RE CHUNG KONG MATERIALS (JV) LTD

HCCW 338/2016 [2018] HKCFI 2588 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING-UP) PROCEEDINGS NO. 338 OF 2016 ___________________ IN THE MATTER of CHUNG KONG MATERIALS (JV) LIMITED and IN THE MATTER of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Chapter 32 __________________ Before: Hon Anthony Chan J in Court Date of Hearing: 13 November 2018 Date of Judgment: 27 November 2018 ________________ J U D G M E N T ________________ This is the Petition of Total Profit Transportation Ltd (“Petitioner”) to windup Chung Kong Material (JV) Ltd (“Company”) pursuant to s.177(1)(d) of the Companies (Winding up and Miscellaneous Provisions) Ordinance, Cap 32 on the ground that the Company has failed to pay a debt of nearly HK$3.3 million (“Debt”) owed to it as set out in a Statutory Demand dated and served on the Company on 2 September 2016. The Petition is opposed by one of the contributories, Ms Ling Jia Li (“Ling”), who is one of two directors of the Company and holding 50% of its shares. The other director and 50% shareholder is Mr Peter Chan (“Chan”). It will be seen below that there is little doubt that the Debt is due from the Company. However, there is a serious question over the Petitioner’s entitlement over the Debt. Background The Debt is made up of 4 elements, namely, charges for: transportation of excavated material (mud and sand), storage of such material, fuel for barges or vessels used in the transportation and repair cost of one such vessel. In order to understand how the Debt was incurred, one needs to know the rather complicated dealings between various parties. In summary, the Company had 2 contracts (“Contracts”) with Crown Asia Engineering Co Ltd (“Crown Asia”) which was responsible for the transportation of excavated material to the Mainland for 2 very large building projects in Hong Kong. Under the Contracts, Crown Asia had sub-contracted the transportation work to the Company. According to the evidence of Ling, the business with Crown Asia was introduced by Chan to one Madam Wong (“Wong”). It appears that Wong was based in the Mainland. In turn, Wong referred the business to a Mainland company called “東莞市潤信物业投資有限公司” (“YS”). It appears that Wong probably had an interest in YS. Due to the fact that Chan wanted to share in the exploitation of the business opportunity, the Company was formed by Ling, acting as a nominee of YS, and Chan. Subsequently, the Contracts were signed. Most of the transportation work under the Contracts was actually arranged by Wong (some by Chan). Although Ling referred to the Company as the agent of YS in relation to the Contracts, I believe that it is more accurate to characterise the relationship between the Company and YS as subcontractor and subsubcontractor. I shall return to this relationship below on how the payment from the Contracts was to be shared. The Petitioner has a different story concerning the background to the Contracts. According to the Petitioner, the business with Crown Asia was introduced by one Mr Lau Chun Ming (“Lau”) to “Chan/the Company” because Lau could use the excavated material for the purpose of filling up a pond in the Mainland which belonged to Wong. It was intended that after the operation the land could then be used to build a factory for the expansion of Lau’s business. The Petitioner’s evidence is that Wong encountered difficulty in arranging vessels to perform the transportation work and Lau came to the Company’s assistance. In doing so, he asked his nephew, Mr Liu Hao Xiang (“Liu”), to arrange some of the transportation work under the Contracts. According to the evidence, roughly 30% of the total amount of work carried out under the Contracts was arranged by Liu. In so doing, various charges, which made up the Debt, were incurred. The Debt Most of the supporting documents for the Debt came from Chan. The arrangement between the Company and YS was that the former would charge HK$3 per ton for the transportation of material as a service fee. After the deduction of service fees and disbursements, the contractual payments received by the Company from Crown Asia would be paid to YS. Supporting documents for the Debt were provided by Chan for the purpose of carrying out an accounting exercise with YS to ascertain their respective entitlements. Another complication in this case is that Chan had fallen out with Ling and YS. There are crossallegations made as to the reason(s) for the breakdown of relationship. Indeed, the reason for Ling to resist this Petition as a contributory is that Chan had challenged her authority (acting by herself) to instruct solicitors to defend these proceedings in the name of the Company. It is unnecessary and impossible to resolve the crossallegations in these proceedings. It suffices to say Ling does not accept the supporting documents as accurate. However, subject to minor corrections in the figures to reflect some errors, Chan’s documents are consistent with those produced by the Petitioner. In particular, there is evidence of payment of the charges. There is tension between Ling’s position that the Company has not been fully paid by Crown Asia for its work under the Contracts and her nonacceptance of the work done on behalf of the Company to fulfil the Contracts. Mr Li, who appeared for Ling, made a valiant attempt to cast doubt on the documents, eg, by pointing out that much of the documents do not on their face referred to the Company. With respect, reading the evidence as a whole, there is no real doubt that the charges were incurred and paid for on behalf of the Company. Further, there is a letter signed by Chan and dated 18 August 2016 (“Letter”) from the Company to one Mr Ho of the Petitioner which referred to various chasers issued by the latter over the unpaid charges. By the Letter, Chan had confirmed the Debt and promised to make payment at a later stage. Ling had accused Chan to have colluded with Lau and Crown Asia in makingup fictitious transactions for the purpose of windingup the Company. Quite rightly, Mr Li accepted that such serious allegation is not made out by the evidence. For these reasons, I am satisfied that there is a substantial debt owned by the Company which has not been paid. However, the evidence is that there is a payment from Crown Asia to the Company by way of a cheque in the sum of HK$1.9 million which Chan has not paid into the Company’s bank account by reason of the dispute with Ling over the operation of the bank account. I must add that there is no reason to doubt that the Contracts were profitable to the Company, and therefore it ought to be entitled to and/or have received payments from Crown Asia which would be sufficient to cover the Debt. Unfortunately, the evidence is unclear as to whether all the contractual payments had been made by Crown Asia or whether there is any such payment being held by Chan in addition to the cheque of the HK$1.9 million. There is therefore some doubt whether the Company is in fact insolvent. Petitioner’s entitlement over the Debt The evidence is not free from ambiguity as to who had paid for the charges in question. However, it is undisputed that the Petitioner did not pay for them. The Petitioner’s evidence was provided by Liu. According to him, the transportation charges (which included the storage charges) and the repair charges were paid by Lau “via Liu’s account”, and the fuel charges were paid by Lau’s company, Redland Precast Concrete Products Ltd (“Redland”). There is no evidence that Lau had subsequently reimbursed Liu and Redland for these payments. Ms Ng, who appeared for the Petitioner, asserted that the Petitioner is an equitable assignee of Lau, the creditor of the Company in respect of the Debt. First of all, none of the invoices sent to the Company by the Petitioner (3 had been identified by Ms Ng) made any reference to the Petitioner being an assignee. The same can be said in respect of both the Statutory Demand and the Petition. It is therefore unsurprising that Ling had challenged from day 1 the Petitioner’s entitlement over the Debt. Despite the challenge, the relevant evidence adduced by the Petitioner via Liu is consisted of the following (para 28 of Liu’s affirmation filed on 5 May 2017) : “雖然一直以來，都是我本人，按劉振明指示，直接安排、處‍理運載Materials的事宜，而劉振明本人及他的公司則支付所需的費用 / 開支 (見於上面第22段)，但據我從劉振明所得到的理解，這是一項商業活動，以公司作為承接運載Materials項目的單位，相比起用個人名義，是較為合適的，儘管如‍此，直到中港拖欠尾數事情出現為止，劉振明還沒有明確向Chan/中港表示，承接該項目的單位是哪一間公司，倘若沒有拖欠尾數的事情，一如運輸費及燃油費，他會在中港付款時或之前，才要求Chan/中港，把該筆尾數，支付給他所指定的公司。如今發生了中港拖欠尾數的事情，又鑑於本清盤案呈請人 (“呈請人”) 在2016年4月左右與Crown Asia 簽訂運載Materials合約 (見於下面第97及98)，劉振明於是決定呈請人是承接運載Materials項目的單位，是中港的債權人，向中港追討全筆尾數，而Chan亦同意呈請人為中港的債權人 (見於下面29段)。” Putting aside Mr Li’s criticism that the above evidence should have come from either Lau or Chan (there is no evidence that Liu was authorised by Lau to give evidence on his behalf), what the evidence amounts to is that Chan (assuming that he had reimbursed Liu and Redland for the payment of the charges and thus had become the creditor of the Company) had simply nominated the Petitioner as the party to which the Company should repay the Debt. Ms Ng relied upon the authority of William Brandt’s Sons & Co v Dunlop Rubber Co, Ltd [1905] AC 454 at 462 : “… ‘the document does not, on the face of it, purport to be an assignment nor use the language of an assignment.’ [quoting the Court of Appeal below] An equitable assignment does not always take that form. It may be addressed to the debtor. It may be couched in the language of command. It may be a courteous request. It may assume the form of mere permission. The language is immaterial if the meaning is plain. All that is necessary is that the debtor should be given to understand that the debt has been made over by the creditor to some third person. If the debtor ignores such a notice, he does so at his peril. If the assignment be for valuable consideration and communicated to the third person, it cannot be revoked by the creditor or safely disregarded by the debtor.” Based on the dicta, Ms Ng submitted that the above evidence is sufficient to demonstrate an equitable assignment for which there was no required formality. Much reliance is also placed on the Letter. I am reluctant to accept that the Letter constituted an acknowledgement of an assignment. Quite apart from the fact that it made no reference to an assignment, the evidence is that Chan and Lau were well acquainted with one another. It would not be surprising for Chan to have known that Redland was Lau’s company. It might be the case that Chan was simply assuming that Redland had paid the charges and hence issued the chasers to the Company. In other words, Chan might be entirely ignorant of an assignment, if there was one. Even if the court is to accept that there was an equitable assignment in favour of the Petitioner, Mr Li submitted that Lau should have been joined in these proceedings. The court was referred to the recent case of T v A [2018] 3 HKLRD 730 at §55 where Chow J summarised the principles concerning whether an equitable assignee may sue the debtor without joining the assignor : “(1) The relevant cause of action is vested in the equitable assignee which is, strictly speaking, capable of being asserted by him alone without joining the assignor as a party to the action. There is, however, a long standing practice of the court that before giving final judgment in an action at the suit of an equitable assignee, the court would normally require him to bring the assignor before the court, either as plaintiff or as defendant, in order that the assignor would be bound by the result. The practice of requiring the assignor to be made a party to the action is a procedural, and not substantive, requirement. In exceptional circumstances, the court has power to dispense with the presence of the assignor.” Further, in §58, the learned Judge explained that the procedural requirement for the joinder of the assignor is not to be taken as optional : “… The fact that the requirement is regarded as a procedural, as opposed to a substantive, one does not make it any less a requirement of the applicable law for T to be made a party to in the Arbitration. While is it true that the court (or arbitral tribunal) may, in an exceptional case, dispense with the requirement, that is not something which A can insist upon as a matter of legal right.” Ms Ng had referred this court to the case of Pevonia International LLC v Pevonia Asia Ltd, HCCW 417/2012, 23 April 2014, §49, where To J held that there was no useful purpose to be served for joining the assignor: “Furthermore, the assignment of the debt in this group of invoices has been proved. Despite the lack of notice, the assignment nevertheless remains valid in equity: see Brandt’s Sons & Co v Dunlop Rubber Co. The assignee is entitled to sue in his own name, though it remains the practice that the assignee is normally required to join the assignor: see Brandt’s Sons & Co v Dunlop Rubber Co. Joining the assignor would serve a useful purpose, if the assignor has not disposed of the whole of his interest in the chose in action assigned. But where the assignor retains no interest in the chose in action and the assignment only fails to be statutory because it was not in writing or because no notice has been given, joining the assignor would serve no useful purpose. In the United Kingdom, there has been a move to dispense with joining the assignor under those circumstances: see Chitty on Contracts; The Aiolos; Weddell v JA Pearce & Major; and Raiffeisen Zentralbank Osterreich AG v Five Star General Trading LLC. As Cosmopro and Pevonia Inc had retained no interest in the debt and for the obvious reasons as stated in paragraph 46, I consider joining Cosmopro and Pevonia Inc in this petition wholly unnecessary and a waste of costs.” Pevonia is quite a different case compared to the circumstances of the present. In that case, the learned Judge accepted the petitioner’s entitlement to sue as having arose out of the purchase of the assets of the original creditors (§39). The Judge further held that the course of dealings between the petitioner and the company was such that it was a “classical (sic) case of estoppel by convention” (§46). In the premises, it should be regarded as an exceptional case where the court dispensed with the joinder of the assignor (see principle (4) under para 28 above). In the present case, given the unsatisfactory nature of the evidence as analysed above despite Ling’s challenge; the lack of clear evidence whether Lau (assuming that he was the rightful creditor) has retained any interest in the Debt; and the absence of evidence that the assignment had been perfected with consideration provided by the Petitioner and notice of the assignment having been given to the Company (see William Brandt’s in para 26 above), the Petitioner was invited by this court to join Lau in these proceedings. Regrettably, the invitation was declined. In the circumstances of this case, I do not believe that the court should grant a remedy of last resort to windup the Company when it is in doubt over the Petitioner entitlement to the Debt. I should add that the failure to join Lau in these circumstances tends to lend weight to Ling’s contention that the evidence adduced by the Petitioner does not set out an accurate picture. For these reasons, the Petition is dismissed with an order nisi that the costs be to Ling. I am grateful to counsel for their assistance. (Anthony Chan) Judge of the Court of First Instance High Court Ms Queenie W S Ng, instructed by K H Lam & Co, for the Petitioner Mr Jeffrey Li, instructed by Christine M Koo & IP, for the Opposing Contributory