Re The Tung on Plumbing Co, Ltd ("Tung on")

HCCW 818/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 818 OF 2005

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AND

HCCW 819/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 819 OF 2005

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Before: Hon Kwan J in Court

Date of Hearing: 9 January 2006

Date of Decision: 9 January 2006

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D E C I S I O N

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1.This is the adjourned hearing of an application for a validation order in respect of each of two companies, The Tung On Plumbing Company, Limited (“Tung On”) and Saiton Engineering Limited (“Saiton”).  The winding-up petitions were presented against them on 26 October 2005.

2.In the amended summonses for a validation order, the companies seek to validate the payments in Schedules 2 to 4.  Essentially, this is to enable them to pay 1 month’s salary to the staff, to pay the outstanding operation expenses, and to pay the projected operation expenses capped at the amounts mentioned for January and February 2006.

3.The payments sought to be validated also include payments to the legal advisers for fee notes rendered for work done, but do not include unbilled work in progress.

4.The Official Receiver has no objection to the applications.

5.The companies are jointly and severally liable to all the financial creditors and these liabilities make up 80% of the indebtedness of the companies.  I understand all the financial creditors have been given notice of the present applications.  Various banks have put in writing that they have no objection to the validation orders.  They are the largest unsecured creditor, the Standard Chartered Bank (Hong Kong) Limited, and the Bank of America, Ever-Long Finance Limited and Liu Chong Hing Bank.

6.It was submitted by Mr Zimmern for the companies that the main consideration here is whether the payments sought to be validated would be in the interests of the creditors.  It is accepted by the companies for the purpose of the present applications that they are insolvent on a cash flow basis, as they cannot pay the debts which are due.

7.Saiton was established in 1988 and Tung On in 1948, both are well-established building services contractors in Hong Kong. In 1996, a number of directors of Saiton bought all the shares in Tung On.  Since then, the business operations of the two companies are run jointly.  Tung On has only maintained a few administrative staff, and all its staff were transferred to Saiton.  The professional staff members are on the payroll of Saiton and seconded to Tung On on a project-to-project basis.

8.In 2001, there was a restructuring of the companies in anticipation of a listing which has not occurred.  The two companies became wholly-owned subsidiaries of Saiton Tung On (BVI) Limited.

9.At the hearing of the winding-up petitions on 3 January 2006, I adjourned the petitions for 3 months to give an opportunity to the companies to explore an offer for restructuring received from China United Enterprise Company Limited (“China United”) on 9 December 2005.  China United has offered to buy 80% of the issued share capital of the parent company of the companies for HK$30 million, of which HK$5 million would be injected as working capital immediately.  The offer is subject to the financial institutions agreeing to their claims being settled out of the HK$30 million injection of funds and the petitions being adjourned for 3 months.  The winding-up petitions were adjourned for China United to conduct due diligence of the companies.

10.Two main reasons were given by the companies why they seek limited validation orders:

(1)

Saiton’s works at a project at Ka Wai Man Road are scheduled for completion on 24 March 2006.  Tung On has been carrying out outstanding post-completion date variation works and defects repairs regarding its subcontracted works at the Four Seasons Hotel, these works are expected to be completed by the expiry of the post-completion defects liability period at the end of June 2006.  So both projects are close to completion.  Default on either project would incur substantial liabilities for breach of contract which would reduce the amount distributable to the creditors in the event of liquidation, and would be more prejudicial to the interests of the unsecured creditors as a whole than their continuation.

(2)

The continuation of these projects would have an impact on the success of China United’s proposal and the potential use by the companies of the HK$5 million that China United has proposed as working capital, which proposal would, on the face of it, be commercially beneficial to the creditors as a whole.  So the companies seek validation orders for all outstanding liabilities already incurred in the ordinary course of business and those to be incurred in the ordinary course of business up to and including 28 February 2006, being the latest date on which the companies would know if the restructuring proposal of China United would carry sufficient support of the creditors.

11.Mr Zimmern has also drawn my attention to these matters which are of relevance:

(1)	The employees have not been paid their salaries for November and December 2005 and any continued non-payment of these sums would risk further resignations and default on the projects.  The proposal is to pay 1 month’s salary to most of the staff (not those who are also guarantors) to appease them and to enable the projects to be continued.
(2)	All future expenses sought to be validated relate only to the two projects and no other general business expenses, save for the preservation of assets.
(3)	Special accounts are intended to be set up with the Standard Chartered Bank for each company and all payments would be made and monitored by KPMG, the independent reporting accountants engaged by the companies.
(4)	There are both present and future receivables and collectables for both companies in the event of a continuation of the projects and/or the granting of the validation orders.  Cheques of the companies that have not been presented for payment are in the sum of HK$452,000.00 odd.  In addition, there is HK$784,000.00 which has been approved for payment by the main contractor of Saiton in another project, but withheld until the companies’ bank accounts are unfrozen.  Further, Saiton is currently negotiating settlement payments from the main contractors of Olympic Station, the Four Seasons Hotel and the Ma Wan Island projects, which cover claims by Saiton of HK$13.2 million; this would involve some deductions for early termination.

12.I am satisfied in the circumstances it would be appropriate for a limited form of validation order to be made.  I make an order in terms of the amended summons in HCCW No. 818 of 2005.  For the amended summons in HCCW No. 819 of 2005, I make an order in terms of the application, save and except for the payment of 1 month’s salary to Madam Hai Ka Yiu in Schedule 2 of the amended summons in the sum of HK$31,000.00.  I propose to adjourn this part of the application relating to the salary of Madam Hai, for Saiton to file further affirmation in support of this part of the application.  In respect of both amended summonses, I order that the costs are to be in the cause of each of the petitions, including the costs reserved by Reyes J on 30 December 2005.

Mr Tony C Y Li, instructed by Messrs Dibb Lupton Alsop, for the Petitioner in both proceedings

Mr Richard Zimmern, instructed by Messrs Laracy Gall, for the Companies

The Official Receiver, attendance excused