Timing and drafting prove decisive in Hong Kong SAR construction insolvency case

The decision overturns an earlier judgment that had required three nominated subcontractors to repay more than HK$54 million (approx. US$6.88 million) received after the winding up of Hsin Chong Construction (Asia) Limited.

The dispute centred on payments made by the project employer directly to subcontractors on the Hong Kong Ocean Park Marriott Hotel project after a winding-up petition had been filed against the contractor. The company’s liquidators argued the payments were void under section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance because they were made after the commencement of the winding up.

While a court initially accepted that argument, finding that the contractor retained the right to receive the money and that the direct payments were merely an alternative payment mechanism, the Court of Appeal disagreed. Examining a 2017 supplementary agreement between the employer and contractor, the court concluded that the arrangement did more than change how money flowed. Instead, it effectively divested the contractor of its right to receive payments for nominated subcontract works before the insolvency process began.

As a result, the funds no longer formed part of the contractor's assets when the winding up commenced.

Hannah Griffiths, an expert in insolvency at Pinsent Masons, said: “The Hong Kong Court of Appeal has confirmed that, in the context of insolvency, it is not how a payment is made, but who is legally entitled to it. A properly drafted direct payment arrangement can remove those funds from the contractor's insolvent estate altogether.”

“This decision highlights the difference between redirecting a payment and transferring the entitlement to receive that payment,” she said.

“That distinction may determine whether subcontractors keep the money or have to repay it to liquidators years later.”

The court found that, under the agreement, the money was no longer owed to the contractor and had to be paid directly to the subcontractors instead. Because the contractor had already given up its right to receive the funds before the winding-up process began, the payments were not considered company property and did not breach s182.

Hinson Cheung, an expert in construction disputes at Pinsent Masons, said: “The judgment provides welcome recognition of commercial reality in the construction industry. Where parties have genuinely reallocated payment rights before insolvency, the courts will look at substance rather than contractual labels.”
“For contractors facing financial distress, the timing and drafting of direct payment arrangements matter enormously,” he said.

“If the underlying payment right has been transferred before insolvency, there may be nothing left for liquidators to recover.”

The Court of Appeal set aside the earlier orders requiring the subcontractors to repay the funds and dismissed the liquidators' claim.