On 28 March 2024, the District Court dismissed an application (the ‘Application‘) by KONE Elevator (HK) Ltd for leave to appeal the Court’s previous decision on KONE’s Statutory Appeal (as defined below) against a levy imposed by the Construction Industry Council (‘CIC‘).

The previous decision

Under the Construction Industry Council Ordinance (Cap. 587) (‘CICO‘), a ‘Construction Industry Levy’ has to be paid by contractors to the CIC in respect of construction operations with a value exceeding $3 million.  The levy is calculated as a percentage of the value of the construction operations in question.

KONE, a prominent player in the lift and escalator industry, objected to a levy imposed on them regarding certain lift and escalator maintenance works.  This objection was referred to the Objections Board established under the CICO, which affirmed the levy.

Dissatisfied with the Objections Board’s decision, KONE appealed further to the Court, which was the first-ever statutory appeal against a levy decision made by the CIC pursuant to section 57 of the CICO (the ‘Statutory Appeal‘).

In the Statutory Appeal, KONE had 3 broad complaints – (1) allegations of bias and procedural unfairness against the Objections Board, (2) challenge to the constitutionality of the Objections Board’s proceedings, and (3) claims that the CIC did not have power or jurisdiction to issue the levy payment notice as the works performed by KONE were not ‘construction operations‘ within the meaning of the CICO.

Previously, the Court dismissed KONE’s Statutory Appeal in a decision dated 30 November 2023.  KONE subsequently applied for leave to appeal on the below 4 grounds, as well as on the ‘some other reason in the interests of justice‘ ground pursuant to section 63A(2)(b) of the District Court Ordinance (Cap. 336).

The Application

The grounds pursued by KONE and the Court’s reasoning are set out as follows:

1. Ground 1: KONE criticised the Court’s approach in determining whether the lift and escalator maintenance operations covered by the levy payment notice qualified as ‘construction operations‘ under the CICO. KONE considered that the Court should have taken a more strict approach to interpreting Schedule 1 of the CICO, which lists the types of work included in the definition of ‘construction operations‘. The Court rejected this ground, holding that it had taken a correct approach by construing the CICO purposively, and realistically analysing the particular facts and circumstances.  KONE also claimed that the Court failed to take into account industry practice or expert evidence, but the Court held that whether lift and escalator maintenance operations were ‘construction operations‘ was a matter of statutory interpretation based on a faithful construction of the relevant provisions, not of industry practice or expert evidence.

2. Ground 2: KONE claimed that ‘construction operations‘ were limited to works requiring the appointment of an ‘authorized person‘ pursuant to the Buildings Ordinance (Cap. 123), and that as no authorized person had been appointed, the relevant works were not construction operations. The Court held that KONE’s contention was based on a misreading of the definition of ‘authorized person‘ at section 2(1) of the CICO, which was not limited to only authorized persons appointed under the Buildings Ordinance.  The Court also expressly rejected KONE’s proposed definition of ‘construction operations’ as confined to work requiring the appointment of an authorized person.

3. Ground 3: KONE criticised the Court’s rejection of its expert evidence on the industry meaning of the terms ‘stage‘ or ‘part‘. KONE’s expert had not been cross-examined in the earlier Statutory Appeal and the CIC had not adduced contrary expert evidence.  The Court held this complaint without merit, as it had already held in its previous decision that the relevant point was a matter of law for which expert evidence was inadmissible.  KONE also complained that it should have been notified that the Court did not accept KONE’s expert evidence and given a chance to respond, but the Court found that this had been addressed during the oral closing.

4. Ground 4: Regarding whether certain identified items fell within the definition of ‘construction operations‘, KONE argued that the Court erred by placing the burden of proof on KONE to demonstrate why the works were not ‘construction operations‘, instead of on the CIC to justify charging a levy. The Court referred to its previous decision on this issue, in which it held that the CIC did bear the burden of justifying the levy, but that there was sufficient evidence before the Court to make a finding one way or another without having to refer to burden of proof.  KONE also argued that it had given sufficient factual evidence whether certain items did not amount to ‘construction operations‘.  The Court referred to numerous deficiencies in the witness statement that had been identified in its previous decision, and rejected this argument.

The Court overall found no merit in KONE’s arguments, considering them a rehash of their previous trial positions.  It further concluded that there was no justifiable reason to hear the appeal on the ‘some other reason in the interests of justice‘ ground, despite KONE’s assertion that the case may be ‘the first of its kind‘ and could have ‘far-reaching consequences for other contractors or property owners‘.

The Court’s dismissal of the Application and its previous decision may nonetheless provide useful judicial guidance as to various aspects of the construction regulatory regime in Hong Kong, particularly as CICO cases seldom come before the courts.  The definition of ‘construction operations‘ is often a contested issue in matters under the Construction Workers Registration Ordinance (Cap. 583), which is also administered by the CIC.  The CIC’s regulatory role and the practices of the Objections Board were also discussed at some length in the previous decision, which may have implications on various similarly-structured appeal procedures for other CIC-run schemes.

The full judgment can be accessed here.

Update on the liquidation of China Properties Group Limited (“CPG“):  Further to our previous article where the former director of CPG, Mr Wong, was ordered by the Hong Kong court to pass written resolutions to facilitate the winding up of CPG, the Hong Kong court once again stood fast in lending its assistance to the liquidators in face of the extensive obstructions by Mr Wong and his associates (“Former Director’s Camp“).

In Summit Prestige Enterprises Ltd v Peak No 1 Holdings Ltd [2024] HKCFI 999, the Honourable Madam Justice Linda Chan dismissed the discharge summonses issued by the Former Director’s Camp (to discharge / set aside the appointment of the holdco’s (CPG) liquidators as provisional liquidators of its Hong Kong subsidiaries (“Appointment Order“) and ordered that the Appointment Order to continue pending determination of the appeal of the CPG winding-up order (“Appeal“).

The Court summarised the events since the making of the CPG winding-up order and the obstructive acts conducted by the Former Director’s Camp:

• Mr Wong caused legal proceedings to be commenced in the name of CPG to enjoin the liquidators from accessing or inspecting documents of CPG and its subsidiaries ([25]);
• Mr Wong caused the BVI subsidiaries to commence BVI proceedings in restraining the liquidators from taking control of the BVI subsidiaries until an order for recognition and assistance had been obtained from the BVI court[1] ([37]);
• Despite the Hong Kong court’s order for Mr Wong to pass the relevant written resolutions, the Former Director’s Camp purportedly approved the removal of Mr Wong as director of the BVI subsidiaries, and under this pretence, passed further resolutions to purportedly resolve that the written resolutions were invalid ([43]-[45], [70(1)]);
• The Former Director’s Camp took steps to change the legal representatives of the 4 wholly owned subsidiaries of the Hong Kong subsidiaries (which hold the Group’s main real estate project in Chongqing) from persons who are subject to the in personam jurisdiction of the Hong Kong court, to persons residing outside of the jurisdiction ([59]); and
• After persuading the Court (through his counsel) that it was not “impracticable” for the Hong Kong subsidiaries to hold EGMs as requisitioned by the BVI subsidiaries (i.e. the Petitioners in these actions), Mr Wong procured his associates to frustrate / vote against the resolutions in appointing the holdco’s liquidators as additional directors of the Hong Kong subsidiaries ([55], [70(3)].

Against these obstructions posed by the Former Director’s Camp to prevent the liquidators from taking over the Hong Kong subsidiaries, the liquidators considered that there was an “overwhelming need” to immediately appoint themselves as provisional liquidators over the Hong Kong subsidiaries. For the following reasons, Chan J was satisfied that there were good grounds to make / continue the Appointment Order.

First, upon the making of the CPG winding-up order, the former directors (including Mr Wong) ceased to have any power to act in the name or on behalf of CPG (e.g. to commence proceedings, to pass resolutions) other than for the limited purpose of pursuing the Appeal, or to seek a discharge of the appointment of the liquidators ([9]). Vice versa the liquidators were the only persons entitled to take control over the BVI and Hong Kong subsidiaries ([69]).

However, the Hong Kong subsidiaries remained under the control of the Former Director’s Camp as a result of their abovementioned actions ([69]). In particular, “it was abusive for Mr Wong to flout the 15 Sept Order by signing the Resolutions on one hand and procuring his associates to pass… Resolutions for the purpose of invaliding the very Resolutions he signed” ([70(1)]). Unless and until the Former Director’s Camp is displaced, the liquidators had no means to ensure that the assets of the Hong Kong subsidiaries were being safeguarded ([69]).

Secondly, although there was no basis for the Former Director’s Camp to deny the liquidators to represent the BVI subsidiaries (i.e. the Petitioners in these actions), or to change the constitution of the board of the Hong Kong subsidiaries, the constant change of the boards of the Hong Kong subsidiaries would only leave much uncertainty in their states. If this is allowed to continue, it would only result in more disputes and litigations between the Former Director’s Camp and the liquidators – the Appointment Order thus put such uncertainty to an end. ([70]-[72])

Thirdly, in response to the allegation of material non-disclosure on part of the BVI subsidiaries (i.e. the Petitioners in these actions) that the Appointment Order was “unprecedented”, Chan J emphasised that the Court can and will appoint liquidators of the holding company as provisional liquidators of the subsidiaries, where the circumstances warranted the appointment ([79(1)]).

Takeaways

The Hong Kong Court once again made clear that the making of a winding-up order brings into operation a statutory scheme for dealing with the assets of the company that is ordered to be wound up, and all powers of dealing with the company’s assets, including the power to carry on its business, are exercisable by the liquidator for the benefit for those persons who are entitled to share in the proceeds of realisation of assets under the statutory scheme. Thus, the former directors ceased to have any power to act in the name of the company other than for the limited purposes of pursuing the appeal against the winding up order, or to seek a discharge of the appointment of the liquidators.

In that vein, the Court would be prepared to lend assistance to liquidators to carry out their duties, which, in this case, includes appointing them as provisional liquidators of the subsidiaries, if it is appropriate to do so.

See full judgement here.

[1] This culminated into the subject matter of our previous article where Mr Wong was ordered by the Hong Kong court to pass written resolutions to ratify the appointment of one of the holdco liquidators as sole director of the BVI subsidiaries. It also appears to be in line with BVI court’s position as Wallbank J observed that the liquidators were entitled to procure CPG to exercise its right as shareholder of the BVI subsidiaries without first seeking an order for recognition or assistance ([48]).

The Hong Kong market has in recent years seen a number of listed companies having to go through the painful process of prolonged suspension of trading as a result of failure to publish their financial statements to the public in accordance with the timeframe prescribed in the Listing Rules.  A portion of these suspensions arose as a result of whistleblowing or anonymous complaints pertaining to potential irregularities in the listed companies’ financial statements, misconduct of senior management or other corporate misfeasance.  As a result of such complaints, the affected listed companies may be required to conduct internal investigations to address the issues arising from the complaints and undertake remedial measures before trading of the shares can be resumed.

How one handles whistleblowing or anonymous complaints will potentially have significant implications on the listed companies.  While it is debatable whether a prolonged suspension is a proportionate result of whistleblowing which may or may not be substantiated after an internal investigation, it is clear that potential misconduct or irregularities which affect the interests of public shareholders are often uncovered by whistleblowing.

Looking at things from a broader angle, whistleblowing is also one of the key ways for management to find out about potential wrongdoing or misconduct within an organisation, so that appropriate measures can taken to manage the risks arising before it is too late.

It goes without saying that in order to encourage a whistleblower who intends to make a report of suspected wrongdoing, one may need to give sufficient assurances and protection to a whistleblower (most notably, confidentiality and safeguards against retaliation).

An organisation may have its own whistleblowing policy offering protection to whistleblowers and establishing a process to handle whistleblowing or anonymous complaints.  In addition to such internal policies and procedures, one may also see if a whistleblower is offered any statutory protection, especially when whistleblowing takes place outside a specific organisation.

Compared to other jurisdictions, Hong Kong does not currently have a composite piece of legislation which is designed to provide a comprehensive scheme for whistleblower protection. Instead, the whistleblower protection in Hong Kong is scattered around various ordinances.

It can be foreseen that a reform to introduce a composite piece of legislation for whistleblower protection (whether or not this will happen) will not be an easy task, as any such legislation should balance between protecting whistleblowers from retaliation and blindly offering wide protection such that it invites frivolous and plainly unsubstantiated complaints. In addition to that, the legislation will have to take into account all the other existing protections that are offered to whistleblowers under various legislations.

Please see our article that sets out some examples that are relevant to Hong Kong’s regime on whistleblowing for more details.

MinterEllison has collaborated with the Fresh Fish Traders’ School’s (FFTS) once again by sponsoring the Chinese New Year Card Design Competition. The winning design was chosen as our official Chinese New Year greeting card for our clients. As a token of our appreciation, participating students received vouchers. This initiative is one of the many ways that MinterEllison contributes to the community.

Our Partner Katherine U, associate Thomas Sham, and other members of our Community Investment Committee attended the awards ceremony at FFTS on 22 March 2024 and presented the awards to all the winners.

On 2 November 2023, the Securities and Futures Commission (the “SFC“) issued two highly anticipated circulars on tokenisation (i.e. the Circular on intermediaries engaging in tokenised securities-related activities (the “Tokenised Securities Circular“), and the Circular on tokenisation of SFC-authorised investment products (the “Tokenised Investment Products Circular“)). The Tokenised Securities Circular aims to provide conduct-related guidance to intermediaries engaging in tokenised securities-related activities, while the Tokenised Investment Products Circular sets out the requirements and additional safeguards under which the SFC would consider in allowing tokenisation of investment products authorised by the SFC under Part IV of the Securities and Futures Ordinance (Cap. 571) for offering to the public in Hong Kong.

Notably, the Tokenised Securities Circular now allows retail access to the distribution and marketing of “Tokenised Securities”, a concept defined in the circular itself. This represents the SFC’s shift in attitude since its Statement on Security Token Offerings dated 28 March 2019, where security tokens were previously considered as “complex products” requiring additional investment protection measures which should only be offered to professional investors.

Please see our article for more details.