Introduction

The Mandatory Provident Fund Schemes Ordinance (Cap 485) requires employee and employer to make mandatory contributions to a Mandatory Provident Fund scheme (“MPF”), failing which the Mandatory Provident Fund Schemes Authority (“MPF Authority”) may bring proceedings to recover mandatory contributions and the employer may commit an offence. In the recent case of Re Hsin Chong Construction Co Ltd [2020] HKCFI 3160, the Court discussed whether the payment of unpaid mandatory MPF contributions made after the commencement of winding up can be validated.

Background

Hsin Chong Construction Co Ltd (“Company”) is engaged in the business of providing construction services and is now in liquidation. Since February 2018, the Company occasionally failed to make mandatory MPF contributions for its employees. The MPF Authority commenced civil actions and obtained 4 default judgments against the Company for the unpaid MPF contributions from March to September 2018 in the total sum of HK$9.58 million.

The winding up petition against the Company was presented on 28 August 2018. On 18 December 2018, the Company delivered 4 cashier’s orders in the total sum of HK$8.46 million (“4 Cashier’s Orders”) to the MPF Authority for the Company’s MPF payments for March to June 2018, and August to October 2018. In light of the large number of affected employees and amount of default contributions, on 17 January 2019, the MPF Authority presented the 4 Cashier’s Orders. On 19 November 2019, the MPF Authority made an application for a validation order under section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“CWUMPO”) for the 4 Cashier’s Orders for payment. On 2 November 2020, a winding up order was made against the Company. Pursuant to section 184(2) of the CWUMPO, the winding up is taken to have commenced on 27 August 2018, the date of petition filed.

Court’s ruling

The MPF Authority accepted that the payment made via the 4 Cashier’s Orders should be regarded as dispositions of the property of the Company. The question is whether the Court should exercise its power to sanction the dispositions retrospectively, particularly considering (i) if a prior validation order had been sought, would it have been granted; and (ii) has the disposition had the result, in the events which have happened, of reducing the assets available in the winding up for the unsecured creditors.

Dispositions in payment of preferential debts

The Court highlighted that a special feature of the present case is that parts of the dispositions in question discharged preferential debts, which are paid in priority to other debts in a winding up and should be paid forthwith subject to the retention of sums for the liquidation costs and expenses. The concern here is to ensure that the interests of creditors of the same or higher rank will not be prejudiced.

In this case, approximately HK$6.2 million is regarded as preferential debts, covering the unpaid MPF contributions which should have been paid before the commencement of the winding up and the employee’s portion of MPF contributions deducted from the employees’ wages by the Company but not yet paid to the MPF Authority.

The joint provisional liquidators submitted that the Company was involved in more than 300 sets of legal proceedings and they were unable to ascertain the total amount of liquidation expenses. If the assets of the Company were later found to be insufficient to satisfy the liquidation expenses, validating the subject dispositions now might contradict the prescribed priorities of application of assets. The Court also considered the preferential claims of other creditors, including the claims of the Protection of Wages on Insolvency Fund Board for ex gratia payments made and employees for long service payments.

The Court held that it would not be appropriate to sanction the immediate payment of preferential debts or to make a validation order in respect of the preferential portions of the 4 Cashier’s Orders solely by reason of their preferential status. The application insofar as it concerns preferential payments should be adjourned. Once it is known that there would be a surplus for distribution in full on these preferential debts, the dispositions should be validated.

Dispositions in payment of non-preferential debts

Although the non-preferential parts of dispositions concern the payment of MPF mandatory contributions (for the period after the commencement of the winding up), it in itself insufficient to justify a validation order.

In granting a validation order of this kind, the Court has to be satisfied that the payments were likely to generate a net benefit for the creditors i.e. the carrying on of the business was beneficial to the creditors overall, such as that it was likely to generate net income for the Company. In particular, the Court has to address (i) did the continued carrying on of the business of the Company result in a net benefit to the creditors; and (ii) were the dispositions causally related to the continuation of the business. It would be sufficient for the MPF Authority to show that the continued business operation was “likely to have been a benefit to the creditors”.

The Company is a large construction firm involved in many substantial projects.  An abrupt cessation of its business may lead to significant adverse consequences. The Court was of the view that the continuation of trading to some extent was likely to benefit the Company and its general creditors. However, there was no evidence that the 4 Cashier’s Orders were given to the MPF Authority in order that the employees would remain to enable the continuation of business. There was nothing to show that the employees who did remain would not have done so but for the payments made to the MPF Authority, at any rate when their salaries were still being paid, given the relatively small portion of MPF contributions.

Further, the Court did not find the benefit of avoiding prosecution and fines persuasive, as prosecution relying on employees’ testifying in the criminal proceedings was usually not successful and it was not possible to say that those payments brought an overall benefit to the creditors financially.

Therefore, it was ordered that the non-preferential part of the dispositions should not be validated and the application was to that extent dismissed.

Conclusion

In deciding whether the payment of unpaid MPF contributions made after the commencement of winding up could be validated, the Court would first identify which part of the dispositions is in respect of preferential debts. For the MPF contributions regarded as preferential debts, the Court is likely to adjourn the application until it is clear that there would be a surplus of assets available for payment of a dividend in respect of those preferential debts. For the non-preferential debts, the validation application to that extent is likely to be dismissed, unless the applicant can prove that (i) the continuation of the company’s trading was likely to benefit the creditors generally, and (ii) the dispositions in question brought about, contributed to or were made in order to obtain that benefit.