RE HUA HAN HEALTH INDUSTRY HOLDINGS LTD

HCCW 110/2019

[2021] HKCFI 793

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 110 OF 2019

________________________

________________________

________________________

D E C I S I O N

________________________

1.  The Joint and Several Provisional Liquidators, Chan Ho Yin and Chi Lai Man Jocelyn of Borrelli Walsh, (“JPL”) of the Company apply for an order under s227A of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap. 32 (“Ordinance”) regulating the Company to which the Official Receiver has no objection. The application is opposed by five opposing contributories. The background to the application is as follows [1].

2.  The Company is incorporated in the Cayman Islands and is listed on the Main Board of the Stock Exchange of Hong Kong Limited (“SEHK”).  On 11 April 2019 Cypress House Capital Limited presented a petition for the winding up of the Company on the grounds of insolvency.  The Petition was amended on 20 May 2019.  The Petitioner’s debt was satisfied and a consent summons signed for the dismissal of the Amended Petition dated 27 May 2019.  Prior to the Petition’s dismissal a shareholder, Haw Par Corporation Limited (“Haw Par”) (holding 10.03% of the issued shares) had issued a summons dated 7 May 2019 seeking the appointment of provisional liquidators.  On finding out about the prospective dismissal of the Petition Haw Par issued a summons dated 3 June 2019 for substitution as petitioner.  The applications came on before Coleman J on 18 July 2019.  Both the application for substitution and the appointment of provisional liquidators were opposed by the Company and the shareholder (Bull’s-Eye Limited), who had satisfied the Petitioner’s debt.  Coleman J granted both applications on 18 July 2019.  The Company unsuccessfully sought leave to appeal.  As a consequence of the substitution what became the Re-Re-Amended Petition came on before me in open court on 2 December 2019, which was the Monday hearing of adjourned petitions.  The Company did not appear.  The JPL had filed a report, which demonstrated that the Company is massively insolvent [2], that there appeared no realistic prospect of restructuring and there was no proposal for one.  A supporting creditor appeared, who proposed an adjournment, but as there appeared to be no good reason to do so I made the normal winding up order.

3.  The opposing contributories who appeared before me on the present application suggested that something had gone wrong on 2 December 2019 and that they were not aware of the hearing, because there had been no public announcement.  The evidence relied on by the Opposing Contributories is filed by Zhang Quan, which was only made available shortly before the hearing.  It is apparent from Mr Zhang’s evidence that he at least was aware of the appointment of the JPL by the Company’s announcement dated 3 September 2019.  I agree with Mr Ho that it seems doubtful that the Opposing Contributories were unaware of the hearing, as they had opposed the appointment of provisional liquidators. However, little turns on that.

4.  The order that the JPL seek is as follows:

(1)  to dispense with the first meetings of the creditors and contributories of the Company for the purpose of considering the appointment of a liquidator;

(2)  to appoint the JPL, namely Mr Chan Ho Yin and Ms Chi Lai Man Jocelyn, both of Borrelli Walsh Ltd, as the Joint and Several Liquidators of the Company;

(3)  for a committee of inspection of the Company to be constituted and to comprise of the four major creditors of the Company (collectively holding over 99% of the total creditors’ claims), namely: (1) Driven Innovation Ltd; (2) Haitong Int’l Financial Products Ltd; (3) Design Time Ltd; and (4) China Great Wall AMC (Int’l) Holdings Co Ltd (collectively, “Major Creditors”)

5.  In summary, and I borrow from Mr Ho’s skeleton, the JPL say that this is an obvious case for a regulating order for the following reasons:

(1)  It would clearly be impractical to hold the creditors’ and contributories’ first meetings, bearing in mind the very large number of contributories (numbering in the hundreds), the prohibitively high costs associated with summoning such meetings and the lack of financial resources of the Company. The JPL also have concerns that holding such meetings would risk confidential information relating to their investigation being leaked to the public, thereby jeopardising their efforts to date.

(2)  The application has the support of the four Major Creditors of the Company (representing over 99% of the total claims of the Company’s creditors to date), in respect of whose wishes the Court should accord great weight.

(3)  Whilst a number of purported shareholders have expressed their opposition to the application, their views should be given little weight, given: (1) the fact that the views of creditors in an insolvent liquidation take precedence over those of contributories; and (2) the fact that the status of a large number of such purported shareholders is wholly unsubstantiated and unverified; and (3) in any event, the complaints of such purported shareholders are demonstrably without foundation and should be accorded little (if any) weight.

(4)  As to the identity of the liquidators, it would be most cost-effective to appoint the JPL as liquidators of the Company, given that they have been conducting detailed investigations into the Company’s affairs for nearly 10 months and are best placed to conduct the Company’s liquidation efficiently and effectively.

(5)  As to the committee of inspection, the JPL propose that such committee comprise the four Major Creditors which would be fair and just, given that they told the vast majority of the claims of the Company’s creditors.

6.  The Opposing Contributories oppose a regulating order for the following reasons:

(1)  They believe that the circumstances leading up to Haw Par’s substitution is are suspicious and in particular the share charge dated 13 March 2019, which formed the basis of Haw Par’s petition.

(2)  The fact that the audited financial statements for the period ending 30 June 2015 show the Company has having assets totalling HK$8,792,564,000 of which HK$6,598,816,000 was cash or cash equivalent.

(3)  The role of the JPL, which the Opposing Contributories criticise.

(4)  As a consequence of their concerns the Opposing Contributories propose to apply for a stay.

7.  The principles, which guide the court in determining applications for regulating orders are not controversial.  I most recently summarised them in Re Hsin Chong Construction Company Limited [3]:

“3.  The relevant principles are not controversial. Section 227A(1) of the Ordinance provides as follows:

‘Where it appears to the court on application being made by the Official Receiver, provisional liquidator or liquidator or by any creditor at any time after the presentation of a winding up petition that by reason of the large number of creditors or contributories or for any other reason the interest of the creditors so requires, it may, on or after the making of a winding-up order, order that the winding up of the company by the court shall be regulated specially by the court, and such order be known as a regulating order.’

4.  A regulating order is usually made in a situation where, by reason of a large number of creditors or contributories, it is impractical to hold a first meeting (as required under section 194(1)(b) of the Ordinance): see Re JV Fitness [4].

5.  The legislative provisions under sections 227A and 227B of the Ordinance are drafted in very wide terms and give power to make regulating orders in a situation for any reason the interest of the creditors so requires. However, the Court must be satisfied that it is right in the circumstances to make a regulating order: Re Legend International Resorts [5].

6.  Section 227B of the Ordinance provides:

‘(1)  The court may, on the application of the Official Receiver or provisional liquidator, by order—

(a)  dispense with the summoning of first meetings of creditors and contributories as required under sections 194 and 206 for the purpose of considering the appointment of a liquidator and a committee of inspection;

(b)  appoint one or more persons that the court thinks fit as a liquidator or liquidators; and

(c)  as regards a committee of inspection—

(i)  appoint any qualified persons that the court thinks fit as a committee of inspection;

(ii)  remove any member of the committee; and

(iii)  fill any vacancy in the committee.

…’

7.  As noted in Butterworths Hong Kong Company Law (Winding Up and Miscellaneous Provisions) Handbook [6], on making a regulating order, the Court may also make various directions regarding dispensation of the first meeting of creditors/contributories and/or appointment of liquidators, as provided for in section 227B(1).

8.  In Re Guangnan (KK) Supermarket Ltd [7], the estimated costs for summoning a first creditors’ meeting were a significant factor taken into account by Yuen J (as she then was) when deciding to dispense with the same [5]–[7].

9.  As to the appointment of liquidators in the usual case where there is a dispute between creditors and contributories on the choice of liquidators, and the dispute is to be resolved by the Court, the Court would usually have regard to the wishes of the independent creditors: see Re Legend International Resorts [8].

10.  As explained by Kwan J (as she then was) in Re Wah Nam Group Ltd [9]:

(1)  The appointment of a COI is a matter for the discretion of the Court. It is not necessary to ascertain the wishes of the creditors or contributories [14]; and

(2)  A committee is more than just a consultative body for the liquidators.  Its function is to assist the Court in its supervisory role over the liquidators, and avoid the need for time-consuming and costly applications to the Court [16].”

8.  On the face of the matter the JPL’s application seems appropriate in the circumstances.  The Company has very little money to pay the JPL’s out of pocket expenses of organising meetings of contributories and creditors.  So far 10 proofs of debt have been submitted to the JPL (the Company is a holding company and, therefore, would normally not be expected to have much in the way of trade creditors).  The creditors are supportive of the application and will have four representatives on the committee of inspection that the JPL propose is ordered to be formed and those four represent 99% in value of the debt.

9.  On 10 June 2020 I directed that the JPL give so far as possible notice of the application to all interested parties including shareholders.  In June 2020 the JPL informed the 10 creditors, who had submitted proofs of debt.  They also sent letters to all shareholders they could identify.  This included 108 letters to shareholders whose details were provided by the Company’s secretarial provider Tricor.  This included HKSCC, which is the common nominee of 287 shareholders.  Of this number 264 are market intermediates who are consenting investor participants and who have disclosed contact details.  They represent 99.4% of the Company’s issued share capital.  All of them were sent letters notifying them of this application and asking whether they wished further information and/or to attend the hearing.  The JPL subsequently notified a further 11 consenting shareholders of the application.  On 15 June 2020 the JPL wrote to 55 purported shareholders who had previously been in contact with the JPL asking if they wished further information or to attend the hearing.  Eight replied showing an interest and were sent copies of the application.  On the same date the JPL wrote to the Li & Partners, who act for the Opposing Contributories, who have appeared on this application and at their request sent them copies of the application.  The JPL also caused an announcement to be published on the SEHK providing details of the hearing.

10.  I am satisfied that the JPL have complied with my direction and have taken steps to inform all shareholders, who are interested in participating in the application of it. The group of shareholders that have been most vocal (the 55 referred to earlier) hold 4.04% of the Company’s shares.  In response to requests from the JPL to this group to substantiate their shareholding only 21 replied doing so representing 2.77% of the Company’s shares.  The fact that so many individuals would have purported to take an interest in the application and then not been able to demonstrate that they are shareholders is surprising.  It becomes all the more noteworthy when considered in the following context.

11.  On 21 February 2020 Li & Partners wrote to the JPL stating that they acted for Taikang Asset Management (Hong Kong) Co Limited, who act as a manager for the beneficial owners of 2.22% of the Company’s shares.  They asked for the JPL to withhold making the present application while their client considers making an application to appoint liquidators.  On 18 June 2020 Li & Partners sent the JPL a letter dated 10 March 2020 from Standard Chartered confirming that it held shares in the Company on behalf of Taikang.  The ultimate beneficial ownership is not identified.

12.  On 16 June 2020 the JPL received from the Official Receiver six emails from purported shareholders also sent to the Securities and Futures Commission containing complaints about the JPL.  The JPL have not managed to verify the shareholdings of the six purported shareholders.  The emails consist of unsubstantiated complaints.

13.  The way in which a group of shareholders has involved itself in this matter is relevant in two ways.  First, is a concern the JPL have about the contributories not keeping confidential sensitive information about the JPL’s investigations concerning what they believe are probably substantial misappropriation of assets in the Mainland.  I will not describe the relevant information in detail.  Suffice it to say that it is clear to me that the JPL have undertaken a considerable amount of useful work and progressed their investigation of what appears to have been transactions of questionable propriety.  I agree with the JPL that it is not desirable that this information is made public and I think there is some justification in their concern that the course proposed by the Opposing Contributories would interfere with their investigations and would not be in the creditors’ best interests or that of the contributories.

14.  Secondly, the way in which certain shareholders have dealt with this application does not seem to me consistent with a genuine wish to ensure that the circumstances of the Company’s collapse is thoroughly investigated by experienced professionals with an established track records of dealing with the insolvencies of listed Mainland business groups involving suspected wrongdoing.  I note that Borrelli Walsh have been involved in a number of such matters with which I have dealt.  On the contrary the approach of the Opposing Contributories and the other shareholders or purported shareholders to whom I have referred seems more consistent with a coordinated attempt to prevent a thorough investigation.

15.  The Opposing Contributories’ objection to the order is largely a litany of complaints about the understandably unsatisfactory situation in which they find themselves, namely, believing in 2015 that they were shareholders in a valuable company and then discovering as a result of the auditors raising concerns during the 2015/16 audit about the veracity of the Company’s financial statement that this is not the case.  However, the Opposing Contributories do not identify a credible alternative to a winding up or a reason to think that what the JPL propose is in the circumstances not the most sensible way forward.  The Opposing Contributories have suggested that they intend to apply for a stay of the winding up, but no sensible reason for doing this is suggested.  The Company is clearly massively insolvent and the suggestion that the court should stay the winding up and, presumably, allow a new board to be appointed to investigate the Company’s affairs is not credible particularly in the face of creditor opposition.  Clearly the affairs of the Company need investigating by experienced insolvency practitioners.  If the Company is going to be wound up, unless there is a very good reason not to do so, I can see no reason why the choice of the creditors should not be determinative of the identity of the liquidators particularly as the creditors preferred liquidators have already carried out a significant amount of work and are familiar with the matter and have relevant experience of these kinds of insolvencies.

16.  I will, therefore, make an order in the terms of the summons.