RE GOLDEN SHIELD HOLDINGS (INDUSTRIAL) LTD

HCCW 289/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 289 OF 2014

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D E C I S I O N
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1.  This is an application issued by Chance Talent Management Limited (“applicant”) on 6 January 2015 for appointment of provisional liquidators over Golden Shield Holdings (Industrial) Limited (“Company”). The application is made under section 193 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“Ordinance”).

A. BACKGROUND FACT

2.  The Company was incorporated in Bermuda and was registered as a non‑Hong Kong company under Part XI of the former Companies Ordinance (Cap 32) on 25 May 2011 and remains registered as such company under Part 16 of the Companies Ordinance (Cap 622) (“CO”).  The shares of the Company have since 14 July 2011 been listed on the main board of the Stock Exchange of Hong Kong Limited.

3.  The Company’s issued share capital, as stated in its annual return dated 25 May 2014, is HK$112,990,000.  The Company’s parent company is Tong Fa Limited (“Parent”), which holds approximately 56% of its issued share capital.  The Parent’s shares are held by Mr Qiu Jianfa (“Mr Qiu”) and Mr Chen Binghui (“Mr Chen”) as to 79% and 21% respectively.  Until their resignation on 6 November 2014, Mr Qiu was a non‑executive director of the Company while Mr Chen was an executive director and Chairman of the board of directors.

4.  As a result of the inability of the Company to publish its audited results for the year ended 31 December 2013, since 1 April 2014, trading of the shares have been suspended.  To date, the Company has not been able to publish its audited results for 2013 or the interim results for the period ended 30 June 2014.

5.  The Company’s main operating subsidiary is Golden Shield Textile (Jing Yang) Co, Ltd (“GST”), a company established in the PRC and wholly owned by the Company.  The legal representative of GST was and still is Mr Chen, who is also one of its directors.

6.  On 30 April 2014, the Company announced the appointment of Ernst & Yong Transactions Limited (“EY”) as an independent financial advisor but the appointment was terminated on 2 July 2014.  There is a dispute as to the reason for termination of the appointment.

7.  The Company has undergone a complete change in management in November and December 2014 in that:

(1) On 6 November 2014, Mr Chen and Mr Qiu resigned from all their positions held in the Company.  Ms Xue Fang and Ms Tong Jinzhi resigned as independent non‑executive directors and were replaced by Mr Lam Tin Faat and Mr Mak Ka Wing Patrick.

(2) Since November 2014, the Company has not been able to contact the other executive directors, Mr Chen Zhifeng and Mr Wu Shoumin. As Mr Wu Shoumin was the financial controller of the Company, on about 5 December 2014, he was replaced by Pang Pui Hung Paton.

(3) On 19 November 2014, Mr Chow Ming Ho Patrick (“Mr Chow”) was appointed as executive director of the Company and Mr Fan Xilu and Dr Chew Chee Wah (“Dr Chew”) were appointed as non‑executive directors.  Dr Chew was also appointed as Chairman of the board.  On the same day, a special review committee was established to investigate into the outstanding audit issues in relation to the interim and annual results of the Company and certain proceedings in the PRC.

(4) On 5 December 2014, Mr Chan Yuk Tong resigned as non‑executive director of the Company.

8.  The applicant says that as a result of the above changes, the whole board of directors of the Company has effectively been replaced by a new management team.  This is not disputed by the Company.

B. APPLICABLE PRINCIPLES

9.  The Company is an “unregistered company” for the purpose of winding-up (see section 326(2) of the Ordinance).  Under section 327 of the Ordinance, the court has jurisdiction to make a winding‑up order against an unregistered company and all the provisions of the Ordinance with respect to winding‑up shall apply.  This includes the power to appoint provisional liquidators under section 193 of the Ordinance.  Section 327(3)(b) provides that the court may wind up a company if the company is unable to pay its debts.

10.  The principle governing the winding‑up of an unregistered company has been stated by the Court of Appeal in Re Yung Kee Holdings Ltd [2014] 2 HKLRD 313, at § 38.  In short, the court may exercise its jurisdiction to wind up an unregistered company if the petitioner is able to satisfy the three core requirements as follows:

(1) There is a sufficient connection between the company and Hong Kong.  In the context of insolvency, the connection is normally satisfied by the presence of assets, but this is not essential.

(2) There is a reasonable possibility that the winding‑up order would benefit those applying for it.

(3) The court must be able to exercise jurisdiction over one or more persons interested in the distribution of the company’s assets.

11.  The principles governing applications for the appointment of provisional liquidators are well‑established. It is incumbent upon the applicant to satisfy the court that:

(1) there is a good prima facie case for a winding‑up order at the hearing of the petition; and

(2) in the circumstances of the case, it is right that a provisional liquidator should be appointed (Re Union Accident Insurance Co Ltd [1972] 1 All ER 1105, at 1110a‑c; Re Five Lakes Investment Co Ltd v Multiford Co Ltd [1985] HKLR 273 at 283F‑I).

12.  As to purpose of the appointment, it was stated by Rogers VP in Re Legend International Resorts Ltd [2006] 2 HKLRD 192 at §§ 27 & 35 in this way:

“27 … The purpose of the appointment was to protect the assets of the Company and hence some danger to the assets, not limited to malfeasance, had to be shown.”

“35 … the appointment of a provisional liquidator must be for the purposes of the winding‑up. Provided that those purposes exist there is no objection to extra powers being given to the provisional liquidator(s), for example those that would enable the presentation of an application under s.166…”

C. MERIT OF APPLICATION

C1. Prima facie case for winding-up

13.  The petition was presented on 14 October 2014 by Messrs. Angela Ho & Associates (“petitioner”) on the basis that the Company had failed to comply with a statutory demand served on it on 28 July 2014.  In the statutory demand, the petitioner required the Company to pay HK$833,685.35, being the professional fees and disbursements for the legal advisory services rendered by the petitioner from September 2012 to June 2014.  By amendments made on 9 January 2015, the petitioner pleaded (at §§ 15 to 18) the connections between the Company and Hong Kong and the presence of creditors within the jurisdiction. 

14.  The Company does not dispute that it was indebted to the Petitioner or that the court has jurisdiction to make a winding‑up order against the Company.

15.  By a statutory demand served on the Company on 8 December 2014, the applicant required the Company to pay HK$116,050,000, being the senior notes in the principal amount of HK$80,000,000 due on 14 April 2014 and the interest accrued on the HK$120,000,000 senior notes issued by the Company to the applicant on 12 October 2012 (“Notes”).  The Notes were issued pursuant to the Investment Agreement dated 28 September 2012 made between the Company (as issuer), the applicant (as investor), the Parent, Mr Qiu and Mr Chen, which was subsequently amended on 8 March 2013, 23 May 2013 and 19 December 2013 (together “Investment Agreement”).  

16.  The Notes were secured by (a) a charge over the shares in the Company held by the Parent, (b) charges over the shares in the Parent and (c) personal guarantees given by Mr Qiu and Mr Chen, all dated 12 October 2012.  As the Company has not provided any security in favour of the applicant, the applicant is an unsecured creditor of the Company.

17.  There is no dispute that the Company did not comply with the applicant’s statutory demand.  However, the Company suggests, in §§ 13‑14 of the 2^nd affirmation of Mr Chow filed on 3 March 2015, that the Investment Agreement was in the nature of a loan and that the effective interest rate charged by the applicant “should come close to 50% per annum”.  Apart from his assertion that the Company has already repaid HK$60,400,000 to the applicant, Mr Chow does not explain how he came up with an effective interest rate of 50% per annum. Nevertheless, Mr Chow says that the Company reserves its position to challenge the Investment Agreement on the basis that it contravenes the provisions of the Money Lenders Ordinance (Cap 163).  The contention seems to be unsustainable as the issued share capital of the Company is in excess of HK$1,000,000 and, as such, the Investment Agreement falls within the meaning of an “exempted loan” under § 12 of Part 2 of Schedule 1 to the Money Lenders Ordinance.

18.  As the matter now stands, there is no valid basis for the Company to dispute the debts claimed by the applicant and the petitioner.  Indeed, Mr Kenny Lin, counsel for the Company, confirms that for the purpose of this application, the Company is content to proceed on the basis that the applicant has satisfied the court that there is a prima facie case for winding-up the Company.

C2. Whether it is appropriate to appoint provisional liquidators

19.  In my view, this is not an appropriate case for appointment of provisional liquidators for the following reasons:

(1) the precarious financial state of the Company means that it is likely that a winding up order will shortly be made against the Company; and

(2) the Company only has negligible liquid assets and it has not been shown that any assets of the Company are at risk of dissipation or that they need to be protected by independent provisional liquidators pending determination of the petition.

C2.1 Financial state of the Company

20.  The evidence before the court shows that the Company is and has for sometime been in a precarious financial state in that:

(1) it has not been able to comply with the statutory demands issued by the petitioner and the applicant within the time limits and by virtue of section 178(1)(a) of the Ordinance, the Company is deemed to be unable to pay its debts;

(2) according to Mr Chow, the Company does not have any valuable assets except its listing status; and the Company is grossly insolvent.

21.  According to Mr Chow, as at 12 February 2015, the total liabilities owed to the unsecured creditors, excluding those amounts which the Company dispute, was RMB626.49 million:

Name of Creditors	Amount owed (RMB million)	% of total unsecured liabilities
1. Petitioner	0.66	0.11%
2. applicant	92.8	14.81%
3. Han Changan	15.31	2.44%
4. Liu Dianbi & Chan Bun	51.70	8.25%
5. Shi Wenzhi	127.61	20.30%
6. Jianwei Fangzhi	49.16	7.85%
7. Guangzhou Tian Yu	11.00	1.76%
8. Beijing Zhong Tai	278.00	44.37%
9. Gold Kingdom International Ltd (“Gold Kindgom”)	0.70	0.11%
TOTAL	RMB626.49	100%

22.  Amongst them, items 3 to 8 above are said to be the contingent liabilities uncovered by the new management which arose out of certain guarantees given by the Company.  These contingent liabilities amounted to RMB532.33 million or 85% of the total unsecured indebtedness of the Company (“Contingent Liabilities”).  The applicant contends that these Contingent Liabilities are not genuine liabilities, a matter I shall refer to in the later part of this Decision.

23.  It is thus inevitable that the Company will be wound up by the court unless the Company is able to put forward a proposal for restructuring its indebtedness and that such proposal has the support of the requisite majorities of the creditors, as required by section 674 of the CO.  As to this, Mr Manzoni SC, counsel for the applicant, submits that to date, the Company has not formulated any restructuring proposal in respect of its indebtedness and there is nothing to suggest that a meaningful restructuring proposal will soon be put forward by the Company.  This is not disputed by the Company at the hearing.

24.  The Company produces certain letters signed by six creditors (which accounted for 77.23% of the unsecured indebtedness of the Company) stating that they “in principle” agree to give time to the Company to restructure its indebtedness.  Mr Manzoni submits, and I agree, that no weight should be given to these letters for the following reasons:

(1) Except for Gold Kingdom to which RMB0.7 million was owed, the liabilities claimed by the other five creditors are part of the Contingent Liabilities allegedly owed by the Company.  It is doubtful that such Contingent Liabilities are genuine as according to the Interim Report 2013 published by the Company on 30 August 2013 (being the latest accounts published by the Company), neither the Company nor the Group had any contingent liabilities.

(2) Despite the repeated requests of the applicant, to date, the Company has only produced 59 pages of documents in support of these Contingent Liabilities.  It is inconceivable that the Company would have incurred contingent liabilities of such magnitude with such few documents.

(3) No bona fide creditors would give their unqualified support to the Company in the absence of any concrete restructuring proposal. 

25.  If one excludes the Contingent Liabilities, the applicant is the single largest creditor and without its support, no restructuring proposal can be implemented by the Company.

26.  In light of the above matters, it is likely that the Company may shortly be wound by the court.  There is no need to appoint provisional liquidators pending determination of the petition.

C2.2 Risk of dissipation of assets not shown

27.  As stated above, there is no dispute that the Company does not have any meaningful assets apart from its listing status (which is not strictly speaking an asset). The only liquid fund is the HK$700,000 odd deposited at bank which has been frozen and cannot be used, let alone disposed of, without the consent of the applicant.

28.  According to Mr Chow, in consideration of the Exclusivity Agreement dated 4 December 2014 (“Exclusivity Agreement”) made between the Company and Pinnacle Partner Global Limited (“Investor”), the Investor has made available a working capital facility of up to HK$10 million to Gold Kingdom (“Facility”), which is a wholly owned subsidiary the Company.  To date, only HK$700,000 had been drawn down by Gold Kingdom, which was used to pay the expenses incurred by the Company.

29.  Thus, the evidence before the court shows that the Company does not have any meaningful assets which can be dissipated or misused. 

30.  In any event, the Company and each of the incumbent directors (except Mr Wu and Mr Wu Shoumin whom the Company has not been able to get in contact) has given an undertaking to the court not to “dispose of the property of the Company and its subsidiaries, including things in action” other than in its ordinary course of business unless with the approval of the court (exhibited as “PC‑7”).  With this undertaking in place, even if the Company has assets which may be dissipated (which has not been shown by the applicant), they would not be at risk of dissipation.  This is particularly so when according to the descriptions of Mr Chow, the members of the new management are either professional accountants or experienced businessmen who are independent of the former management.  There is no reason to think that they will act in breach of the undertaking voluntarily given to the court.

31.  For the reasons set out in §§ 27 to 30 above, I do not think that the applicant has shown that the assets of the Company are in jeopardy or that they need to be protected by independent provisional liquidators.  Applying the principles in Re Legend, the application for appointment of provisional liquidators should be dismissed.

32.  Nevertheless, Mr Manzoni contends that in light of the following concerns, there is an urgent need for the court to appoint provisional liquidators over the Company:

(1) Since 7 July 2014, the Company has been under the control of Mr Chen Yu Ren and Mr Chen Bin (together “Chen Brothers”) and the new management were appointed at their directions.  There are strong grounds to suspect that the new management are acting at the behest and on the instructions of Chen Brothers.

(2) The Company only has one “operative” executive director, Mr Chow, who does not have the necessary experience or expertise to manage the Company.

(3) Since the appointment of the new management, there has been a massive increase in the liabilities of the Company, from about HK$120 million to RMB632 million.  Although the new management claim that these additional liabilities (ie the Contingent Liabilities) were incurred by the former management, it is clear that they did not perform any proper investigation on their validity and simply accepted that they formed part of the liabilities of the Company.  By contrast, the Company under the new management tries to dispute the debt owed to the applicant even though it has no valid ground to do so.

(4) In obtaining the Facility from the Investor and giving security for such Facility, the Company has acted in breach of clauses 11.6 and 11.12 of the Investment Agreement, which provide that the Company cannot create any security interest over any assets or incur any financial indebtedness without the written consent of the applicant.

(5) There was no commercial reason for the new management to enter into the Exclusivity Agreement, which restricts the ability of the Company to negotiate with other potential investors interested in “acquiring” the listing status of the Company for a period of six months.  As a result of the Exclusivity Agreement, the Company lost the ability to negotiate with other investors who may be able to offer a better price for the listing status of the Company.

(6) The Company has not been acting in a transparent or responsible manner vis‑à‑vis the applicant in that despite the applicant’s repeated requests for documents relating to the Investor, the Exclusivity Agreement and the security given to the Investor, no information or documents were provided by the Company to the Investor.

(7) Mr Chen is the legal representative and director of GST, which is a cause for concern.  Moreover, the creditors of GST have commenced proceedings in the PRC against GST.  If provisional liquidators are appointed, they can take immediate steps to get control over GST and to protect its assets from being seized by its creditors.

33.  It should be noted the above matters relied on by the applicant took place at least five months ago.  As Mr Lin points out, the problems faced by the Company including its default under the Investment Agreement took place in April 2014, but the applicant did not seems to be concerned about the situation and in fact took part at meetings with the Chen Brothers, Deloitte (the advisor appointed by the Company) and subsequently, the Investor.  Even after the petitioner presented the petition, the applicant had not taken any action until it served a statutory demand on 8 December 2014 and issued a summons for appointment of provisional liquidators on 6 January 2015.  The hearing of the summons fixed for 28 January 2015 was vacated by consent for reasons not explained by any party.

34.  In light of this period of delay, I do not think the applicant has shown that there is an urgent need to appoint provisional liquidators over the Company.  If the applicant considers that the Company should be placed under the control of independent professionals, a view which it is entitled to take, the proper course should be for the applicant to urge the court to make a winding‑up order against the Company at the coming hearing on 11 May 2015.  There is no reason why this course cannot be taken, as a scheme of arrangement (through which the listing status can be “sold” to an investor) can still be implemented even after the Company is being wound up.  Neither the applicant nor the Company has suggested otherwise.

35.  I turn to consider the matters of concerns relied on by the applicant.

36.  The first three matters can be dealt with together.  It is clear that the involvement of the Chen Brothers and the reconstitution of the board of directors of the Company were known to the applicant for at least nine months.  On the evidence before the court, the change in management is in the interests of the Company rather than against its interests.  Indeed, both the applicant and the new management have identified problems relating to the accounts of the Company, which led to the appointment of the Special Review Committee and the appointment of EY to review the accounts.  As for the Contingent Liabilities, the new management acknowledged that they were not disclosed in the Company accounts and their existence was only discovered after they had taken control over the management.  The validity of the Contingent Liabilities are matters which need to be properly investigated.  The Company says that it has appointed lawyers in the PRC to investigate their validity which investigation is still ongoing, and the limited documents provided to the applicant are the documents thus far obtained by the new management.  I do not think that the new management can be criticized for taking steps to rectify the problems created by the former management.

37.  As for the concerns about the Company’s act in entering into the Exclusivity Agreement and obtaining the Facility (described in § 32(4), (5) and (6) above), I do not think that they are grounds for immediate appointment of provisional liquidators:

(1) As the evidence shows, the Company was in need of fund and the Facility provided a source of fund which has been used by the Company to support its operation.

(2) The Exclusivity Agreement has been in place for almost five months and, as Mr Manzoni accepts, it is binding on the Company even after the appointment of provisional liquidators.

(3) As for the security said to have been given to the Investor, Mr Chow confirms at § 67 of his 2^nd affirmation that although clause 4.1 of the Exclusivity Agreement stated that the Facility “shall be secured by the Working Capital Security Documents”, such clause “was eventually varied by mutual consent and no security was ultimately given by the [Company] under the Exclusivity Agreement”.  At the hearing, Mr Lin on behalf of the Company confirms that neither the Company nor any of its subsidiaries has given any security in respect of the Facility.

(4) As for the failure of the Company to provide the documents requested by the applicant, it does not take the point any further.  There is no dispute that the salient information about the Exclusivity Agreement, the Facility including the security to be given by the Company were disclosed by the Company in its announcement on 5 December 2014.  The applicant has not explained why as a creditor of the Company, it is entitled to require the Company to provide information and documents beyond what was disclosed in the public announcement.

38.  As for the applicant’s suggestion that provisional liquidators can take immediate steps to take over control over GST, it ignores the reality that an order for appointment of provisional liquidators will not be recognized or enforced in the PRC and, as such, unless the cooperation of Mr Chen is forthcoming, it will take some time for provisional liquidators or liquidators to take control of GST.  In any event, it has not been demonstrated that the assets of GST are in jeopardy or that Mr Chen has been misappropriating its assets.

39.  For the above reasons, I do not think that it is an appropriate case for appointment of provisional liquidators and I dismiss the summons.  The undertaking given by the Company and each of the incumbent directors should be incorporated into the order dismissing the summons. As for costs, I make an order nisi that the costs of and occasioned by the summons, including the costs of the Official Receiver, be paid by the applicant to the Company, to be taxed if not agreed.