Re Hong Kong Malayan Drillers & Engineerings Ltd

HCCW000050/1978

IN THE SUPREME COURT OF HONG KONG

COMPANIES WINDING-UP

NO. 50 OF 1978

-----------------

-----------------

Coram: Penlington, J.

Date of Judgment: 15th July, 1980

-----------------

JUDGMENT

-----------------

1. This is an application made by the Official Receiver, as Liquidator of Hong Kong Malayan Drillers and Engineering Ltd. (the company) for directors pursuant to section 200(2) of the Companies Ordinance (Cap. 32).

2. Before a winding-up order was made on the 25th September 1978 the company was the sub-contractor on a large number of sites and when the principal contractors became aware that it was in severe financial difficulties they decided that in order to ensure that work continued on their respective sites, they would take over the responsibility for payment of the workers' wages. Furthermore, however, when the workers also became aware that the company was going into liquidation they demanded, and received, severance pay even though they were not in fact loosing their jobs but were to be re-employed by a different company.

3. Advances were therefore made by these principal contractors to the company for the purpose of paying both wages and severance pay. The question now arises as to what, if any, preference the principal contractors are entitled to in relation to those advances. I am advised by the liquidator that there will be sufficient funds available to pay all preferred creditors, there will be a dividend of some sort for the debenture holders but nothing for ordinary unsecured creditors.

4. In his report the liquidator states that, insofar as the advances made were for wages due he had no doubt that the principal contractors making such advances are entitled to priority pursuant to section 265(2) of the Companies Ordinance and I agree with him on that. What clearly is more doubtful is the position regarding the amounts advanced for severance pay on this point he seeks directions. The liquidator has referred me to In re Lamplugh Iron Ore Company Ltd. (1927) Ch. 308 and says that if, as he considers is correct, and I think he is, severance pay is not "wages", the principal contractors may still be entitled to preference if they were acting as surety for payment. The Lamplugh case involved a consideration of section 5 of the Mercantile Law Act 1856, and section 209 of the Companies (Consolidation) Act 1908. That later section, as it applied to payment of parochial rates as preferred debts, is identical to section 265(1) of our Companies Ordinance and similarly section 5 of the Mercantile Law Act 1856 corresponds to section 15 of our Law Amendment and Reform Ordinance (Cap. 23).

5. The liquidator is of the view that the continued effect of these sections is that, while not entitled to priority under section 265 of the Companies Ordinance above, the continued effect of that section together with section 15 of the Law Amendment and Reform Ordinance does give priority for money advanced as surety for severance pay. That opinion is supported by Counsel for Harbour Engineering Co. Ltd. and Solicitors for Nishimatsu Construction Co. Ltd.

6. I have considered the correspondence attached to the liquidator's report relating to the claims of those two companies and I agree with the liquidator that there are, as sureties for the severance payments, entitled to receive preference. The documents annexed to the liquidator's report which were executed at the time seem to me to make that quite clear and I so direct.

7. Counsel for Lam Construction Co. Ltd. has argued that while not a guarantor or surety for payment of severance pay, his clients can rely on the doctrine of subrogation and on the basis of that doctrine may step into the shoes of the workers who have received severance pay from money supplied by them. He refers to dicta of Lord Diplock in Drakpo v. Wanson Investments Ltd. (1977) 3 A.E.R. 1 where, at page 7, he sets out how the doctrine applies in the case of a lender who discharges a borrowers liability either direct to the existing creditor at the borrower's request or through the borrower himself.

8. I am satisfied, and indeed it is not in dispute, that in satisfying the workers' claims against the company for severance pay, the workers' rights were assigned to Lam Construction Co. Ltd. and there is subrogation of those rights. However the Lam Construction Co. Ltd. argue, as indeed they must, that not only are the workers' rights as creditors assigned but even though those rights are no longer vested in the workers, the preferential provisions of section 265 still apply. In the absence of statutory provision I do not think that is so. The assignor, if he wishes to avail himself of that provision must, it seems to me, bring himself within section 15 of the Law Amendment and Reform Ordinance which Lam Construction Co. Ltd. (and other contractors not represented) have not done. To hold otherwise would be to declare that section 15 was unnecessary and would be to add words to section 265(2) of the Companies Ordinance which are not there.

9. I am satisfied that the claim by Lam Construction Co. Ltd., Dickson Construction Co. Ltd. and Sang Lee Construction Co. Ltd. should be admitted but not for preferential dividend, and so direct.

10. This was a very proper application and I was much assisted by the arguments of Counsel. I consider it would be equitable if all parties, including the Lam Construction Co. Ltd. were to have their costs paid as an expense in the liquidation and so order.

Representation: