Whether Payment Arising from Future Performance of Contract is Disposition of Property by the Company Requiring Validation Order

February 2020

In Hsin Chong Construction Company Limited (in provisional liquidation) v Build King Construction Limited [2019] HKCA 1305, dispute arose from the validity of the removal of Hsin Chong Construction Company Limited by its joint venture partner, Build King Construction Limited from a joint venture project, which was done after a winding-up petition had been issued against Hsin Chong. The Court of Appeal elucidated the definition of “property” in the context of section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Chapter 32, Laws of Hong Kong.

Factual background

Hsin Chong and Build King entered into a joint venture agreement for the purpose of executing a major government construction project in November 2013. Under the joint venture agreement, they established an unincorporated integrated joint venture to prepare and submit prequalification and, upon being prequalified, a tender for executing a major government design and construction project with Hsin Chong taking a 65% interest and Build King the remaining 35%. The Government awarded the contract to the joint venture in 2016. The two joint venture partners entered into Articles of Agreement with the Government in 2016.

Clause 17 of the joint venture agreement was a default provision which gives the innocent party a right to, among others, exclude the other party from further management and participation of the joint venture in the case of the defaulting party’s insolvency.

In 2018 a winding up petition was issued against Hsin Chong due to its financial difficulties. Build King exercised the exclusion right under the joint venture agreement on 13 December 2018 and after which, Hsin Chong should have no right other than the residual right in the final account under Clause 17 and the exclusion does not release Hsin Chong’s obligations to bear its proportionate share of any loss.

Build King offered to settle at HK$53.6 million to acquire all Hsin Chong’s residual right under the joint venture agreement taking into account parts of the potential profits that may be generated after the exclusion and releasing Hsin Chong from any future obligations resulting from the joint venture agreement. Such arrangement was accepted by Hsin Chong by way of a Supplemental Agreement made between them a few days after the exclusion on 17 December 2018.

Hsin Chong opposed on the ground that, among others, the exercise constituted a disposition of “property”. The exclusion of Hsin Chong was therefore void and should not be validated under section 182 of the Ordinance. At the first instance, the court of first instance held in favour of Build King. Hsin Chong appealed to the court of appeal.

Court of appeal’s ruling

The court of appeal affirmed the decision and held that there was no disposition of the property of Hsin Chong involved in the exercise of exclusion rights under Clause 17. The judges hearing the appeal rejected that idea that “property” for purpose of section 182 of the Ordinance as being “susceptible of referring to something which has no present existence but may possibly come into existence on some uncertain event in the future”. There can be no legal entitlement to receive a share of any future profits unless Hsin Chong was in a position to perform and had performed its own contractual obligations.

As the prospect of payment arising from future performance of the contract for the project was only something that may possibly come into existence on some uncertain event in the future, it cannot be taken to be a “property” of Hsin Chong under section 182 of the Ordinance and hence Clause 17 was indeed valid.

The court of appeal also took the view that Hsin Chong at that time was clearly not in a position to perform the contract of the project, and further held that there was no basis for Hsin Chong to assert it has been deprived of a right to share in the future profits of the joint venture or to participate in the project. As a disposition of any such right cannot have any impact on the creditors of Hsin Chong, the court of appeal concluded that section 182 of the Ordinance was not engaged.