RE CHINA OCEAN INDUSTRY GROUP LTD (“the Company”)

HCCW 230/2019

[2019] HKCFI 2363

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 230 OF 2019

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D E C I S I O N

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Background

1.  A winding-up petition has been presented against the Company on the ground of its failure to satisfy a statutory demand for repayment of a loan due in the amount of about HK$11 million.

2.  This is the Company’s application for validation orders in respect of (i) the transfer of issued and fully paid up shares in the Company since the date of the petition; and (ii) a fund raising exercise which involves reduction of capital, consolidation of shares of the Company, together with issue of convertible bonds to 2 subscribers in the total amount of HK$110 million. The Company intends to apply funds raised towards payment of outstanding debts, including those due to the petitioner.

3.  The petitioner, the 2 supporting creditors (Forward Fund SPC-Double Management Fund SP and Better Shine Limited), a creditor (Pacific Ocean Marine Limited) and the Official Receiver remain neutral to this application.  It remains for the Company to satisfy the court that the application is justified.

Validation of the share transfer

4.  In respect of the application for validation of a share transfer, the court should ask whether or not the creditors might be better or worse off in the event of a winding-up order being made and the transfer not having been sanctioned.  A transfer of fully paid up shares cannot be objectionable: Re Belgravia Properties Ltd [2015] 1 HKLRD 509, §§6-8.

5.  In the present case, all the issued shares of the Company in the stock market are fully paid up.  The creditors would not be worse off if the validation order in respect of the transfer of shares in the company is granted or a winding-up order is made.

6.  On the other hand, if the validation order is not granted, the Hong Kong Stock Exchange may suspend the trading of the Company’s shares and ultimately cancel the Company’s listing status, which is an important asset of a listed company: Re China Solar Energy Holdings Ltd (No 2) [2018] 2 HKLRD 338, §39.

7.  A validation order for the share transfer is appropriate.

Validation of the fund-raising the re-structuring exercise

8.  In relation to an insolvent company, the court should grant a validation order to enable the [company] to carry on trading only if it is satisfied that the continuation of trading is likely to generate net income for the company: Re Century Group Ltd., HCCW 59/2004 (18 March 2004), §9.

9.  Where there are doubts as to the solvency of the company, the court would not sanction the proposed transaction unless it was satisfied by affirmative evidence that they would be beneficial and advantageous for the company and for all practical purposes therefore, the court would require a fairly heavy onus in relation to evidence as falling on persons seeking to justify a disposition not in the ordinary course of the company’s business: Re First Dragon Fashion (Hong Kong) Limited [2010] 4 HKLRD 592, at §14.

10.  Mr Lam, counsel for the Company confirms that the Company is insolvent, although there is no evidence of the total indebtedness.  The capital reduction and issue of convertible bonds are to raise funds for repayment of debts.  The credit arising from capital reduction will be transferred to contributed surplus account of the Company and applied towards off-setting accumulated losses of the Company.  Any balance of credit shall be transferred to the distributable reserve account of the Company.

11.  Thereafter, there will be a consolidation of every 40 shares into one consolidated share in the share capital of the Company.

12.  Upon the actual issue and subscription of the convertible bonds, the Company would receive gross proceeds of HK$110 million and net proceeds of HK$109 million.  It is the intention of the Company to apply the net proceeds towards repayment of debts owed to the group and the balance for general working capital.

13.  The fund raising and re-structuring exercise will generate net cash to reduce indebtedness and is for the benefit of the Company’s creditors.  A validation order should be granted.

Conclusion

14.  For the reasons given above, I grant the validation orders sought and make an order in terms of paragraph 1 of the summons, with no order as to costs.