Hong Kong Court rules no trust over Retention Monies

In Hip Hing Construction Company Limited v Hong Kong Airlines Limited [2024] HKCFI 370; HCCT 107/2022 (1 February 2024) (the Judgment), the Hon. Mimmie Chan J dismissed the application by Hip Hing Construction Company Limited (the Contractor) for a declaration that Hong Kong Airlines Limited (the Employer) held retention monies on trust for the Contractor because there were no identifiable trust assets in the absence of segregation or setting aside from the rest of the Employer’s funds.

Background

The contract between the Employer and the Contractor incorporated clause 32.5 of the General Conditions of the Standard Form of Building Contract (2005 Private Edition) (GCC 32.5) which stipulates that retention money is held upon trust by the Employer for the Contractor, subject to the Employer’s right to have recourse.

A sum of HKD56,321,000 was the retention money withheld by the Employer as certified under an Interim Payment Certificate on 17 December 2018 (Retention Monies). However, the Retention Monies had never, prior to the Contractor’s application, been paid into any separate bank account of the Employer, nor segregated from the rest of the Employer’s funds.

On 4 March 2022, a winding-up petition was presented against the Employer, and in December 2022, a scheme of arrangement (Scheme) and restructuring plan were sanctioned by the Court. If the Retention Monies were trust assets belonging to the Contractor, the Contractor could take the entire Retention Monies for itself, without the need to share the Retention Monies with other creditors by equal distribution under the Scheme.

No certainty of trust assets

The Court found that the purported trust assets are too vague and uncertain. The Court must be satisfied (at the very least) that there was an identified or identifiable source for the Retention Monies, in that the accounts where the monies were kept could be clearly ascertained. However, in the present case the Employer had not at any time paid any Retention Monies into a specific account. The Court was unable to identify and differentiate the Retention Monies from all other money in the Employer’s general funds.

This is in contrast to the manner of which retention monies were kept by the employer in Re Hsin Chong Construction Co Ltd [2021] 5 HKLRD 212, where the Court of Appeal was satisfied that there was certainty of trust assets because the employer had kept the retention monies (together with the total project fundings) in a designated project account and adopted a stringent project accounting system in which the retention monies could be easily ascertained. At each financial year end, the retention monies were set aside in the retention money payable accounts.

In the Judgment, the Hon. Mimmie Chan J expressed sympathy for the Contractor, stating that the intended purpose of GCC 32.5 is to protect contractors against the insolvency of the employer. However, the protection completely failed because of the Employer’s breach of its contractual obligations to put the intended trust assets into a segregated account and failed to pay the certified Retention Monies.

Key Takeaways

Unless and until there is a statutory obligation to establish retention money trust accounts (as seen in other jurisdictions such as in New South Wales, Australia), contractors (or sub-contractors) should ensure retention monies are preserved and secured at an early stage of the project (indeed, at all times), rather than wait till the employer (or main contractor) becomes insolvent. To mitigate this risk, contractors should press for a right to request for proof of creation of trust over retention monies when negotiating contracts with employers.

The Decision can be accessed here.

Please contact May Ng (Partner) or Marcus Wong (Associate) if you have any questions or would like to discuss this article further.