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Hsin Chong Construction Company Limited (In Liquidation) v Build King Construction Limited

Judgment Cited authorities 13 Cited in 1 Precedent Map Related
Vincent
Judgment Date13 May 2021
Neutral Citation[2021] HKCFA 14
Judgement NumberFACV11/2020
Subject MatterFinal Appeal (Civil)
CourtCourt of Final Appeal (Hong Kong)
FACV11/2020 HSIN CHONG CONSTRUCTION COMPANY LIMITED (in liquidation) v. BUILD KING CONSTRUCTION LIMITED

FACV No. 11 of 2020

[2021] HKCFA 14

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 11 OF 2020 (CIVIL)

(ON APPEAL FROM CACV NO. 321 OF 2019)

_____________________

BETWEEN

HSIN CHONG CONSTRUCTION COMPANY LIMITED
(in liquidation) 		Appellant
and
BUILD KING CONSTRUCTION LIMITED Respondent

_____________________

Before:
 Chief Justice Cheung, Mr Justice Ribeiro PJ, Mr Justice Fok PJ, Mr Justice Tang NPJ and Mr Justice Gummow NPJ
Date of Hearing: 22 April 2021
Date of Judgment: 13 May 2021

________________________

JUDGMENT

_________________________

Chief Justice Cheung:

1. I agree with the joint judgment of Mr Justice Ribeiro PJ and Mr Justice Fok PJ.

Mr Justice Ribeiro PJ and Mr Justice Fok PJ:

2. This judgment concerns a contested application for the retrospective validation of the disposition of a company’s property made after commencement of the company’s winding up.

A. The Joint Venture Agreement and the Company’s financial difficulties

3. Pursuant to a Joint Venture Agreement dated 21 November 2013 (“the JVA”) Hsin Chong Construction Company Limited (“the Company”) and Build King Construction Limited (“Build King”) tendered for and, on 22 June 2016, were awarded a Government contract to design and build a large police facility in Kowloon with the Company taking a 65% interest and Build King the remaining 35% in their unincorporated joint venture.

4. In 2017 and 2018, it became increasingly clear that the Company was in dire financial straits. Among other indications, trading in the Company’s listed shares was suspended in March 2017, defaults occurred in meeting its debt obligations, its auditors qualified its accounts on the going concern basis and, on 17 July 2018, the West Kowloon Cultural District Authority, the employer under a separate contract for the Company to construct the M+ Museum, determined that contract on the ground of the Company’s insolvency. On 27 August 2018, a creditor issued a petition to wind up the Company.[1]

5. Clause 17 of the JVA provides a mechanism whereby one party may exclude the other from the joint venture on the ground of that other’s insolvency. It enables the “Continuing Party” to exclude the “Defaulting Party” from “further participation in the management of the Joint Venture and the Contract and the profits arising therefrom” and permits the Continuing Party “to take over the benefits of the Defaulting Party in the Joint Venture (but without releasing the Defaulting Party from its obligation to bear its proportionate share of any loss resulting or to result from the Contract) ...”.

6. If the option to exclude is exercised, Clause 17 provides for an accounting exercise to be performed at the completion of the project to calculate the amount of any accrued profit the Defaulting Party might be entitled to up to the date of exclusion, less the Defaulting Party’s share of any losses, pre- and post-exclusion, and any expenditure or loss incurred by the Continuing Party due to the Defaulting Party’s default. Clause 17.5 accordingly provides:

“Upon completion or termination of the Contract, receipt of all amounts due to be paid by the Client pursuant to the terms thereof and the ascertainment of all liabilities of the Continuing Party under or arising out of or in connection with the Contract or the construction of the Works, the Continuing Party shall, subject as hereinafter provided, account to the Defaulting Party who shall be entitled to receive an amount equal to the sum provided by him towards the Working Capital together with his proportionate share (as adjusted in accordance with the terms and conditions hereof as the case may be) of any profits or other entitlements earned and received by the Joint Venture in respect of the Contract but calculated up to the date when the Defaulting Party was excluded from the Joint Venture less:-

(a) his share of any losses arising from the Contract calculated in accordance with the Proportions whether before or after the date of exclusion; and

(b) all costs, expenses, losses and damages incurred by the Continuing Party directly or indirectly as a result of the default of the Defaulting Party.

7. The final account might show a sum due to the Continuing Party and Clause 17.6 accordingly stipulates:

“In the event that the share of the costs, expenses, losses and damages chargeable to the Defaulting Party exceeds its entitlements, the Defaulting Party, or (as the case may be) its successors, receivers or other legal representatives, shall promptly pay the excess to the Continuing Party as a primary obligation and as a debt.”

8. It will be convenient to refer to the benefits contingently claimable by the Defaulting Party in the event of Clause 17 being triggered as “the residual rights”.

9. On 13 December 2018, having taken the view that the Company was insolvent, Build King did indeed invoke Clause 17 constituting itself the “Continuing Party” and the Company the “Defaulting Party” for the purposes of that clause. At that stage, the design phase was close to completion and construction works on the structure were well advanced, while work on the architectural finishes and building services was just commencing.

B. The Supplemental Agreement

10. Negotiations ensued. They resulted in Build King and the Company entering into a Supplemental Agreement (“the SA”) dated 17 December 2018 whereby Build King agreed to acquire the Company’s residual rights together with its interests in materials, plant and equipment, deposits and partial payments which it had contributed to the joint venture. The consideration agreed to be paid by Build King for such acquisition was the sum of $53.6 million to be paid in two instalments of $20 million and $33.6 million respectively. It is common ground and has been accepted below that this represented a fair, and indeed, favourable valuation of the Company’s rights and interests being acquired since it included a significant amount for projected post-exclusion profits to which the Company was not entitled under the JVA. It also eliminated certain contingencies and removed the need to await a final accounting at the project’s completion.

11. However, crucially, by its clause 5(d) the SA specified that the $53.6 million “will be paid in [sic] the following designated account requested by [the Company]: Bank of East Asia 136-68-00013-1 savings account, Cogent Spring Limited [‘Cogent Spring’].” Clause 5(e) went on to stipulate:

“[The Company] confirms that [Cogent Spring] is a wholly owned subsidiary of Hsin Chong Group Holdings Limited and that Build King’s payment to [Cogent Spring] will be understood as and/or equivalent to the effect that Build King has discharged its liability in connection with or arising from this SA.”

12. Initially, as indicated in a resolution by the Company’s board dated 13 December 2018, the intention was for the Company itself to use the amounts received from Build King “to settle the outstanding payment of MPF [Mandatory Provident Fund] and staff wages/salaries”, without any mention of Cogent Spring or any other third party recipient. However, as the trial judge found:

“On 14 December 2018, the Company requested that payment be made to [Cogent Spring] ... as the Company’s bank accounts were frozen because of the petition and outstanding MPF contributions and employees’ wages could not be paid.”[2]

13. That proposal raised concerns on the part of certain directors on both sides of the transaction. The reaction of Mr Desmond Chang Kam Chuen, a Build King director, was to send an e-mail dated 14 December 2018 to Mr Wilfred Wu (then a director of the Company) stating:

“I just noted that you request us to pay the first $20 million to another company named Cogent Spring. I’m sorry that we can’t entertain this request; instead, we will provide you a bank draft payable to [the Company], the party to the agreement.”

14. And Mr James Lee Kok Foo, who was one of the Company’s directors until he stepped down from the board on 14 December 2018, protested when he saw draft board minutes purporting to approve such payment to Cogent Spring and in his e-mail to the Company’s directors dated 16 December 2018, he stated:

“I remind all to check the lawfulness of requesting Build King to make payments to [Cogent Spring] while [the Company’s] accounts have been frozen by concerned banks. This may be viewed as fraud rendering legal liability to directors so involved.”

15. Nonetheless, Build King proceeded to pay the first instalment to Cogent Spring instead of the Company, evidently to circumvent the problem of the latter’s frozen bank accounts with a view to paying outstanding salaries and MPF contributions. On 17 December 2018, the sum of $20 million was transferred into Cogent Spring’s account with the Bank of East Asia, as specified in the SA. The funds were then dissipated in making a variety of payroll and MPF payments, as well as towards meeting legal costs and miscellaneous utility and other expenses, involving not only the Company but other entities in the Group.

C. Section 182 and the application for validation

16. Section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance[3] (“CWUMPO”) materially provides as follows:

“In a winding up by the court, any disposition of the property of the company, including things in action, ... made after the commencement of the winding up, shall, unless the court otherwise orders, be void.”

17. As we have seen, the SA was executed on 17 December 2018 and the payment of $20 million to Cogent Spring was effected on the same date. As this was after...

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1 cases
  • Hsin Chong Construction Company Limited (In Liquidation) v Build King Construction Limited
    • Hong Kong
    • Court of Final Appeal (Hong Kong)
    • 23 June 2021
    ...ON COSTS _________________________ Mr Justice Fok PJ (giving the judgment of the Court): 1. By the Court’s judgment dated 13 May 2021 ([2021] HKCFA 14), the appellant’s appeal was unanimously allowed and the validation orders in respect of the Supplemental Agreement and the dispositions mad......

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