RE TIANJI HOLDING LTD

HCCW 637/2024

[2025] HKCFI 765

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 637 OF 2024

_______________

_______________

__________________________________

REASONS FOR JUDGMENT

__________________________________

1.  At the hearing of the petition presented by the petitioner, China Evergrande Group (中國恒大集團) (in liquidation) (“CEG”) against Tianji Holding Limited (天基控股有限公司) (“Tianji”) on 8 November 2024 (“Petition”), I made a winding-up order against Tianji and reserved costs with directions on joinder of Mr Chen Daiping (陳代平) (“Chen”) for the purpose of costs only. These are the reasons for my judgment.

A.  BACKGROUND

2.  Tianji was incorporated under the former Companies Ordinance (Cap. 32) in 2009. It holds over 200 subsidiaries incorporated in the BVI, Hong Kong and the Mainland (together “TJ Group”). Chen is the sole director of Tianji. He joined the “Group” (as defined in §4(1) below) in July 2008.

3.  CEG was wound up by this Court on 29 January 2024. On the same day, a regulating order was made appointing Mr Edward Middleton and Ms Wong Wing Sze Tiffany, both of Alvarez & Marsal Asia Limited as liquidators of CEG (together “Liquidators”).

4.  The relevant background and the reasons for making a winding-up order against CEG are set out in the Reasons for Judgment in Re China Evergrande Group [2024] 1 HKLRD 1128, [2024] HKCFI 363 (“Reasons”). As stated in the Reasons:

(1)  Before its demise, CEG was an investment holding company and the ultimate holding company of a group of companies known as Evergrande Real Estate Group (“Group”) with its headquarters in Guangzhou in the Mainland (§4).

(2)  The key subsidiaries in the Group included Tianji and its parent company, Hengda Real Estate Group Co. Ltd (恆大地產集團有限公司) (“Hengda”), a Mainland company which holds a substantial number of operating subsidiaries, project companies and assets located in the Mainland (§6(3)-(4)).

(3)  The payment obligations under the “SJ Notes”, which are 4 series of USD-denominated senior notes with maturity dates ranging from 24 October 2022 to 24 October 2023, are guaranteed by Tianji and its 103 subsidiaries, as well as a keepwell and equity interest purchase agreement entered into by Hengda. As at 30 June 2022, the outstanding principal and unpaid interest due and payable under the SJ Notes were US$5,226 million and US$629 million respectively (§§12-13).

5.  Since their appointment on 29 January 2024, the Liquidators have been able to obtain a considerable amount of information regarding the companies within the Group from the “central management team”. However, the Liquidators have not been able to obtain control over Tianji or its books and records, which remain under the control of Chen[1]. The Petition was presented by CEG with a view to enable the Liquidators to take control over Tianji.

6.  On 12 July 2023, Tianji filed an originating summons in HCMP 1090/2023 seeking leave to convene a meeting of the creditors of the 4 categories of “Existing Debts” as defined in §29(4) below (collectively “Creditors”) for the purpose of considering and voting on a proposed scheme of arrangement between Tianji and the Creditors (“TJ Scheme”) alongside with another application filed by CEG in HCMP 1091/2023 in respect of a proposed scheme between CEG and its creditors (“CEG Scheme”) (together “Schemes”). The Schemes, if approved by the requisite majorities of the creditors, would take effect upon satisfaction or waiver of a whole array of conditions precedent one of which was that both Schemes would become unconditional. The applications were supported by an affirmation made by Mr Hui Ka Yan, the Chairman and executive director of CEG, made on the same date[2]. In that affirmation, Mr Hui referred to and relied on the draft composite scheme documents (including the draft explanatory statements) in respect of the Schemes and confirmed their truthfulness.

7.  At the hearing on 24 July 2023, this Court made some observations on the draft scheme documents and gave leave to CEG and Tianji to convene meetings for the relevant creditors to be held on 22 August 2023 to consider and approve the Schemes.

8.  On 31 July 2023, Tianji issued the composite scheme document which included an explanatory statement issued pursuant to ss.670, 673 and 674 of the Companies Ordinance (Cap. 622) (“ES”). As will be seen further below, in the ES, Tianji expressly referred to the “Intercompany Balance” (as defined in §10(1) below) owed to CEG, and made clear that should the TJ Scheme fail, Tianji would most likely be put into liquidation as it was insolvent.

9.  The scheme meetings were postponed and subsequently cancelled as the Group was not able to meet the requisite qualifications for CEG to issue new debt instruments under the CEG Scheme[3]. Despite the further adjournments of the petition, CEG was not able to provide any further revised proposal or the type of disclosures directed by the court to the creditors. Nor did CEG show that there was any proper ground for the court to grant any further adjournment of the petition[4].

B.  DISCUSSION

10.  In the Petition, CEG contends that by reason of the following facts and matters Tianji is insolvent and unable to pay its debts:

(1)  In the ES, Tianji expressly acknowledged the intercompany balance owed by Tianji to CEG as at 31 December 2022 in the amount of US$5.03 billion (equivalent to RMB 36 billion) (“Intercompany Balance”)[5];

(2)  CEG’s records show that Tianji owed CEG the sum of RMB 37,146,242,375.38 (“Outstanding Sum”)[6];

(3)  The statement of affairs prepared by CEG’s former management dated 27 February 2024 (“SoA”) states that RMB 39,642,159,700 was due from Tianji to CEG. The difference between the amount stated in the SoA and the Outstanding Sum was due to different exchange rates[7];

(4)  The letter dated 23 August 2024 issued by CEG’s solicitors demanding payment of the Outstanding Sum, followed by service of the statutory demand on 3 September 2024 requiring Tianji to pay the Outstanding Sum (“SD”). Tianji failed to comply with the SD and, as such, is deemed insolvent by virtue of s.178(1)(a) of the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUMPO”)[8];

(5)  The board’s observations in the ES that if the TJ Scheme does not proceed, Tianji will not be able to pay its existing debts and insolvent liquidation will be the most likely outcome. Due to difficulties in implementing the Schemes, the proceedings in respect of the Schemes were dismissed[9];

(6)  Tianji’s inability to comply with its guarantee obligations in relation to the SJ Notes with outstanding principal of US$5.2 billion (equivalent to RMB 35.9 billion) as it only had RMB 4 million cash and bank balance as at 30 June 2023[10]; and

(7)  Tianji had since at least 2022 been balance sheet insolvent as shown by the “Liquidation Analysis” (as defined in §29(5) below) and confirmed by the latest management accounts of Tianji made up to 30 June 2023, which show that it had net liabilities of RMB 15 billion[11].

11.  The aforesaid facts and matters stated in the Petition are not in dispute or are indisputable. Nevertheless, Chen filed an affirmation on 10 January 2025 (“Chen 1^st”) to oppose the Petition on the following grounds[12]:

(1)  The SD does not comply with rule 3B of the Companies (Winding-up) Rules (Cap. 32H) (“CWUR”) in that it did not state the consideration for or the way in which the Outstanding Sum arose;

(2)  There is a bona fide dispute on substantial grounds in respect of the Outstanding Sum as Tianji “has identified various sums relied upon by CEG which were never intended as debt or liabilities owed by [Tianji] to CEG, including by reason that [Tianji’s] role was merely as a conduit and/or agent and/or intermediary for the transfer of funds”. Once such sums are removed, it is CEG which owes money to Tianji, but not the other way round;

(3)  CEG is not a creditor under SJ Notes as it is not the noteholder and has no possible claims against Tianji thereunder; and

(4)  CEG has no standing to present the Petition and, as such, the issue concerning Tianji’s solvency is irrelevant.

12.  I should add that in Chen 1^st, he exhibited an opinion of Zhang Xiaowei dated 7 January 2025 as expert evidence on PRC laws (“Opinion”), which is said to be relevant to the question whether there is a bona fide dispute on substantial grounds in respect of the Outstanding Sum. Mr MC Law SC, counsel for Tianji, submitted that the Opinion was relevant and material to the determination of the Petition in that:

(1)  it confirmed that in the course of a proposed reorganisation in 2016, Hengda was required under PRC laws to demonstrate its financial independence from CEG. Tianji was interposed between Hengda and CEG such that they would be seen to be financially independent. The Opinion was relevant and material to Tianji’s case that it was “customary” for funds emanating from CEG to be first channelled to Tianji before they were distributed to the relevant operating subsidiaries in the Group’s property development and property investment business. It was pursuant to this practice that various items of funds were transferred from CEG to Tianji. There was thus no intention that Tianji, being a mere conduit/agent/intermediary, should make repayments to CEG[13]; and

(2)  the Opinion explained the concept of “cross-border cash pool” as a special financial product under PRC laws. Due to foreign exchange restrictions in the Mainland, if there is no cross-border cash pool between the intended transferor and transferee, cross-border transfers of RMB would be less convenient. This supports Tianji’s case that some transfers of funds were in substance transfers between Hengda and Tianji, and CEG was interposed because (a) there was no longer a cross-border cash pool between Hengda and Tianji, which was terminated in June 2019, and (b) it would be more convenient for Hendga to transfer funds to Tianji through the cross-border cash pool between CEG and its onshore subsidiaries[14].

13.  The Opinion was adduced without leave of the court[15]. Following the protest of CEG, Tianji issued a summons on 10 January 2025 to seek leave to adduce the Opinion as expert evidence.

14.  At the hearing on 23 January 2025, this Court dismissed the summons and ordered the Opinion to be expunged for the following reasons:

(1)  It had not been shown by Tianji that the Opinion was relevant to the determination of the Petition. There was no dispute that Tianji performed treasury function for the Group and there were many transfers of funds between CEG and other entities within the Group including Tianji. The Opinion was superfluous in so far as it purported to confirm the undisputed fact that Tianji performed a treasury function for the Group.

(2)  More importantly, Tianji had in the ES expressly acknowledged and admitted the Intercompany Balance (which exceeded the Outstanding Sum) (as further discussed in §§28-33 below).

(3)  Tianji relied on the ES and obtained leave to convene meeting for the Creditors to vote on the TJ Scheme. It was not open to Tianji or Chen to resile from the admissions contained in the ES or to re-write the accounts of Tianji by alleging that some of the items recorded in the Intercompany Balance should not be treated as amounts owed by Tianji to CEG. This was particularly so when Chen did not in Chen 1^st say that any statements in the ES were false or that he knowingly allowed any false evidence to be placed before the court in HCMP 1090/2023.

15.  For the reasons explained below, there is no merit in any of the grounds relied on by Tianji.

B1.  SD is not defective

16.  Mr Law[16] argues that the SD did not comply with the requirement of rules 3B and 3C and Form 1A of the CWUR in that it failed to identify the consideration of the Outstanding Sum (or the way in which it arose) as required under rule 3B(1)(b)(ii). In particular, although the SD asserted that that the Outstanding Sum arose from “intercompany transactions” between CEG and Tianji, there were no particulars as to the nature, purpose, and/or consideration of these transactions, far less how such transactions gave rise to any liability on Tianji’s part (and if so, on what basis). The SD makes a mockery of the statutory requirement and must not be allowed to stand.

17.  The argument is misconceived. As submitted by Mr John Scott SC[17], all that rule 3B(1)(b)(ii) requires is that the SD must state “the consideration for the debt, or if there is no such consideration, the way in which the debt arises”. This requirement has clearly been complied with. In the SD, it was stated that:

(1)  the Outstanding Sum was incurred during the period from 6 July 2018 to 29 October 2021 (“Period”);

(2)  the Outstanding Sum represented the net aggregate balance paid by CEG to Tianji and arose out of the intercompany transactions between CEG and Tianji during the Period; and

(3)  an extract from the ledger of CEG containing particulars of the date, voucher reference, nature of transfer, amount and currency in respect of each intercompany transactions during the Period were set out in the appendix to the SD (“Appendix”).

18.  Far from non-compliance, the SD contained much more information than what was required under rules 3B and 3C.

B2.  No bona fide dispute on substantial grounds

19.  Mr Law accepts that the burden is on Tianji to show that there is bona fide dispute on substantial grounds in respect of the Outstanding Sum and, for this purpose, must adduce sufficiently precise factual evidence to substantiate its allegations (Re Hongkong Bai Yuan International Business Co Ltd [2022] HKCFI 960, §23). The Companies Court is not precluded from examining the evidence and taking a view on whether the debt is disputed on substantial grounds, but it does not try the dispute on affidavits (Bai Yuan, §23). The petition would be dismissed or “taken off the file” unless there are unusual circumstances about the case, or the issues involved can be disposed of very simply (Re ICS Computer Distribution Ltd [1996] 1 HKLR 181, 182I-J, per Rogers J, as he then was).

20.  Mr Law submits that Tianji has adduced contemporaneous documents (including CEG’s and Tianji’s accounting vouchers and approval forms), to demonstrate that the following Items in the Appendix cannot give rise to any repayable debt (collectively “Disputed Items”):

Item	RMB
3	21,232,988,000.00
4	1,007,895,000.00
10	4,544,820,900.00
16	547,983,998.06
17	1,349,808,000.00
23	132,278,901.95
24	3,445,302,140.00
25	692,827,195.80
26	4,174,100,000.00
27	818,123,600.00
28	196,752,000.00
30	308,244,800.00
31	295,128,800.00
35	246,098,063.75
Total:	38,992,351,399.56
Outstanding Sum in Petition	(37,146,242,375.38)
Amount owed by CEG to Tianji	(1,846,109,024.18)

21.  Mr Law’s arguments run like this.

22.  First, in relation to Item 16, the injection thereunder was not a loan from CEG to Tianji as the relevant funds emanated from Hengda, rather than CEG. The transfers were in substance between Hengda and Tianji. CEG was interposed merely because (1) a direct transfer from Hendga to Tianji involved a cross-border transaction; (2) it was more convenient for Hengda to complete this cross-border transaction using CEG’s cross-border cash pool, which required the relevant funds to first be transferred from Hengda to CEG’s onshore subsidiary, which then transferred the same to CEG (using the cross-border cash pool), and to Tianji. Since CEG merely acted as a conduit to channel funds from Hengda to Tianji, there was no intention that Tianji would have to make any repayment to CEG[18].

23.  Second, in relation to Item 17, the sum thereunder has been fully repaid[19].

24.  Third, there was no intention that Tianji should repay the sums under the remaining Disputed Items because Tianji received them only ministerially as a mere conduit and/or intermediary and/or agent:

(1)  At common law, the agent recipient is regarded as a mere conduit for the money, which is treated as paid to the principal, not to the agent (Portman BS v Hamlyn Taylor Neck [1998] 4 All ER 202, 207g, per Millett LJ (as he then was)).

(2)  Therefore, a restitutionary claim generally does not lie against an intermediary who is no more than “a mere conduit-pipe” for payment of the ultimate recipient (Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79], §73, per Ribeiro PJ).

(3)  Based on the documents adduced by Tianji in relation to the remaining Disputed Items, (a) Tianji’s involvement was only to channel funds from CEG to other entities within the Group; and (b) Tianji was acting at the instructions and directions of others, often without Tianji’s involvement in the decision-making process at all.

(4)  For example, in relation to Items 24 and 25, Tianji acted at the direction of a Shenzhen subsidiary of Hengda (referred to as “深圳公司” in the vouchers); Tianji did not participate in the decision-making process at all; and once Tianji received the relevant sum from CEG on 23 March 2021, it transferred the exact same amount to the recipient designated by 深圳公司[20].

(5)  All the remaining Disputed Items share the same fund flow pattern where it is obvious that Tianji only acted as a mere conduit to channel funds from CEG to other entities.

25.  Once the Disputed Items are removed and deducted from the netting exercise, the net position is that CEG owes monies to Tianji, not the other way around.

26.  The arguments are based on the assumption that it is open to Tianji to retract the admissions contained in the ES and to re-write the accounts of Tianji by removing the Disputed Items from the Intercompany Balance.

27.  In so far as admissions in the ES are concerned:

(1)  Mr Law contends that the admissions are “only prima facie evidence of indebtedness” (Re Hi-Tech Precision Products Ltd, CACV 294/2003, 25 May 2005, §26). I disagree. In Re Hi-Tech Precision, Yuen JA merely reiterated the principle that the company had to deal with the admission relied on by the petitioner “head-on” and mere denial of liability was not enough.

(2)  The other cases cited only go to show that the court may come to a different view if there are other countervailing evidence available, and even a “serious and considered admission” may be disregarded by the court where “there is a properly arguable case based on proper evidence”[21] or that a substantial defence could be established despite an acknowledgement of debts where the evidence and argument is compelling[22]. These statements reinforce the requirement that the company needs to adduce proper or compelling evidence if it seeks to resile from the admission.

28.  In the present case, the admissions of the Intercompany Balance was made by Tianji on the basis of the amount recorded in its audited consolidated financial statements for the TJ Group for the year ended 31 December 2022 (“FY22 GFS”), and was one of the “Existing Debts” which Tianji sought to restructure and compromise under the TJ Scheme.

29.  In the ES, Tianji stated, inter alia, as follows:

(1)  The financial information in the ES “where it relates to the TJ Group only is from the [FY22 GFS]”, which are available on the transaction website for the Schemes. “Standalone financial information for [Tianji] is also included in the [FY22 GFS]”. The auditor expressed a disclaimer of opinion for the results contained in the FY22 GFS and “noted that there are material uncertainties related to the going concern basis of the TJ Group” (§3.5).

(2)  The ES “has been prepared solely to assist [Creditors] in respect of voting on the [TJ Scheme]” (§3.12).

(3)  The “Director believes that the most likely outcome in the event that the Restructuring were not to go ahead would be for [Tianji] to be placed into insolvent liquidation, and that this would result in a substantially lower return to creditors of [Tianji] than if the Restructuring were approved and successfully implemented as proposed” (§3.16(b)).

(4)  The “Existing Debts” which Tianji seeks to restructure and compromise consist of (a) the SJ Notes guaranteed by Tianji, (b) certain private loans that have been guaranteed by Tianji, (c) certain put options provided by Tianji, and (d) “an intercompany claim of CEG against Tianji (note that CEG will be entitled to receive Scheme Consideration in respect of the Intercompany Claim but will not vote)” (§4.3).

(5)  “Intercompany Claim” is defined in Schedule 1 as “the intercompany claim of CEG against [Tianji] as listed in Schedule 2 to the Scheme”. Schedule 2 is the Liquidation Analysis Report dated 17 July 2023 prepared by Deloitte (“Liquidation Analysis”). In the Liquidation Analysis:

(a)  “CEG-Tianji Intercompany Balance” is defined as “Intercompany balance owed by the Tianji to CEG which on 31 December 2022 was in an amount equal to approximately US$5.03 billion”.

(b)  The sources of information included interview and discussions with members of the management team of the Group, which included Chen, and his position was described as “Manager, Accounting”.

(c)  In the “Overview of Financial Position as at 31 December 2022” of CEG, the amount of “Intercompany receivables” from Tianji was RMB39,076 million.

(6)  Tianji obtained an order from the court to convene a meeting for the Creditors to consider and vote on the TJ Scheme (§4.3).

(7)  A letter from the board to the Creditors dated 31 July 2023 made by Chen on behalf of the board (“Board’s Letter”) (§§7, 8.2).

(8)  As at 31 December 2022, Tianji had total liabilities of RMB19.9 billion on a stand-alone basis, and its liabilities under the Existing Debts was US$12,176 million (§§8.7(a), 8.9(d)).

30.  The Board’s Letter stated, inter alia, as follows:

(1)  The ES is distributed “for the purpose of providing [Creditors] with all the information reasonably necessary to enable the [Creditors] to make an informed decision on whether to approve the Scheme” (underlined added) (§3).

(2)  “Following extensive and thorough consideration, consultation and negotiation, the board of directors of CEG and Tianji have determined that the Restructuring, is in the best interests of Tianji and those with an economic interest in Tianji, including, in particular, the [Creditors]” (§5).

(3)  “The Board believes that should the [TJ Scheme] not proceed, Tianji will be unable to comply with its obligations under the Existing Debts as well as in connection with the other outstanding indebtedness of the Group”. In these circumstances, the Board “anticipates that members of the Group would likely be required to make, or cause Tianji to make, an application to the Court … to place Tianji and/or certain members of the Group into liquidation or other appropriate Insolvency Proceedings to facilitate an orderly winding-up and realisation of their assets for the benefit of the creditors of Tianji and/or the relevant members of the Group” (underlined added) (§8).

(4)  Based on Tianji’s financial position as at 31 December 2022 and the assumptions set out in the Liquidation Analysis, the estimate recovery to CEG under the “CEG-Tianji Intercompany Balance” is 2.31% (§8A).

(5)  The current board of Tianji consists of one Director (§10).

(6)  “The Board has reviewed this [ES] and the documents referred to in it and approves the form and content of this [ES]”, and the Board “strongly recommend that the [Creditors] to vote in favour of the [TJ Scheme] at the Scheme Meeting” (§13).

31.  Having made and relied on the above statements in the knowledge that the Creditors and the court would rely on them when considering the TJ Scheme, I do not see how Tianji can now allege that it did not owe the Intercompany Balance or, indeed, any sum to CEG. As this Court observed at the hearing on 23 January 2025, if Chen now claims that the statements and admissions relating to the Intercompany Balance in the ES are false, he should make an affirmation to say so. He has not made such affirmation. The only inference which can be drawn is that Chen himself does not believe that the statements and admissions relating to the Intercompany Balance are false.

32.  As Tianji has failed to show that there is any proper basis to doubt the statements and the admissions in the ES, it cannot be heard to say that the it was not indebted to CEG for the Intercompany Balance. It follows that there is no bona fide dispute on substantial grounds in respect of the Intercompany Balance owed by Tianji to CEG.

33.  For completeness, I do not think it is open to Tianji to re-write its Intercompany Balance in the manner alleged by Chen given that:

(1)  Tianji’s accounts (including the ledger recording the intercompany balance between CEG and Tianji) formed the basis upon which the audited consolidated of the TJ Group (i.e. FY22 GFS) and the standalone financial statements of Tianji were prepared which, in turn, were used in preparing the ES; and

(2)  Chen’s suggestion that one can cherry pick the Disputed Items recorded in the CEG-Tianji intercompany ledger and adduce selected documents to show that some of the funds did not emanate from CEG or that the funds were subsequently transferred to another entity within the Group is fundamentally flawed. It ignores the fact that for every debit entry in the intercompany ledger, there must be a corresponding credit entry in another ledger recording the same amount. One cannot just remove the liability under the Disputed Items and retain the asset for the same Items.

B3.  Tianji is insolvent

34.  As Tianji has failed to comply with the SD, it is deemed insolvent by virtue of s.178(1)(a) of the CWUMPO. Further, the fact that Tianji is insolvent and unable to pay CEG if the TJ Scheme falls through have been admitted by Tianji in the ES.

35.  Mr Law’s argument that CEG is not a creditor under SJ Notes and has no possible claims against Tianji thereunder is misplaced. In the Petition, CEG relies on Tianji’s inability to comply with the guarantee obligations under the SJ Notes as one of the factual bases for contending that Tianji is insolvent. There is no averment in the Petition to the effect that CEG is a creditor of Tianji under the SJ Notes.

C.  COSTS

36.  For all the above reasons, it is clear that there is no valid ground for Tianji to oppose the Petition and Chen was well aware of it as he had approved the contents of the ES. This is a case which the court should consider ordering Chen, a third party to these proceedings, to bear the costs of the summons (which has been reserved) and the costs of and occasioned by the opposition to the Petition including all the costs incurred by Tianji in opposing the Petition. It seems to this Court that it would be unfair to Tianji and hence its creditors to bear these costs which were incurred as a result of the stance adopted by Chen.

37.  Directions were given for joinder of Chen for the purposes of costs and to file evidence to show cause as to why costs should not be ordered against him personally.