MORGAN STANLEY EMERGING MARKETS INC. v. LEGEND INTERNATIONAL RESORTS LTD

FAMV No. 11 of 2007

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 11 OF 2007 (Civil)

(ON APPLICATION FOR LEAVE TO APPEAL FROM

CACV No. 223 of 2006)

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D E T E R M I N A T I O N

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Mr Justice Ribeiro PJ:

The proceedings below

1.  Legend International Resorts Limited (“the Company”) was incorporated to operate a casino business in the Philippines.  It entered into a Facility Agreement dated 22 July 1997 with a syndicate of lenders for a revolving credit in the principal amount of US$33 million.  One of the lenders was Keppel Bank of Singapore Limited.  Funds were drawn down.  A year later, the Company was in default for failing to make payments then due and payable.

2.  The petitioner is a corporation formed under the laws of the State of Delaware and, among other things, is in the business of acquiring “distressed debt”.  It acquired Keppel Bank’s debt (by then a debt owned by the Overseas Chinese Banking Corporation Limited which took over Keppel) by a novation under the Facility Agreement on 25 February 2002. 

3.  On 29 October 2004, the petitioner served a demand on the Company for repayment of US$5,236,020.54 and then presented a petition on the basis of the Company’s inability to pay its debts.  It was said then to owe HK$137,157,735 and US$152,906,922 and it is common ground that the Company is hopelessly insolvent.

4.  After presenting the petition, the petitioner acquired more of the Company’s debts from other Lenders, taking the petitioner’s debt to US$60 million or so.

5.  Meanwhile, in the Philippines, where the Company’s casino assets were situated, rehabilitation proceedings were commenced and the Philippine Court made an order staying proceedings on 9 November 2004.

6.  The Company tried unsuccessfully to strike out the petition in Hong Kong[1] and the petition was restored before Kwan J for hearing on 8 June 2006.  On the same day, she made the winding-up order.

7.  On 24 November 2006, the Court of Appeal[2] dismissed an appeal brought by the former directors of the Company against the winding-up order.  Leave to appeal to this Court was refused by the Court of Appeal on 1 February 2007.

The grounds of the application

8.  Application is now made to the Appeal Committee for leave to appeal.  It is important to note that it is sought to appeal against the making of the winding-up order.  The following grounds are put forward:

(a)	That the appeal is as of right;
(b)	Alternatively, that there are questions of great general or public importance raised on the appeal, namely:
	(i)	As to the eligibility of the petitioner under the Facility Agreement to become transferee of the debts acquired, a question said to give rise to a bona fide dispute as to the validity of the debt forming the basis of the petition;
	(ii)	As to the correctness of the Judge’s decision to deal summarily with the aforesaid question while refusing to admit expert evidence and to allow cross-examination at a separate trial; and
	(iii)	As to the effect on the petition of the Philippine proceedings and the petitioner’s conduct in respect thereof.

Leave as of right

9.  The directors rely on two alternative bases for contending that leave to appeal is as of right within the meaning of s 22(1)(a) of the Court’s statute, that is, as showing that “the matter in dispute on the appeal amounts to or is of the value of $1 million or more, or ... involves, directly or indirectly, some claim or question to or respecting property or some civil right amounting to or of the value of $1 million or more”.

10.  First, they rely on the face value of the debts asserted by the petitioner, ie, the purchased debt exceeding US$5 million at the time of petition and debts of a further US$55 million or so purchased thereafter.  Secondly, it is said that the Company’s dominion and control over its assets worth well over HK$1 million have been affected by the challenged winding-up order.

11.  We do not accept either of these alternatives as a ground for grant of leave as of right.  The issue is whether a winding-up order should in law have been made on the footing that the Company was unable to pay its debts.  Such an order has the nature and the consequences described by Lord Diplock in Ayerst v C & K (Construction) Ltd.[3]  A creditor who issues a winding-up petition is not suing on his debt.  If the winding-up order is made, it does not constitute or lead to an order for repayment of the debt.  Nor does it follow that the petitioner will recover any particular sum in the winding-up.  A liquidated claim for the debt is not the subject-matter of the proceedings and its face value therefore provides no basis for an appeal as of right.

12.  Neither does the petition constitute a liquidated claim to the Company’s assets realizable on a liquidation.  If a winding-up order is made, the liquidator comes under a statutory duty to collect in the company’s assets and to apply them in discharge of its liabilities, thereafter distributing any surplus among the members of the company in accordance with their respective rights under the memorandum and articles of association.  A winding-up petition with such consequences, is not a claim to or in respect of any particular property and falls outside the ambit of s 22(1)(a).

13.  As to the second alternative, it is true that upon the making of a winding-up order all powers of dealing with the company’s assets become exercisable by the liquidators for the benefit of those persons who are entitled to share in the proceeds of realisation of the assets under the statutory scheme.  It is therefore true that the dominion over the Company’s assets previously exercised by the directors and the Company in general meeting has been displaced by the winding-up order.  However, with due respect to an apparently contrary view expressed in an Australian leave application,[4] we are unable to see how a petition which results in the transfer of such powers to the liquidators makes it a claim within the ambit of s 22(1)(a).

Points of law

14.  The true construction of the words “other financial institution”, defining eligibility as a party to a novation under the Facility Agreement, is case-specific.  Its determination does not settle the construction of any other contract even if such other agreement contains similar wording based on standard forms.  The question of construction of the Facility Agreement is therefore not one of great general or public importance.

15.  The Judge’s decision to determine that question of construction in the context of the winding-up proceedings, and thus to resolve the dispute as to the debt, accords with the established principles which confer a discretion on the court to adopt such a course: see, for instance, Brinds Ltd v Offshore Oil NL.[5]  It was a short point of law raising no questions of fact and no need for any viva voce evidence.  The expert evidence sought to be introduced regarding practice in relation to standard forms with similar wording was not relevant.  No question of great general or public importance arises regarding the Judge’s exercise of discretion.

16.  Having shown that it had a valid unpaid debt and that the Company was insolvent, the petitioner was entitled to a winding-up order ex debito justitiae as between itself and the Company under Hong Kong law.  This is unaffected by the state of any proceedings in the Philippines.  It is a matter for the liquidators, in the discharge of their statutory duties, to decide what steps, if any, to take in respect of those proceedings.  No point of great general or public importance arises in relation thereto.

17.  Leave to appeal is accordingly refused with costs.