HCK CHINA INVESTMENTS LTD. AND ANOTHER v. WAH NAM GROUP LTD.

HCCW 166/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 166 OF 2000

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R U L I N G

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1. This is an unusual application taken out by Wah Nam Group Limited ("the Company"). The summons issued on 25 July 2000 seeks an order that the hearing of the petition be adjourned for 6 weeks. This summons was taken out after the hearing of the petition had been concluded on 21 July 2000 and after I have ordered that the matter be adjourned to the afternoon of 26 July for delivery of judgment. The reason for the lateness of the application is as follows.

2. On 24 July 2000 the Company received a Letter of Intent from China Investment Group Limited ("China Investment") to purchase the 60% interest in a PRC joint venture called Hangzhou Huanan Engineering and Development Co. Ltd ("HHED") which is owned by Wah Nam Infrastructure Investment Limited ("WNII"). WNII is a BVI company and is a wholly owned subsidiary of the Company. The purchase price mentioned in that letter is "approximately than [sic] HK$100 million subject to contract". It is further stated in that letter that China Investment would instruct its solicitors to prepare the draft sale and purchase agreement and in the meantime the Company was asked to instruct the directors of WNII to assist China Investment in performing due diligence on the proposed acquisition.

3. The letter is headed "subject to contract", and it is expressly stated that it is a letter of intent and is not legally binding. The valuable asset owned by HHED is a toll road being Highway G320 in Hangzhou. China Investment is owned 44.06% by Henderson Investment Limited.

4. The Company's affirmation in support of this application was made by a director Miss Chow Kit Lin. She stated in paragraph 5 of her affirmation that she was advised by Mr Chan Pak To William who is another director of the Company and has been in charge of the negotiation with China Investment and she veily believed that the formal contract for the sale and purchase of HHED is expected to be signed within 14 days of her affirmation. This is a substantial transaction if it is carried through. Save for the one page letter of intent, I have not seen any document regarding the "negotiation" mentioned by Miss Chow. No details have been provided of this negotiation. Mr William Chan, the director who is in charge of the negotiation, made no affirmation in support of this application. The court is not told what is the basis of his expectation that there is to be a formal contract for sale and purchase within 14 days. I should also mention that Mr William Chan has featured prominently in these proceedings. He has played an important role in the affairs of the Company at all material times. Although he left the board of directors at one stage he has rejoined in early July 2000. He has not made any affirmation in the winding-up proceedings to date.

5. In exercising my discretion whether to grant or refuse an adjournment, I have taken into account the following matters apart from the ones I have already mentioned regarding the supporting affirmation.

6. Very little information has been placed before the court on the financial position of WNII. I note from the audited report in Chinese of HHED as at 31 December 1999 that there is a substantial liability of WNII owing to HHED in the sum of RMB56 million. In the last audited account of the Company made up to 31 December 1998, it is stated that the Company and its subsidiary had pledged its 60% shareholdings in HHED (being the subject of the proposed sale) with its net asset value amounting to approximately RMB109 million to HHED's PRC joint venture partner, Hangzhou Lu Da Highway Engineering Company, to secure for Lu Da or its related company to grant guaranties in favour of certain banks in obtaining bank loans of RMB35 million for HHED. I have no information whether there has been further borrowings by WNII or the extent of the prior charge on WNII's 60% shareholding in HHED. The court is left in doubt as to what would be the net proceeds received by WNII and the Company even if the deal were to go through.

7. As I have mentioned earlier, the letter from China Investment is merely a letter of intent, there is no certainty whether the deal would go through or not. There had been previous attempt by the Company and WNII to dispose of the 60% interest in HHED. This is mentioned in the last audited account of the Company referred to earlier. It is stated that there was an intended disposal of the 60% interest for a projected cash consideration of HK$85 million in September 1999 and a non-binding letter of intent had been signed with the potential purchaser. Nothing had come of that letter of intent.

8. The next matter I wish to mention is a Mareva injunction granted by Beeson J in HCA No. 12439 of 1999 on 15 December 1999. This is an action brought by the supporting creditors against the Company and others in respect of 4 loan notes. An injunction was granted to restrain the disposal of assets up to HK$61 million. One of the assets specifically covered by that injunction is WNII's 60% interest in HHED. The Company says that if an adjournment is granted today, an application would be made in HCA12439 of 1999 to discharge or vary that injunction. I have been told by counsel appearing for the supporting creditors that there was a previous attempt to vary or discharge the injunction in January this year and the application was unsuccessful.

9. I note further that notwithstanding the Company has filed an affirmation in March 2000 deposing that the Company and its subsidiaries hold unencumbered assets of HK$93 million, which is more than the limit provided for in the injunction, the Company has not taken out any application to discharge that injunction. I think there is great uncertainty if the Company would succeed in getting a discharge or variation.

10. Given the uncertainties whether there would be a deal to sell the 60% interest in HHED, the uncertainties regarding the amount of net proceeds to be received, the paucity of information on the financial position of WNII, and the uncertain prospects of a variation or discharge of the injunction, I do not think it would be proper to exercise my discretion to grant an adjournment. I would mention that if a winding-up order is to be made, the deal, if there is one, would not be affected. I am sure the liquidator would take the matter in hand and exercise his best endeavours to negotiate with the intended purchaser to reach a deal beneficial to all.