by the sums claimed by the Respondent in its action, the balance is still greater than the debt.

18.The Respondent has accordingly sought to argue that it is not open to the Applicant, as a matter of law, to assert a set-off.

19.In respect of this issue, I have been referred to three decisions:- Jones J's decision in Pysogea v Rightfairs Development Ltd [1991] 1 HKC 341, Le Pichon J's decision in Re Finbo Engineering Co Ltd [1998] 2 HKC 480 and Kwan J's decision in Ho Yip Shing v Handa Contractors Ltd HCSD 10/2002 (unrep).

20.In all three cases, principal contractors had paid wages of their sub-contractors' employees under the provisions of the Employment Ordinance and were seeking to enforce the debts. The debtors in all three cases asserted a right of set-off. The first two decisions concerned companies against which winding-up petitions had been presented, and the last decision concerned an individual against whom a statutory demand had been presented, but there is no dispute that the same principles should be applied whether the debtor was a company or an individual.

Pysogea

21.In Pysogea, the debtor company claimed an equitable set-off and sought to strike out the petition presented. The judge refused to strike out the petition, holding that the sub-contract between the creditor and the debtor company was a separate transaction from the creditor's statutory liability to the debtor's employees. He also held that the company's claim under the building contract was not closely connected with the creditor's demand under the Employment Ordinance and did not go to the root of the creditor's claim.

Finbo

22.In Finbo, both legal set-off and equitable set-off were discussed. The distinction between the two are that at law, so long as debts are liquidated and there is mutuality, set-off can apply even though the debts are not connected; in equity, even unliquidated debts may be set-off so long, however, as the debts are connected.

23.One of the questions in Finbo was whether legal set-off remained part of the law of Hong Kong after the passing of the Application of English Law Ordinance in 1966. Le Pichon J (as she then was) held that it was at least arguable that legal set-off remained part of the law of Hong Kong.

24.As for equitable set-off, the judge considered that Jones J did not intend to lay down any inflexible rule in Pysogea that whenever a petition was based on the Employment Ordinance debt, equitable set-off could not apply. That was because Jones J had in his judgment appeared to concur with counsel's submission that no fault could be attached to the creditor for the debtor's failure to fulfil its obligations to the employees.

25.Le Pichon J then went on to hold that it was arguable that equitable set-off could, and did, apply to that case, and that in any event, there was an assertion of a cross-claim which exceeded the debt.

Ho Yip Shing

26.In Ho Yip Shing, Kwan J held, following Finbo, that it was arguable that the debtor had a right of legal set-off of the liquidated sums in the interim payment debit notes, and in any event, there was a counterclaim which equalled or exceeded the debt in the statutory demand.

Present case -

Legal set-off

27.In the present case, counsel for the Respondent did not seek to argue that legal set-off was not part of the law of Hong Kong, but was content to submit that in any event, there was a lack of mutuality in that even though the same two parties were involved, the payment made by the Respondent under the Employment Ordinance was not connected with the sub-contract.

28.I did not accept the submission that there was a lack of mutuality for the purposes of legal set-off. Mutuality for these purposes means no more than that the same two parties were involved, and that each of the parties have an interest in the amounts in their own right (as opposed to say, as a trustee or agent only). The nature of the claims, whether statutory or contractual, have no bearing on the issue.

29.In the present case, there clearly was mutuality in that the Applicant and the Respondent were both interested in their own right in the amounts the subject of the debt specified in the statutory demand and the claim in the high court actions.

30.Given that it was undisputed that this court was not the appropriate forum to decide the detailed disputes set out in the high court actions, that issue of legal set-off was sufficient to secure for the Applicant an order to set aside the statutory demand.

Equitable set-off

31.In any event, there was adequate material in the present case for an equitable set-off. In my view, the debt specified in the statutory demand and the Applicant's claim in her high court action are sufficiently closely connected. Whilst it is true that the debt specified in the statutory demand arose from a statutory liability of the Respondent to pay the Applicant's employees, that statutory liability was created precisely because the Respondent was the principal contractor of the Applicant in the project works under the contract, when, according to the Applicant, the Respondent's failure to pay the full amount of the invoices in time led to her inability to pay those wages.

32.Further, and in any event, quite apart from legal and/or equitable set-off, it was clear from the matters set out in paragraphs 6,8 and 17 above that the Applicant has a counterclaim or cross demand against the Respondent, which would be sufficient ground for the Court to exercise its discretion to set aside the statutory demand.

Order

33.For the reasons set out above, I set aside the statutory demand with costs.

Representation:

Mr Gary Chung instructed by Hobson & Ma for the Applicant

Miss Theresa Low instructed by Kong & Tang for the Respondent