RE YU PUN HOI

HCB 6118/2023

[2024] HKCFI 960

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 6118 OF 2023

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REASONS FOR JUDGMENT

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A.  INTRODUCTION

1.  Before the Court on 26 March 2024 was the Petitioner’s Petition dated 18 October 2023 (“Petition”) for a bankruptcy order against the Debtor based on his failure to make payment in compliance with the Statutory Demand dated 30 June 2023 which was duly served on him on 17 July 2023 (“SD”).

2.  The Debtor also issued two summonses respectively dated 18 March 2024 and 22 March 2024 for leave to file and serve his 2^nd and 3^rd Affirmations, in support of his application for an adjournment of the hearing of the Petition on 26 March 2024 (“Hearing”), which were dismissed by this Court for the reasons set out in the Decision dated 26 March 2024 (“26 March Decision”).[1]

3.  At the conclusion of the Hearing and after hearing counsel’s submissions on the Petition, this Court made the usual bankruptcy order against the Debtor, and with costs against the Debtor on an indemnity basis with certificate for two counsel, to be taxed and paid out of the estate.

4.  This Court indicated it will hand down reasons for judgment, which are now set out below.

B.  BACKGROUND

5.  The following background facts are not in dispute.

B1.  The Petitioning Debt

6.  The SD was issued based on a judgment debt obtained by the Petitioner in HCA 659/2022, amounting to the sum of HK$472,875,355.64 (“Petitioning Debt”) inclusive of legal costs and interest calculated up to 30 June 2023[2], and after taking into account the Petitioner’s estimated value of its security in the form of the charging order obtained by the Petitioner in HCA 659/2022 (“Petitioner’s Charging Order”) in respect of the Debtor’s 2 shares (“Dadi Shares”) in Dadi Limited (“Dadi”) (representing its entire issued share capital), such estimated value being HK$2.

7.  Whilst the Petitioning Debt is undisputed, the Debtor opposes the Petition on the sole ground that the Petitioning Debt is “fully secured” by the Petitioner’s Charging Order.

B2.  Assets held by Dadi and its subsidiaries

8.  Based on information provided by the Debtor:

(1)  Dadi wholly owns 5 BVI subsidiary companies (“BVI Subsidiaries”), namely: (i) Pippen Limited (“Pippen”), (ii) First Best Assets Limited (“First Best”), (iii) Rosewood Assets Limited (“Rosewood”), (iv) Unicorn Assets Group Limited (“Unicorn”), and (v) Staverley Assets Limited (“Staverley”).

(2)  The BVI Subsidiaries in turn hold an aggregate of 54.6% of the shares in Nan Hai Corporation Limited (“Nan Hai”), a company listed on the Stock Exchange of Hong Kong (“SEHK”) (stock code SEHK:680) until 16 November 2023 when it was delisted.

9.  The group shareholding structure may be summarised as follows:

10.  At all material times, the Debtor was and is the sole director of Dadi and a director of each of the BVI Subsidiaries. He has also been a director of Nan Hai since September 2000, and is currently an executive director and chairman of its Board of Directors.

B3.  Debtor’s defaults leading to final judgment in HCA 659/2022

11.  The Petitioning Debt arose from Pippen’s obligations under a Bond Instrument dated 24 March 2017 (“Straight Bond Instrument”), under which Pippen issued bonds to the Petitioner.

12.  Pippen’s obligations under the Straight Bond Instrument were guaranteed by Dadi and the Debtor by a Deed of Guarantee dated 24 March 2017 (“Deed of Guarantee”).

13.  Pippen, Dadi and the Debtor have been in default of repayment of their obligations owing to the Petitioner since 24 March 2021 under the Straight Bond Instrument and Deed of Guarantee, which led to the legal proceedings in HCA 659/2022 in which the Petitioner obtained final judgment on 3 November 2022 (as amended on 15 December 2022) for (inter alia) (i) the sums of HK$378,868,273.97 and HK$32,712,012.93; and (ii) interest on the sum of HK$378,868,273.97 at 18% p.a. from 31 March 2022 to 3 November 2022 and thereafter at judgment rate until payment.

B4.  Petitioner’s security over the judgment debt

14.  Based on the aforesaid judgment debt in HCA 659/2022, the Petitioner obtained the Petitioner’ Charging Order. The Charging Order Nisi was obtained on 8 May 2023 (“Petitioner’s Charging Order Nisi”), which was made absolute on 2 June 2023.

15.  Apart from the Petitioner’s Charging Order, the judgment debt is also secured by the share charges executed by the BVI Subsidiaries over their shareholding in Nan Hai (“Subsidiary Share Charges”), namely:

(1)  a Charge Over Shares and Securities Account dated 24 March 2017 executed by Pippen; and

(2)  four Charges Over Shares and Securities Account, each dated 3 July 2020, executed by First Best, Staverley, Rosewood and Unicorn.

16.  Pursuant to the Subsidiary Share Charges, on 22 May 2023, the Petitioner caused receivers, namely Mr Ho Kwok Leung Glen, Ms Ge Jun and Ms Hau Kai Ling of Deloitte Touche Tohmatsu (“Receivers”) to be appointed over a total of 31,454,492,858 shares in Nan Hai (“Charged Shares”), representing approximately 45.8% of the entire issued share capital of Nan Hai.

17.  The Charged Shares are charged as security for all monies payable by (inter alios) Pippen, Dadi and the Debtor under (inter alia) the Straight Bond Instrument and the Deed of Guarantee.

B5.  Events leading to the delisting of Nan Hai in November 2023

18.  On 24 September 2021, Nan Hai published its last (unaudited) financial accounts in its interim report for the 6 months ended 30 June 2021. Thereafter, Nan Hai had not published any further interim or annual reports, or any financial statements (whether audited or unaudited).

19.  On 30 March 2022, Nan Hai announced (inter alia) that it was unable to complete preparation of its unaudited annual results by 31 March 2022, and that it expected that its shares would be suspended from trading from 1 April 2022.

20.  Subsequently, trading in the shares of Nan Hai were suspended with effect from 1 April 2022, and such shares were delisted from the SEHK on 16 November 2023.

B6.  Charging order over the Dadi Shares obtained by CMB

21.  On 5 July 2022, China Merchant Bank Co Ltd (“CMB”) commenced proceedings under HCA 822 & 823/2022 against Nan Hai and the Debtor respectively for payment of approximately US$53.4 million together with interest from 14 June 2022.

22.  CMB obtained final judgment against the Debtor in HCA 823/2022 on 30 March 2023 for payment of over US$53.4 million, plus interests and costs (“CMB Judgment Debt”).

23.  On 27 April 2023 (which was before the Petitioner obtained the Petitioner’s Charging Order Nisi on 8 May 2023), CMB had obtained a Charging Order Nisi (“CMB’s Charging Order Nisi”) also in respect of the Debtor’s 2 Dadi Shares, on the basis of the CMB Judgment Debt.

24.  CMB’s Charging Order Nisi was made absolute on 14 June 2023.

C.  PROCEDURAL CHRONOLOGY AND THE PARTIES’ EVIDENCE

25.  After the issuance of the Petition on 18 October 2023, on 20 December 2023, the Debtor filed his Notice of Intention to Oppose Petition on the ground that the Petitioning Debt is “fully secured”.

26.  On 28 December 2023, the Debtor filed his 1^st Affirmation (“Yu 1^st”), in which he does not dispute that the Petitioning Debt is owing from him, but explained (inter alia) that:

(1)  Dadi, through the BVI Subsidiaries, holds 54.6% of Nan Hai’s issued share capital;

(2)  a third party in the name of China Huarong Asset Management Co Ltd (Shenzhen) (“Huarong”) was in the final stages of negotiations to purchase the Petitioning Debt and the Charged Shares;

(3)  for the purpose of such intended acquisition, Huarong had independently commissioned Shinewing Certified Public Accountant (“Shinewing”) to prepare a valuation report in December 2023 to value Nan Hai (“Shinewing Valuation Report”);

(4)  according to the Shinewing Valuation Report, the entire shareholding of Nan Hai is estimated to be worth around RMB 1,263,000,000 as at 30 June 2023[3];

(5)  given that (i) Dadi indirectly holds 54.6% of Nan Hai, and (ii) the only liability of Pippen is in the sum of HK$4.25 million, the 2 Dadi Shares are worth HK$654,025,600, not taking into account Dadi’s personal liability under the Deed of Guarantee nor Pippen’s liabilities to the Petitioner; and

(6)  the Petitioner is thus fully secured by the Petitioner’s Charging Order.

27.  On 8 January 2024, the Petitioner obtained leave to file and serve evidence in reply to Yu 1^st, and subsequently filed Qian Zhiyi’s 2^nd Affirmation on 19 February 2024 (“Qian 2^nd”). The main contentions made in Qian 2^nd include (inter alia) that:

(1)  Yu 1^st did not provide disclosure of accounts and/or financial statements of Dadi, the BVI Subsidiaries and Nan Hai, thus rendering the Debtor’s valuation of the shares in Nan Hai and the Dadi Shares unreliable; and

(2)  the Dadi Shares are subject to a competing charging order i.e. the CMB Charging Order based on the CMB Judgment Debt, which amounts to around HK$453,507,949.38; and

(3)  based on the information available to the Debtor, the value of the Dadi Shares, the BVI Subsidiaries and Nan Hai is negligible.

28.  Qian 2^nd also exhibited a report dated 18 February 2024 (“KPMG Report”) prepared by KPMG Advisory (Hong Kong) Limited (“KPMG”) commenting on (inter alia) the reliability of the Shinewing Valuation Report.

29.  The Debtor accepted in his counsel’s skeleton submissions that his evidence on the value of the Petitioner’s security is “incomplete”, and thus issued the two summonses respectively dated 18 March 2024 and 22 March 2024 and applied for an adjournment of the Hearing to enable him more time to file full evidence to oppose the Petition.

30.  For the reasons set out in the 26 March Decision, the Debtor’s two summonses and the application for adjournment were dismissed by this Court. Hence, the only evidence before the Court on the Petition is Yu 1^st and Qian 2^nd.

D.  APPLICABLE LEGAL PRINCIPLES

31.  The Debtor has no dispute on the following legal principles relied on by the Petitioner.

D1.  Burden of proof as to whether a creditor is “fully secured”

32.  The burden is on the debtor to show that:

(1)  there is “credible evidence” or “at least a real issue” as to whether, “after giving proper credit for the value of the security, the debtor was indebted to the petitioner at all”: see Re Choi Chi Kwun [2000] 3 HKC 503 at 507C-E; In Re a Debtor (No 64 of 1992) [1994] 1 WLR 264 at 270A-E; and

(2)  there are substantial grounds for thinking that the petitioner might be fully secured: see Re Li Wing Sang [2019] HKCFI 924 at §23.

33.  Rule 70 of the Bankruptcy Rules (Cap.6A) (“Bankruptcy Rules”) also provides:

“ On the hearing of the petition, the amount of assets and liabilities, and in the case of a creditor’s petition any matters which the debtor has given notice that he intends to dispute, shall be proved.” (emphasis added)

D2.  Principles on estimating the value of the petitioner’s security

34.  Where a debtor opposes a bankruptcy petition on the basis that the creditor is “fully secured” in respect of the debt, the relevant principles on estimating the value of the security may be summarised as follows:

(1)  Generally, the court should only be concerned with the value of the security as at the date of the statutory demand or petition: see Re Chiu Chi Hong [2021] 2 HKC 50 at §28(1).

(2)  The Court generally would not inquire into the correctness of a petitioning creditor’s estimate provided it was genuine, though this practice should not be applied inflexibly: see Re Chiu Chi Hong at §28(2); Re Choi Chi Kwan at 505-507; Re Cao Zhong [2021] HKCFI 3143 at §85(1). The relevant test is whether the estimate was a “genuine” estimate and not a sham: see Re Cao Zhong §85(4); Re SNG Allan [2018] HKCFI 2016 at §5[4].

(3)  Disagreement of the value which a creditor puts on his security per se cannot provide a basis to challenge a statutory demand, unless the debtor is able to claim by credible evidence that (i) the creditor had undervalued the security and that (ii) its true value either equal or exceed the full amount of the debt: see Re Chiu Chi Hong at §28(3); Re Kwok Chok Yee [2000] 2 HKC 543 at 546I-547C; In Re a Debtor (No 64 of 1992) [1994] 1 WLR 264 at 267G, 268B, 270C-E.

(4)  The same principle applies with greater force in relation to a petition, as the debtor would have had ample opportunity to challenge the valuation prior to the hearing of the petition: see Re Chiu Chi Hong at §28(4); Re Choi Chi Kwan at 507A-508E.

(5)  Where the debtor disputes the petitioner’s estimated value of security, the parties may provide their respective supporting evidence to the judge, who would then determine whether the statutory minimum sum for the presentation of a petition (i.e. HK$10,000 under section 6(2)(a) of the Bankruptcy Ordinance (“BO”)) has been reached: Cheng Hung Kit v Tsoi Chik Sang Lawrence [2018] 3 HKLRD 517 at §22.

35.  Where the charged shares are of a private company, and the petitioner has limited or was denied access to updated audited financial statements of the company (which information is held by the debtor):

(1)  A petitioner’s rough estimation or best attempt at an estimate could justify the grant of a bankruptcy order: see Re Choi Wing Cheong (unreported, HCB 16148/2003, 22 December 2004) at §§30, 33.

(2)  Further, the Court could form a view that, based on available information, it is more likely than not that the security had negligible or no value: see Re Choi Wing Cheong at §34.

36.  Hence, a petitioner may estimate the value of the security:

(1)  based on limited financial information available; and

(2)  taking into account such factors as (i) liabilities of the company (of which the secured share was granted) and its subsidiaries, (ii) discounts for underperformance of corporate projects or forced market sale, and (iii) adverse consequences brought on by enforcement actions taken by creditors against the company or its subsidiaries.

See Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2021] HKCFI 2135 at §§61, 63-64.

37.  Where the security consists of shares in a private company, even if the debtor produces a purported balance sheet of such company, that would be of limited assistance to the Court if it does not provide any useful indication as to the value of the security: see Re Cao Zhong §85(3).

38.  Where the secured shares are of a company which has been suspended from trading on the SEHK, it may be reasonable for a petitioner to put a nil valuation on those shares: Re Chiu Chi Hong at §§26-29; Re SNG Allan [2018] HKCFI 2016 at §§5, 6, 8[5].

39.  As explained by the Court of Appeal in Re SNG Allan [2022] 1 HKC 601 at §§25-27:

(1)  there are multiple ordinary practical scenarios where a security interest may quite properly and appropriately be valued at nil; and

(2)  the purpose of Section 6B of BO is to enable a secured creditor to petition for a debtor’s bankruptcy, where he is for all practical purposes unsecured in respect of the shortfall between the amount of the debt and the value of the security held.

D3.  Valuation basis and valuation date

40.  Whilst generally, the relevant valuation date is at the date of the statutory demand or the petition in assessing the true value of the security (see Re Chiu Chi Hong at §28(1)), the Court is entitled to take into account events that have occurred since the date of the statutory demand (or petition), where (i) the interests of justice demand that the question of adequacy of security ought to be approached with the most up-to-date and reliable facts available, and (ii) they are probative of the question of whether the debt is adequately secured: see Ludsin Overseas Ltd v Maggs [2014] EWHC 3566 (Ch) at §22.

41.  As to the basis for valuing the security, the correct basis for giving an estimate on the value of security should be that of a “forced sale”, which is less favourable to the debtor than on an “open market basis”: see Re Choi Chi Kwun at 507E-F; Guy Lam v Tor Asia §§63(3)-(4); Platts v Western Trust [1996] BPIR 339 at 347.

E.  THE CMB CHARING ORDER HAS PRIORITY OVER THE PETITIONER’S CHARGING ORDER

42.  There is no dispute by the Debtor that as a matter of law, the CMB Charging Order has priority over the Petitioner’s Charing Order, (both of which relate to the same 2 Dadi Shares) by reason that:

(1)  CMB’s Charging Order Nisi was granted on 27 April 2023 which was before the grant of the Petitioner’s Charging Order Nisi on 8 May 2023.

(2)  As between two charging orders which were both made absolute, the priority inter se is determined by the date of the first charging order nisi, regardless of when the charging orders absolute were made, by reason that when a charging order is made absolute, it operates from and relates back to the date of the grant of the charging order nisi. The charging order nisi is the charging order, but it stands in abeyance until it is made absolute. See Wong Kam Wing v Cyril Murkin (HK) Ltd [1989] 1 HKLR 597[6] at 598-599 per Godfrey J, applying Haly v Barry (1868) LR 3 Ch App 452 at 453, 456-457; Brereton v Edwards (1888) 21 QBD 468 at 495-496.

43.  It is also not in dispute that at 30 June 2023 (being the date of the SD):

(1)  The CMB Judgment Debt (secured by CMB’s Charging Order) was in the sum of approximately HK$453,507,949.38; and

(2)  The Petitioning Debt was in the sum of HK$472,875,355.64.

44.  It follows from the above that:

(1)  even if the 2 Dadi Shares were worth HK$654,025,600 as alleged in Yu 1^st, they would be insufficient to cover and secure both the CMB Judgment Debt and the Petitioning Debt; and

(2)  the CMB Charging Order will have priority over the Petitioner’s Charging Order.

45.  In the premises, given the priority of CMB’s Charging Order, even if the Debtor’s alleged value of Nan Hai is to be accepted, the Debtor cannot demonstrate that the Petitioner is “fully secured” by the 2 Dadi Shares under the Petitioner’s Charging Order.

46.  The Debtor’s sole ground of opposition to the Petition thus stands to be dismissed on this basis alone.

47.  Strikingly, the Debtor has failed to refer to the CMB Charging Order at all in Yu 1^st, despite its relevance and materiality to the issues before this Court.

48.  For completeness:

(1)  The submission made by Mr Joshua Chan (counsel for the Debtor) that it is reasonably arguable that both the Petitioner’s Charging Order and the CMB Charging Order should not have been made and the Petitioner could apply for them to be discharged does not assist the Debtor’s case that the Petitioner is “fully secured”, for the reasons set out at paragraph 21(5) of the 26 March 2024 Decision.

(2)  Mr Chan further submits that although CMB Charging Order has priority over the Petitioner’s Charging Order as a matter of law, as a matter of commercial reality the Petitioner could enforce the Subsidiary Share Charges (which cover 45.8% of Nan Hai’s shareholding) and thereby “outflank” any attempt by CMB to secure control over the BVI Subsidiaries’ entire 54.6% shareholding in Nan Hai. However, in the bankruptcy context, the Court may only have regard to security provided by the Debtor and not security by “third parties”. As stated in Re Chiu Chi Hong at §§16-25, “security” in Rule 44(5) of the Bankruptcy Rule means security provided by the debtor only, and the petitioning creditor has an unfettered choice as to how, and against whom it should proceed to recover the debt to which it is entitled.

F.  DEBTOR’S FAILURE TO PROVIDE CREDIBLE EVIDENCE ON THE VALUE OF THE PETITIONER’S SECURITY

49.  The burden is undisputedly on the Debtor to show, by credible evidence that the Petitioner is “fully secured” by the Petitioner’s Charging Order as he alleges. However, he has plainly failed to do so for the following reasons.

F1.  Debtor’s failure to provide any financial statement/account of Dadi, the BVI Subsidiaries and/or Nan Hai

50.  Given the Debtor’s positions within Dadi, the BVI Subsidiaries and Nan Hai (see paragraph 10 above), the financial statements and accounts of these companies must have been readily available to him.

51.  However, in Yu 1^st, for reasons unexplained, the Debtor had not adduced any financial statement or document in respect of the financial status, or assets and liabilities of, Dadi, the BVI Subsidiaries or Nan Hai.

52.  Such financial information is not readily available to the Petitioner:

(1)  As regards Dadi and the BVI Subsidiaries, they are private offshore companies with very limited information available to the public.

(2)  As to Nan Hai, the latest publicly available (unaudited) accounts were for the 6 months ended 30.6.2021. No further financial statements or accounts had been made available to the public thereafter.

53.  Absent the aforesaid financial information, in particular, financial statements or accounts to show what liabilities or debts are owing by Dadi, the BVI Subsidiaries and Nan Hai itself, this Court is of the view that Debtor cannot even begin to show, by credible evidence, that the true valuation of the 2 Dadi Shares should be worth HK$654,025,600 as he alleges.

F2.  Financial status of Nan Hai, Dadi and BVI Subsidiaries based on limited information available to the Petitioner

54.  The Petitioner submits, and this Court agrees, that even based on the limited information available, there is evidence to show that the true amount of liabilities owing by Dadi, the BVI Subsidiaries and Nan Hai far exceed what has been disclosed by the Debtor, and which also support the Petitioner’s case that the value of the Dadi, the BVI Subsidiaries and Nan Hai is negligible and/or that their shares are unmarketable.

55.  As regards Nan Hai, the Petitioner relies on the following facts (which the Debtor has not sought to dispute):

(1)  Even before the suspension of trading of Nan Hai’s shares in April 2022, Nan Hai had sustained very substantial losses and financial difficulties since 2019.

(2)  The last time that Nan Hai declared any dividends was on 29 March 2019 (for the year ended 2018), and its last published annual report was for the year ended 31 December 2020.

(3)  On 24 March 2021, Pippen, Dadi and the Debtor started to default in their repayment obligations under the Straight Bond Instrument and the Deed of Guarantee.

(4)  Nan Hai published its last (unaudited) accounts in the interim report for the 6 months ended 30 June 2021, which show that:

(i)  Nan Hai suffered a net loss of HK$2.53 billion for the year ended 2020 and a net loss of HK$571 million for the 6 months ended 30 June 2021, and

(ii)  all of Nan Hai’s business segments other than property development suffered losses in a total sum of HK$103 million.

(5)  From Nan Hai’s public announcements made on 30 March 2022, 1 April 2022, 29 April 2022, 6 June 2022, 30 June 2022, 13 July 2022, 30 September 2022, and 16 October 2022:

(i)  Nan Hai had been unable to publish any audited accounts for the year ended 31 December 2021 and thereafter;

(ii)  Nan Hai had experienced substantial uncertainties including on valuation and impairment of its assets/receivables, repayment of debts in the Group (including 2 tranches of credit enhanced notes issued in May and June 2020 for a total of US$700m);

(iii)  During its audit process, Nan Hai’s auditors raised a number of queries relating to the status of its assets and debts, which resulted in the engagement of an external party to conduct internal control investigation on (inter alia) Nan Hai’s assets, liabilities, outstanding litigations, guarantee/pledges;

(iv)  The Nan Hai Group had faced “unprecedented challenges” since 2020 which had seriously affected its key business segments, with box office revenue of its cinema business decreasing by 70% in 2020 and 35% in 2021, and revenue from property development decreasing by over 50% in 2021;

(v)  Given the Group’s liquidity situation, it had not been able to meet part of its financial obligations when due, which resulted in certain creditors initiating enforcement actions and part of the Group’s assets being frozen;

(vi)  Multiple warnings were issued for shareholders and potential investors of Nan Hai to exercise caution when dealing in its shares; and

(vii)  In its announcement dated 16 October 2023, Nan Hai announced that it would not apply for a review of the Listing Committee’s decision to delist its shares from the SEHK.

(6)  On 5 July 2022, CMB commenced the action in HCA 822/2022 against Nan Hai for repayment of US$53.4 million plus interest.

56.  Deloitte (the Receivers over the Charged Shares) also expressed concerns over the difficulties they faced since their appointment in May 2023 in obtaining financial or other information from the Nan Hai board, and hence in realising the value of the Nan Hai shares under the Subsidiary Share Charges. By letter dated 8 February 2024 to the Petitioner, Deloitte reported (inter alia) the following:

(1)  After their appointment, Deloitte tried to contact a representative of Nan Hai to establish a line of communication but the request was refused.

(2)  Despite multiple requests, the Nan Hai Board refused to provide information about the company and/or convene an annual general meeting (which it had failed to convene since 2021).

(3)  There were concerns about whether the Board was properly and independently functioning, given their apparent failures to comply with the relevant Bye-Laws, publication requirements, Resumption Guidance, and to convene a special general meeting.

(4)  Due to the unavailability of financial and operating status, up to date financial information, and lack of cooperation from Nan Hai, Deloitte was and continued to be unable to initiate proper marketing and sale process for Charged Shares.

(5)  As of 8 February 2024, no interested parties expressed interest in acquiring any or all of Charged Shares of Nan Hai.

(6)  Since Nan Hai’s delisting on 16 November 2023, its shareholders and investors were left in difficult position in trying to obtain and maintain understanding of current situation of the Group.

(7)  Based on public information, it is apparent that Nan Hai is unable to service its debts and liabilities, and is on that basis insolvent, implying negative return to shareholders.

(8)  Given that Nan Hai appears insolvent, there is a material risk that Nan Hai might be subject of winding up proceedings on the petition of creditor(s), which would likely exacerbate losses or negative return to shareholders.

57.  As submitted by Mr Paul Shieh SC (counsel for the Petitioner)[7], the undisputed fact that Pippen, Dadi and the Debtor have been in default of their repayment obligations under the Straight Bond Instrument and Deed of Guarantee since March 2021, and have not repaid any part of the judgment debt obtained by the Petitioner in HCA 659/2022 since November 2022, go to show that their ultimate holding in the Nan Hai shares are of minimal value, not marketable and/or not readily realizable. This is particularly so when the Debtor has not offered any explanation or evidence as to why these judgment debtors have not been able to realise their assets to repay the Petitioner since 2021.

58.  As regards Dadi, the Petitioner relies on the following facts:

(1)  Based on an unaudited financial statement of Dadi as at 31 December 2020 (provided by Nan Hai’s representative to the Petitioner), Dadi had a net deficit position of negative HK$252,473. Nothing in Yu 1^st suggests that such liabilities had been paid off. Given that Dadi is an asset holding company (its main asset being its investment in the BVI Subsidiaries which in turn hold shares in Nan Hai) with no business of its own, it is unlikely to have been able to discharge any liabilities since 31 December 2020, given Nan Hai has been sustaining substantial losses and financial difficulties since 2019.

(2)  As stated in Qian 2^nd, as at 9 January 2024, no buyer has expressed any interest to purchase the Dadi Shares in response to the advertisement posted by CMB on 13 September 2023, which goes to show the lack of marketability of such shares.

(3)  As further stated in Qian 2^nd:

(i)  On 31 October 2023, the Petitioner sent an invitation to 9 market potential leading distress asset buyers for the sale of the debt owing to the Petitioner and the Dadi Shares.

(ii)  Amongst them, only Huarong responded and gave a non-binding preliminary proposal of not more than 30% of the principal amount of the debt owing to the Petitioner.

(iii)  As at the date of Qian 2^nd, no settlement had been reached with Huarong and the Petitioner had not received any responses from the other entities, which goes further to show the lack of marketability of the Dadi Shares.

59.  As regards Pippen, the Petitioner relies on the following facts:

(1)  Based on an unaudited financial statement as at 31 December 2020 provided by Nan Hai’s representative to the Petitioner, Pippen was stated to be in a net deficit position of negative HK$101,100,070. Nothing in Yu 1^st suggests that such liabilities had been paid off or that the net deficit position had improved.

(2)  Pippen has been in default of repayment under the Straight Bond Instrument since March 2021 and continues to be in default to repay the judgment debt obtained by the Petitioner in HCA 659/2022 since November 2022.

60.  Although Yu 1^st contains an assertion that the only liability of Pippen is in the sum of HK$4.25 million, this assertion is not supported by any financial statements or other documentary evidence. As submitted by the Petitioner, the natural inference from the matters in paragraph 59 above is that there are undischarged liabilities of Pippen which far exceed the HK$4.25 million claimed by the Debtor.

61.  As regards the other BVI Subsidiaries (i.e. First Best, Rosewood, Unicorn and Staverley), there is no financial information available to enable the Court to assess their financial status.

62.  In the premises, given that the Debtor could, but chose not to, provide reliable information in relation to the financial position of Dadi, the BVI Subsidiaries and Nan Hai, he has failed to discharge his burden of demonstrating by credible evidence, that the Petitioning Debt is “fully secured” by the Petitioner’s Charging Order over the 2 Dadi Shares.

G.  THE DEBTOR’S RELIANCE ON THE SHINEWING VALUATION REPORT

63.  In Yu 1^st, the Debtor relied on the Shinewing Valuation Report (which valued Nan Hai at RMB1,263,000,000 as at 30 June 2023) in support of his case that the 2 Dadi Shares should be worth HK$654,025,600. No explanation has been provided as to how the purported value of HK$654,025,600 was calculated.

64.  In response, the Petitioner adduced the KPMG Report (exhibited to Qian 2^nd), in which KPMG sets out various reasons why the valuation provided in the Shinewing Valuation Report has been overstated and is unreliable.

65.  In Mr Chan’s written submissions, he emphasized the following points in relation to the Shinewing Valuation Report:

(1)  The Shinewing Valuation Report was commissioned by an independent third party, namely Huarong, in the context of its negotiations for the acquisition of the Petitioning Debt and the Charged Shares, and that Huarong did not have any incentive to cause the value of the Nan Hai shares to be overstated.

(2)  While the KPMG Report puts forward a number of criticisms against the Shinewing Valuation Report, KPMG has made no attempt to (i) suggest that Nan Hai’s shares have nil value, or (ii) put forward any concrete estimate as to the extent to which Shinewing may have overvalued Nan Hai’s shares.

66.  However, the fact that the Shinewing Valuation Report was commissioned by an independent third party is neither here nor there, if the valuation stated therein cannot be shown to be reasonably justified. Further, as stated in the KPMG Report, there are various outstanding and missing pieces of essential information which prevented them from conducting a reliable valuation of the Nan Hai shares. In any, the burden is on the Debtor (not on the Petitioner) to demonstrate with credible evidence, that the Petitioning Debt is “fully secured”.

67.  The Debtor has not sought to further explain why Shinewing’s valuation is reasonably justified or to contradict KPMG’s criticisms of such valuation in the KPMG Report. Rather, as stated at paragraph 21(2) of the 26 March Decision, after having seen the KPMG Report (exhibited to Qian 2^nd), the Debtor decided to commission his own independent valuation (and sought an adjournment of the Hearing for further time to do so), rather than to continue to rely on the Shinewing valuation.

68.  In the circumstances, it is difficult to see how the Debtor can still contend that this Court should take into account Shinewing’s valuation as prima facie evidence that Nan Hai is worth the value stated therein.

69.  In any event, KPMG’s criticisms of Shinewing’s valuation appear to this Court to be reasonably justified. The Petitioner relies, in particular, on the following criticisms in the KPMG Report to demonstrate the unreliability of Shinewing’s valuation (which the Debtor has not sought to contradict):

(1)  The Shinewing Valuation Report omits to state what valuation basis was adopted, notwithstanding that:

(i)  such fundamental premises would impact on the valuer’s selection of methodology, input, assumptions and concluded valuation; and

(ii)  there may be significant differences depending on whether the company is valued on a going concern or on a liquidation basis, and whether valued on an open market basis or forced sale basis (with the latter having a value which may be significantly lower).

(2)  The Shinewing Valuation Report lacks essential information and details that should be included to support its valuation conclusion, without which a reader is unable to scrutinise or verify the underlying information/assumptions, and should not place reliance on its valuation. Such missing but essential information includes:

(i)  Pro-forma Consolidated Accounts (which Shinewing stated to have been provided by Nan Hai and on which the report was based, but were not provided); and

(ii)  Nan Hai’s assets and liabilities, financial performance or balance sheet as the valuation date.

(3)  Based on public announcements and information, it was clear that Nan Hai had not been able to meet its financial obligations and has been involved in a number of ongoing litigations. There are also doubts as to whether Nan Hai is able to continue to operate at full scale or as a going concern. Yet there is no suggestion that these considerations had been taken into account in Shinewing’s valuation.

(4)  The market approach and adjusted net asset value approach without adjustments were also not suitable for valuing companies (such as Nan Hai) with going concern issues, and Shinewing’s use of financially stable companies which operate as going concerns as comparables to Nan Hai may also overstate its value.

(5)  KPMG also points out issues concerning Shinewing’s use of price-to-sales (P/S) multiples, and notes that Shinewing’s selection of median/average of multiples in valuing different business segments of Nan Hai is without justification. In particular, the Shinewing Valuation Report adopted the median of the comparable company multiples for all business segments of Nan Hai excluding “Dadi Cinema”, in respect of which an average of the multiples was adopted. The basis for the use of the average of multiples rather than the median in the case of “Dadi Cinema” is not disclosed in the Shinewing Valuation Report. KPMG noted that if the median of the multiple rather than the average of the multiple was adopted in estimating the value of Dadi Cinema, its value would decrease by 50% from RMB1,191 million to RMB600 million and the overall value of Nan Hai would drop from RMB1,263 million to RMB673 million.

(6)  Shinewing failed to apply any of the following discounts (which may be substantial and have overlaps):

(i)  to reflect that Nan Hai was a company in a distressed situation or had going-concern issues, to reflect its diminished ability to trade at full capacity due to lack of liquidity, working capable and financing, impairment of value of assets, and hidden liabilities; or

(ii)  for a “forced sale basis” (i.e. seller is under compulsion to sell) to reflect the short period of marketing time and/or the seller’s weakened bargaining position.

(7)  As to the discount applied by Shinewing to reflect lack of marketability, there is evidence suggesting that the appropriate discount should be much higher than the range adopted by Shinewing, given the negative news and adverse developments of Nan Hai, subsequent delisting of Nan Hai, and absence of latest financial statements.

(8)  In the circumstances, any rational investor would require full access to financial information and would incorporate a discount in the value of the company, which discount may be substantial.

(9)  On the basis of the available information, KMPG is of the view that Shinewing’s valuation of Nan Hai shares has been overstated.

70.  Further, the Shinewing Valuation Report itself states that should there be any material changes to the financial status after the Valuation Date and/or to the Pro-forma Consolidated Accounts, Shinewing’s valuation should not be relied on and a new valuation would be required. Since the valuation date of 30 June 2023, Nan Hai was delisted from the SEHK on 16 November 2023, which is a material development affecting the reliability of Shinewing’s valuation.

71.  The Shinewing Valuation Report also expressly states that its valuation should not be treated as the same as or a guarantee for the actual realisable value of the Nan Hai shares.

72.  In the premises, the Shinewing Valuation Report simply does not cross the threshold of being credible evidence to show that the value of the 2 Dadi Shares equals or exceeds the amount of the Petitioning Debt.

H.  DISPOSITION AND COSTS

73.  For the aforesaid reasons, the Debtor has clearly failed to discharge his burden of adducing credible evidence that the Petitioning Debt is “fully secured” by the Petitioner’s Charging Order as he alleges.

74.  As stated in paragraph 34(2) above, the Court generally would not inquire into the correctness of the Petitioner’s estimate of the value of its security, unless such estimate was not genuine. In the present case, based in the information and evidence before the Court, there is no reason to doubt that the Petitioner’s estimate of the value of the 2 Dadi Shares of HK$2 (i.e. the paid up capital of Dadi) was and is a genuine estimate of their value and not a sham, as at 30 June 2023 (i.e. date of the SD), 18 October 2023 (i.e. date of the Petition) and 26 March 2024 (i.e. the date of the Hearing).

75.  In the circumstances, this Court was satisfied that the Petitioning Debt had been proved, and the usual bankruptcy order was made against the Debtor at the Hearing.

76.  As to costs:

(1)  Under clause 5.6 of the Deed of Guarantee, the Debtor covenanted that he shall pay to or reimburse the Petitioner for (inter alia):

“ ‘ all costs, charges and expenses (including legal and other fees on a full indemnity basis) reasonably incurred’ by the Petitioner in exercising any of its rights or powers thereunder, ‘in suing for or seeking to recover any sums due [thereunder] or otherwise preserving or enforcing its rights [thereunder]’.”

(2)  Although the Court has a wide and unfettered discretion in the grant of costs, it is well-established that where the parties have entered into an agreement as to the incidence of costs (including whether on an indemnity basis), the Court should be slow to disturb the parties’ agreement: see Bank of China (Hong Kong) Ltd v Twin Profit Ltd [2011] 3 HKC 59 at §§3, 7, 8; Bank of China (Hong Kong) Ltd v Twin Profit Ltd (2012) 15 HKCFAR 560 at §§18-19, 21.

(3)  There is no reason in the present case to depart from the parties’ contractual agreement under Clause 5.6 of the Deed of Guarantee.

(4)  Under Rule 79(4) of the Bankruptcy Rules, where a bankruptcy order is made on a creditor’s petition, the costs of the petitioning creditor shall be taxed and paid out of the estate.

(5)  In the premises, the appropriate costs order in this case is for the Debtor to pay the Petitioner’s costs of the Petition on an indemnity basis, with certificate for two counsel, to be taxed and paid out of the estate.