KML ENGINEERING LTD v. UNIVISION ENGINEERING LTD

HCCW 323/2023

[2023] HKCFI 2691

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 323 OF 2023

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REASONS FOR JUDGMENT

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1.  At the hearing of the winding up petition presented against Univision Engineering Limited (“Company”), this court made a usual winding up Order against the Company and gave a brief ruling, with detailed reasons to be handed down. These are the reasons for this court’s Judgment.

2.  The Petition in this case was presented on 24 July 2023 on the ground that the Company is insolvent and unable to pay its debts. The Petition is based on an unpaid judgment debt of over HK$2.1m, judgment having been obtained on 6 March 2023 in HCA 1522 of 2022. On 20 June 2023, the Petitioner served a statutory demand on the Company which had not been complied with.

3.  Apart from the Petitioner, there are 2 supporting creditors viz Synnex Technology International (HK) Limited (“Synnex”) and Leung Ho Lun Paul t/a E-Star Engineering Company (“E-Star”), each of whom has separately filed a winding up petition against the Company in HCCW 348 of 2023 and HCCW 401 of 2023. It is not in dispute that the combined indebtedness owed by the Company to the 2 supporting creditors amounts to around HK$13m. Synnex appeared by counsel at the hearing and maintained its support of the Petition. E-Star had written to this court earlier and indicated that it maintained its stance. Its attendance at the hearing was excused.

4.  The Company has not filed any affidavit in opposition to the Petition in accordance with Rule 32 of the Companies (Winding-up) Rules, Cap 32H. It is only on last Friday ie 13 October 2023 that Mr Stephen Koo, executive chairman and major shareholder of the Company, made an affirmation in opposition (“Koo 1”). In Koo 1, the Company also seeks leave of the court to extend the time to file and serve it. Counsel for the Company, Mr Chin, had prepared a skeleton submission on 13 October 2023. Both Koo 1 and Mr Chin’s skeleton were received by the clerk of this court only in the morning of the hearing. This court understands from Mr Kwan for the Petitioner that he had the benefit of receiving Koo 1 and presumably Mr Chin’s skeleton over the weekend and had an opportunity to consider them prior to the hearing.

5.  The long and short of Mr Chin’s skeleton is that the Company seeks an adjournment for 8 weeks on the ground that there is a viable restructuring plan and there are substantial number of creditors in opposition to the Petition.

6.  The legal principles governing a creditor’s winding up petition on the ground of insolvency are well-established. For the present purpose, this court need only recite two.

(1)  A petitioner whose debt is not in dispute is entitled ex debito justitiae to a winding up order against the company. The burden lies on the company to demonstrate good grounds for the court not to make such an order.

(2)  If the company opposes the petition on the ground that there is a reasonable prospect of being able to restructure and compromise the debts and restore its solvency, it has to demonstrate to the court that a concrete restructuring proposal or a scheme of arrangement has been prepared and put forward to the creditors for their consideration, and such proposal or scheme has the support of the requisite majorities of creditors. It is not enough for the company to point to certain commercial discussions with some creditors or make a general assertion that it has been actively pursuing a restructuring proposal. Nor is it enough for the company to say that it is only seeking a short adjournment of the petition. Unless the company is able to demonstrate that there is some useful purpose in adjourning the petition, there is no proper basis for the court to delay the petitioning creditor’s right in seeking an immediate winding up order against the company.

Re Jiayuan International Group Ltd [2023] HKCFI 1254 at [12] (Linda Chan J)

7.  This court has heard Mr Chin, as well as Mr Kwan and Ms Yeung, and considered in detail Koo 1 and Mr Chin’s skeleton before making the winding up Order against the Company at the hearing.

8.  On the so-called viable restructuring plan, Mr Chin refers this court to paras 16-24 of Koo 1 as well as 2 letters ie (i) letter from Silverbear Capital Inc Ltd[1] (“Silverbear”) dated 10 October 2023 addressed to inter alia this court, the Petitioner and the 2 supporting creditors and (ii) letter from the Company to Silverbear dated 13 October 2023. Suffice it to say that paras 16-24 of Koo 1 largely summarise the gist of the 2 letters.

9.  Since Mr Chin submits that there is a viable restructuring plan, this court will examine the evidence and see whether it indeed supports his submission.

10.  In its letter dated 10 October 2023, Silverbear first expresses its keen interest and support for the Company. The letter goes on to state inter alia the following:

“We are willing to work with the Creditors of the Company to develop a rescue plan that will:

1. enable the Company to fully repay its outstanding debts to the Creditors within 18 months from the date hereof;

2. strengthen the cash flow and capital base of the Company by [i]nvesting and procuring investors to invest in the Company of not less than $50m within 18 months from the date hereof; and

3. restore the Company into solvent status and enable it to run as a going concern to continue carrying on its normal course of business and prosper.

As an indication of our earnest interest in the Company, we will:

a) participate in the coming second Creditors meeting convened to be held on 13 October 2023, to further develop a rescue plan that will be acceptable to and signed by all parties;

b) advance an interest free loan of HK$6 million to the Company for 18 months to enable it to pay off the following immediately:

(i) overdue salaries to employees;

(ii) overdue fees to professionals who have been most supportive to the Company; and

(iii) 10% of the total outstanding sums due to Creditors.

The above is conditional to [sic] but not limited to the following:

1) the three Petitioners withdrawing their respective summons that will be due for hearing on 11 October 2023…” (emphasis added)

11.  In its letter dated 13 October 2023, the Company sets out its vision of a restructuring plan. Points 1 and 2 of the plan are expressed in the following terms:

“1. Strengthen and Widen the Capital Base:

The Company will issue new shares for new investor(s) to subscribe, thereby replenishing our capital base. Through this mechanism, the composition of the majority shareholding shall be reorganized.

2. Solvent Financial Position:

With the infusion of new capital funds, the Company’s cash flow position will significantly improve. This will enable us to repay outstanding debts to our Creditors according to a mutually agreed-upon time schedule, ensuring the Company’s solvency.”
(emphasis added)

12.  It can be seen from the above that Silverbear’s proposed plan is firstly, to offer of a loan of HK$6m to the Company and secondly, to invest and procure others to invest not less than HK$50m in the Company within 18 months.

13.  Concerning Silverbear’s offer of a HK$6m loan to the Company, it is conditional inter alia on the “three Petitioners withdrawing their summons”. As explained in Koo 1 at para 21, this condition is intended to mean the three on-going petitions against the Company ie those presented by the Petitioner, Synnex and E-Star be withdrawn. As far as this condition is concerned, it is obvious at the hearing that it could not be met. This is because at the hearing, Mr Kwan for the Petitioner maintained its stance of seeking an immediate winding up Order against the Company while Ms Yeung for Synnex maintained its support of the Petitioner’s stance. Hence, in the absence of a revised offer from Silverbear, and there is no evidence of such, the HK$6m loan would not be available to the Company.

14.  But even if the HK$6m loan were available, Mr Kwan draws this court’s attention to two matters on the Company’s solvency which this court considers valid.

15.  First, the Company’s unaudited Statement of Financial Position for the 6 months ended on 30 September 2022[2]. The statement shows its total current liabilities were in the region of HK$110m while its total current assets were in the region of HK$68.3m. In other words, there was a shortfall of around HK$42m. The Company’s total liabilities also exceeded its total assets by around HK$21m.

16.  Second, it is not clear from Koo 1 what the amount of the Company’s current outstanding indebtedness is. In para 9 of Koo 1, Mr Koo only gave a ballpark figure of HK$40m without any breakdown or evidence in support.[3] Without knowing the amount of the Company’s current outstanding indebtedness, it is difficult to gauge how attractive the HK$6m loan would be to its creditors. On the evidence, at least the Petitioner and the 2 supporting creditors are not impressed.

17.  Concerning Silverbear’s plan to invest and procure other investor(s) to invest not less than HK$50m in the Company within 18 months via the issue of new shares for the new investor(s) to subscribe, this court does not see any concrete plan from Silverbear or the Company as to how they propose to attract the new investor(s), whoever they might be, or any evidence as to why they are willing and able to invest HK$50m in the Company. This court also does not see any evidence that the Company’s creditors are willing to wait 18 months for the plan to materialize. On the evidence, at least the Petitioner and the 2 supporting creditors are not so willing.

18.  Lastly, concerning Mr Chin’s assertion that there are “substantial number of creditors in opposition” to the Petition. Suffice it for this court to point out that, according to the Court file, none of the so-called “substantial number of creditors”, including the 2 creditors named in para 25 of Koo 1, had filed a notice of intention to attend the hearing and come forward to express their opposition to the Petition. This is not disputed by Mr Chin at the hearing.

19.  In these circumstances, this court is not satisfied from the evidence that the Company has a concrete or viable restructuring plan or such a plan has the support of the requisite majorities of creditors. If so, there is no useful purpose in adjourning the Petition and no proper basis to delay the Petitioner’s right in seeking an immediate winding up Order.