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HCCW000496/1997
1997, No.CWU 496
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
COMPANIES WINDING-UP
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| IN THE MATTER OF FINBO ENGINEERING COMPANY LIMITED |
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| IN THE MATTER OF THE COMPANIES ORDINANCE Cap.32 |
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Coram : The Hon Mrs Justice Le Pichon in Court
Date of Hearing : 26 February 1998
Date of Handing Down of Judgment : 18 March 1998
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J U D G M E N T
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1. This is a petition to wind up Finbo Engineering Company Limited ("Finbo") on the ground that it is unable to pay its debts and that it is just and equitable that it should be wound up. A statutory demand was served pursuant to section 178(1) which remains unsatisfied.
2. The Petitioner AMEC Electrical and Mechanical Engineers Limited ("AMEC") is a mechanical and electrical subcontractor. Finbo was its sub-subcontractor on a project at the Hong Kong University of Science and Technology. It is common ground that on 6 August 1996, AMEC made a payment of wages to the employees of Finbo under section 43C of the Employment Ordinance, Cap.57. The sum so paid became a debt due by Finbo to the superior subcontractor by reason of section 43F.
3. Finbo opposes the petition on the ground that the debt is substantially in dispute because it is entitled to a set-off. The claim to a set-off arises under the sub-subcontract relating to the project. In November 1997, Finbo issued a writ against AMEC. Under paragraph 8 of its Statement of Claim filed on 6 January 1998, it claims the balance of interim payment applications in respect of works done by Finbo up to and including 1 August 1997 as well as the total value of authorised variations, totalling $2.787 million. On that basis, even allowing for the amount paid by AMEC on behalf of Finbo, Finbo is still entitled to $1.5 million for completed subcontract work and variations. This claim is disputed by AMEC who has counterclaimed for over $15 million in respect of the sub-subcontract.
The issues
4. The issues are whether :
(1) there is either -
a) a legal set-off or, alternatively,
b) an equitable set-off
to AMEC's claim;
(2) in any event, whether in the exercise of its discretion, the court ought to make a winding-up order in view of Finbo's cross-claim.
5. As to the difference between legal set-off and equitable set-off, a pithy statement of that difference is to be found in Axel Johnson Petroleum AB v. M.G. Mineral Group AG [1992] 1 WLR 270 where Leggatt LJ observed (at 274H) :
"The state of the law is unsatisfactory that allows a set-off at law of debts which are liquidated, even if unconnected, and in equity of debts which are connected, even if unliquidated, but not a set-off of debts which are both unliquidated and unconnected."
Legal set-off
6. Finbo's claim under paragraph 8 of the Statement of Claim is plainly a liquidated claim. The fact that damages are also claimed under paragraph 14 does not alter this fact. Counsel for AMEC submitted that legal set-off does not apply for two reasons : first, for historical reasons, legal set-off does not apply in Hong Kong; second, mutuality is lacking.
7. Legal set-off arose in England under two statutes enacted in 1729 and 1735 ("the Statutes of Set-off"). The Statutes of Set-off were repealed in England in 1879 by Section 2 of the Civil Procedure Acts Repeal Act and the Statute Law Revision and Civil Procedure Act 1883 in so far as they applied to the Supreme Court of Judicature. As appears from Hanak v. Green [1958] 2 QB 9 at 22, this has been interpreted as preserving the right of set-off originally conferred by the Statutes of Set-off. Mr Carolan's submission is that as the Statutes of Set-off were not in the Schedule to the Application of English Law Ordinance, Cap.88, they form no part of the law of Hong Kong.
8. This submission by counsel for AMEC was raised for the first time at the hearing itself, it not being part of his written skeleton submissions. It would appear that the point that legal set-off does not apply in Hong Kong has not been considered by the Hong Kong courts before. Although counsel for Finbo endeavoured to deal with the point at the hearing despite being taken by surprise, it was plainly not a satisfactory way of addressing an issue that is of considerable difficulty. Accordingly, after the hearing, I directed that further written submissions be made by counsel for Finbo by 9 March with a right to counsel for AMEC to reply by 12 March. I now have the benefit of lengthy written submissions from both sides.
9. I am indebted to counsel for Finbo for his exhaustive historical research on the reception of English law and practice regarding set-off and counterclaim in Hong Kong. As appears below, the position is not that legal set-off has never formed part of the law of Hong Kong : the critical question is whether this right has been abolished.
10. The Statutes of Set-off which were 18th Century English Statutes became part of the law of Hong Kong as a result of section 3 of Ordinance No.15 of 1844 ("SCO 1844") which established the Supreme Court of Judicature at Hong Kong. Section 3 reads as follows :
"And be it further enacted and ordained, That the Law of England shall be in full Force in the said Colony of Hong Kong, except where the same shall be inapplicable to the local Circumstances of the said Colony, or its Inhabitants : ... Provided also, that in all Matters relating to the Practice and Proceedings of the said Supreme Court, and not hereinafter provided for by this Ordinance, the Practice of the English Courts shall be in Force, until otherwise ordered by any Rule of the said Court ... "
Local circumstances would not have made the statutes inapplicable or subject to modification.
11. Subsequent amendments to SCO 1844 made by Ordinance No.6 of 1845, Ordinance No.2 of 1846, Ordinance No.3 of 1873 and Law Revision Ordinance (No.27 of 1937), Schedule, Item 17(1) ("SCO 1937") did not affect the application of the Statutes of Set-off in Hong Kong. That much is now common ground between the parties.
12. But the parties differ as to the effect of the Application of English Law Ordinance (No.2 of 1966) ("AELO") which later became Cap.88. The AELO provided ―
(1) for the common law and the rules of equity to be enforced in Hong Kong so far as applicable and subject to any necessary modifications (section 3);
(2) for certain English Acts as listed in the Schedule to the Ordinance to apply to Hong Kong subject to such modifications as local circumstances warranted (section 4); and
(3) that subject to the provisions of the Ordinance, the practice of the Supreme Court of Judicature of England for the time being in force shall be in force in the court (section 7).
Neither the Statutes of Set-off nor the 1879 and 1883 Acts have ever been listed in the Schedule to the AELO.
13. What therefore is common ground is that for a period of over a 120 years, (i.e. from 1844 to 1966) legal set-off was part of the law of Hong Kong. Mr Carolan submits that a consequence of the AELO was that it abolished legal set-off in Hong Kong. Mr Reyes disagrees. He submits that there was no need for the AELO to make the Statutes of Set-off applicable to Hong Kong to preserve legal set-off because by 1966 the English practice of allowing a pleading of legal set-off as a defence in an action had been firmly established as part of Hong Kong practice and procedure through the various Supreme Court Ordinances enacted between 1844 and 1937, and further that the original rationale for the Statutes of Set-off had gone with the institution of counterclaim by the Judicature Acts. Moreover, section 7 of the AELO preserved English practice and procedure in Hong Kong subject to any contrary provisions in SCO 1837 as then current.
14. Whether legal set-off remains available in Hong Kong, notwithstanding the AELO, is a question of considerable complexity. Did...
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