In re UDL Argos Engineering & Heavy Industries Co. Ltd.

HCCW581/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.581 OF 1998

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Reasons Handed Down : 19 May 1999

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R E A S O N S

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1. This is the adjourned hearing of the petition presented by KYH Steel Co. Ltd. ("the Petitioner") to wind up UDL Argos Engineering & Heavy Industries Co. Ltd. ("the Company"). It is supported by two other creditors, namely, Astel-Peiniger Joint Venture ("APJV") and Materialab Ltd. The petition was scheduled to be heard on 28 April 1999 immediately after the hearing of the petition relating to its parent, UDL Holdings Ltd. ("Holdings"). It had to be adjourned because insufficient time. At the adjourned hearing, I declined to wind up the Company. The reasons appear below.

APJV's claim

2. As in the case of Holdings, the purpose of the adjourned hearing was to ascertain whether or not there is substantial in principle support by the Company's creditors for a scheme of arrangement being proposed by Holdings which not only restructures Holdings but also its principal subsidiaries including the Company. When APJV first applied to appear as a supporting creditor in March, its position was that it is able to make good the assertion that it is a creditor for $91 million and because of its opposition, that was more than sufficient to block any scheme in so far as it related to the Company. Accordingly, affidavits have been filed by both APJV and the Company on this issue.

3. At the adjourned hearing, counsel for APJV acknowledged that its claim of $91 million is substantially disputed. As such, it would not found any "debt" sufficient to support a winding up order. Nevertheless, APJV submitted that for the purposes of any scheme, the full amount of APJV's claim must be taken into account. The point does not appear to be covered by authority.

4. I am unable to accept APJV's submission that for the purposes of ascertaining the level of any in principle support for the restructuring, a creditor whose claim is disputed is nevertheless entitled to have the full amount of his claim taken into account when, in the context of a winding up petition, he does not even have locus as creditor. It defies both logic and reason. Moreover, it seems wrong in principle to treat a disputed or contingent claim as if it were neither disputed nor contingent by ascribing a value to it on that basis. It would certainly be wrong to do so at this stage when the scheme to be put to the creditors has not been fully formulated. As I held in the Holdings case, the classification of creditors in a scheme of arrangement is a matter for the promoter of the scheme. Until the scheme has been properly and finally formulated, the court cannot second-guess what or what it may not contain or how contingent and disputed claims are to be dealt with. A creditor who is not satisfied with the classification and/or valuation of his claim may oppose the scheme but that is a matter that will only arise at a later stage.

Support for the scheme

5. Exhibit LYT2 to the 7th Affirmation of Leung Yat Tung summarises the responses from the creditors to the proposed scheme. As at 31 December 1998, the total indebtedness of the Company amounted to $234.38 million. Creditors holding 3.54% of the overall indebtedness refused to give any in principle support to the restructuring compared to 83.31% who have given their in principle support. The rest, i.e. 13.15%, did not reply. These figures were attacked as being unreliable for two reasons. First, exception was taken to the inclusion in these figures amounts owed to internal creditors who all gave in principle support. In total, they hold approximately $109 million of the indebtedness. Second, it was submitted that the responses of Fuji Bank and the Sanwa Bank who together hold some $25 million in value of the indebtedness ought not to have been classified as having given in principle support.

6. As to the first point, Re Southard & Co. Ltd. [1979] 1 All ER 582 was relied for the proposition that the wishes of creditors who belong to the same group of companies as the company in liquidation do not carry weight commensurate with the size of the alleged indebtedness. The first matter to note is that it did not decide that the claims of internal creditors should be left out of account altogether or their views wholly ignored. The facts of that case were also very different : that case was not about a restructuring but concerned a dispute between two opposing camps of creditors as to whether the liquidation should be voluntary or compulsory. Plainly, Re Southard is distinguishable on the facts. Moreover, as counsel for the Company submitted, even if internal creditors were excluded, it would make little difference to the result. There would still be in principle support from creditors holding about 69% of the overall indebtedness with about 7% refusing support. Over 24% are held by creditors who have not given an indication either way. At the voting stage, it is entirely possible that sufficient of them may support the scheme to make it viable. At this stage, it would be wrong for the court to rule out that possibility.

7. As to the second reason advanced, having perused the relevant letters, I am unable to accept the submission. Neither bank rejected the proposed scheme outright. Whilst the response from the Fuji Bank might arguably be considered as giving conditional or qualified support, the Sanwa Bank plainly was of the view that the proposed scheme was "a constructive rescue plan" and as a result was agreeable to an adjournment in order to give it proper consideration.

8. In my judgment, neither of the two points taken has any substance.

Miscellaneous points

9. A number of miscellaneous points were also advanced in support of a winding up order. As will become apparent, they do not amount to valid or compelling reasons that warrant the making of a winding up order.

Absence of opposing creditors

10. Where what has to be ascertained is the existence of in principle support from a significant majority of the creditors such that there are reasonable prospects for a scheme to succeed, the absence or presence of supporting and/or opposing creditors is not determinative. What is to be given weight are the wishes of the creditors generally.

Winding up of Company not fatal to Holdings' scheme

11. It was submitted that the Holdings scheme remains viable, if less attractive, even if the Company were wound up. But that is hardly a reason to justify the winding up of the Company.

Deterioration in the financial position of the Company since the petition date

12. It was submitted that the financial position of the Company appeared to have undergone a dramatic change if its financial position as outlined in the affidavits of Li Kam Wah of 29 September and 23 October 1998 is contrasted with that presented in the 1st Affirmation of Leung Yat Tung dated 13 November 1998. However, on closer examination, the assets and liabilities as at 30 September 1998 and 12 November 1998 are not significantly different : as counsel for the Company explained, the difference between the Company's total liabilities of $224 million in September and $256.6 million in November is accounted for by the item shown as deferred income of $34 million in the November balance sheet. As regards the value of assets as at November of $193 million compared to $289.7 million for September, the difference is accounted for by the provision made in the November balance sheet for intercompany receivables of $95 million. When that is added back to $193 million, the figure would be brought up to $288 million, not significantly different from the September figure of $289.7 million. In those circumstances, the suggestion that there is a distinct possibility of fraudulent trading is not substantiated.

Need for an independent investigation into the Company's affairs

13. It was further submitted that there is a need for a full and independent investigation into the affairs of the Company because there is prima facie evidence that certain transactions since the date of the petition are capable of being reopened in the event of a liquidation under s.182 of Cap.32. Some $800,000 were paid to creditors in a repayment plan last October and there would appear to be a back-to-back arrangement with certain creditors who, in the aggregate, have been paid just over $1 million. In addition, bank loans which stood at $30 million as at March 1998 had decreased by $8.3 million by 12 November 1998.

14. Counsel for the Petitioner and the supporting creditors submitted that the court should adopt an approach similar to that adopted by the court in Re Halley's Departmental Store Pte. Ltd. [1996] 1 SLR 70. In that case, the company which was facing a winding up petition applied to the court to sanction a scheme of arrangement. Its largest creditor (JI) was owed 71% of the total unsecured debt. JI also owned 45% of the issued share capital of the company. The application was opposed by a judgment creditor who wanted to wind up the company so that there could be a full investigation into the affairs by the liquidators. In particular, they wanted to investigate how the huge debt to JI was incurred and what had happened to the assets of the company. It was submitted that the court should adopt a similar approach in the present case.

15. In my judgment, Re Halley's Departmental Store Pte. Ltd. is not of assistance in the present case : the facts there were very different, given that JI was also a substantial shareholder of the company and that no documents had been produced to substantiate JI's claim. The impression given was that the company was seeking to avoid an investigation. Here, information concerning the transactions has been volunteered by the Company. I accept the submission of counsel for that Company that in those circumstances, it cannot seriously be suggested that the Company is seeking to stave off an investigation, or that it has something to hide.

16. As regards the 'questionable' transactions, these are obviously capable of being addressed by the scheme, if appropriate. For example, it may provide that payments already received be taken into account. Moreover, assuming that the first two transactions can be set aside, this would only produce an additional $2 million for the creditors. In practical terms, it would mean a dividend of, say, 3 1/2 cents as supposed to just under 2 1/2 cents. Counsel for the Company drew attention to the fact that as regards the bank loans, the position is less straightforward since it spanned a period much of which was pre-petition. Even if the third item were taken into account, the dividend would be no more than as 7 cents in a dollar before taking into account the costs of liquidation. Under the scheme the proposed payment would range from 16 cents to 26 cents which is plainly an appreciably larger return.

Conclusion

17. As the court was satisfied on the evidence that there is sufficient in principle support for a scheme, and no good or compelling reasons to justify an immediate winding up order have been established by the Petitioner and the supporting creditors, no winding up order was made and the petition stood adjourned.

18. The costs of and occasioned on 28 April and 14 May are to follow the event and I make an order nisi to that effect.