RE JIAYUAN INTERNATIONAL GROUP LTD

HCCW 317/2022

[2023] HKCFI 1254

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 317 OF 2022

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REASONS FOR JUDGMENT

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1.  At the hearing of the winding up petition presented against Jiayuan International Group Limited (佳源國際控股有限公司)(“Company”), I made a usual winding up against the Company. These are the reasons for my judgment.

2.  The Company was incorporated in the Cayman Islands on 5 May 2015.  It has since July 2015 maintained a principal place of business in Hong Kong and registered as a non-Hong Kong company under the Companies Ordinance (Cap. 622).  The Company is an investment holding company holding shares in various subsidiaries (together “Group”) which engage in development of large scale residential and commercial complexes in the Mainland. The Company’s shares have since March 2016 been listed on the Main Board of the Stock Exchange of Hong Kong Limited. 

3.  The petition was presented by Yeung Man (“YM”) on 6 September 2022 (and amended on 5 January 2023) (“Petition”) on the bases that (1) she is the holder and beneficial owner of two “11.375% Senior Notes due 2022” under which an aggregate amount of US$14,613,622 was due and payable by the Company; and (2) the Company failed to comply with the statutory demand served upon it on 26 July 2022. 

4.  In §7 of the Petition, the facts and matters showing that the Company has close connections with Hong Kong and there is a reasonable possibility of benefit to the creditors if the Company is wound up in Hong Kong are pleaded.  These are matters which go to the first and second “core requirements” for the court to exercise its discretionary jurisdiction under s.327(3) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) in respect of an “unregistered company”[1].

5.  Shortly before the hearing, the Company belatedly filed the affirmation of Cheuk Hiu Nam on 28 February 2023[2] (“Cheuk 1^st”) raising the following grounds in opposition to the Petition:

(1)  YM is not a “Holder” of the Notes and, therefore, does not have locus to present a winding up petition against the Company.

(2)  Although the Company is unable to pay its debts, it has taken active steps to deal with and restructure its indebtedness.  In particular on 24 August 2022, the Company commenced an exchange offer in respect of US$1,174,468,500 (representing 90% of the outstanding principal under the 11.375% senior notes issued[3] (collectively “Existing Notes”)) whereby eligible holders would be issued with “6.5% senior notes” with due dates ranging from 29 January 2025 to 17 May 2026 (“New Notes”) in exchange for the Existing Notes (“Exchange Offer”).  To accept the Exchange Offer, the holders of Existing Notes are required to agree to (a) the variation of their rights under the Indentures governing the Existing Notes set forth in the exchange offer memorandum dated 24 August 2022, and (b) the terms of the Restructuring Support Agreement.  The New Notes are to be secured by security to be granted by certain subsidiaries of the Company[4]. 

(3)  If the Company is able to implement the Exchange Offer, the maturity dates of the Existing Notes will be extended and the events of default to which the Company is currently subject will be waived or rectified. 

6.  Shortly before the hearing before the Master, YM and the Company applied by the consent summons filed on 28 February 2023 to have the Petition been adjourned for 28 days.  The Master refused the proposed adjournment and adjourned the Petition to the Companies Judge in the usual way.  This notwithstanding, YM and the Company applied by another consent summons filed on 1 March 2023 seeking to vacate the hearing with directions for (1) the Company to file further affirmation in opposition to the Petition within 42 days (including evidence on New York law); (2) YM to file affirmation in reply within 42 days; and (3) the hearing of the Petition be adjourned for substantive arguments with one day reserved. 

7.  As the practitioners well know, where there are creditors who have filed notices of intention to appear in a winding up petition, such creditors are parties to the proceedings and their consent must be sought in respect of any proposed adjournment of the petition.  This is because the creditors who support the petition may not agree with the proposed adjournment, and may apply for an order under rule 33 of the CWUR to be substituted as petitioner if the petitioner does not seek a winding up order against the company.  As no consent has been sought from the creditors who have filed notices of intention to appear, this Court directed the hearing of the Petition to proceed as scheduled. 

8.  Shortly before the hearing, on 3 March 2023, the Hongkong and Shanghai Banking Corporation Limited (“HSBC”) applied by summons under rule 33 of the CWUR to be substituted as petitioner and to re-amend the Petition, relying on (1) the debt in the amount of US$191,710,000 (“Debt”) due and payable under a senior facilities agreement in respect of a syndicated loan of US$140 million advanced to Top Galaxy Limited and guaranteed by the Company, and (2) the Company’s failure to pay the Debt despite service of the statutory demand upon it on 14 September 2022.

9.  It is not in dispute that the Company is unable to pay its debts and is insolvent.  According to the financial information provided in Cheuk 1^st, as at 30 June 2022:

(1)  the Group had cash and cash equivalents of RMB6,733 million, of which RMB1,212 million was restricted for use in specific projects or pledged as security in support of the mortgage guarantees given by the Group (§40);

(2)  the Group had bank and other borrowings of RMB16,150 million of which RMB7,808 million is repayable within one year (§41.1);

(3)  the Existing Notes in the principal amount of RMB8,910 million (§§41.2, 42, 53);

(4)  the Group had trade, other payables and lease liabilities in the carrying amount of RMB6,323 million (§42); and

(5)  the Group had contingent liabilities of RMB11,908 million (in respect of mortgage guarantees) and RMB2,034 (in respect of facility granted to related parties) (§§43-44).

10.  It is clear from the above that the cash which could be deployed by the Group to repay the debts (RMB5,521 million) falls far short of the RMB31,383 million debts due and payable by the Company (excluding contingent liabilities). 

11.  At the hearing of the Petition on 6 March 2023:

(1)  HSBC sought to be substituted as petitioner on the ground that YM had not pursued the Petition expeditiously and diligently in the past 6 months;

(2)  OCM APDO Gene Investments Pte Ltd (“OCM”), a creditor of the Company to the extent of US$36,117,799.61, pointed out that Cheuk 1^st was filed in breach of rule 32 of the CWUR.  More importantly, there was no evidence to show that (a) the Company had the means to pay the debts owed to the supporting creditors, let alone all the creditors; and (b) the Company had taken any step to deal with the debts owed to the supporting creditors.  It would not be in the interests of the creditors to adjourn the Petition in the absence of any viable restructuring proposal.  OCM urged the court to make an immediate winding up order against the Company or alternatively, give leave to the Company to file Cheuk 1^st conditional upon the Company paying HK$2,051,963,543 into court, being the amount due to YM and the supporting creditors;

(3)  The Company acknowledged that Cheuk 1^st was filed in breach of rule 32 and the usual practice of the court would be to grant conditional leave requiring the company to pay into court the debts which are not in dispute, but urged the court to grant a short adjournment to allow the Company to progress with the ongoing “restructuring effort” which, if accepted by the creditors, would enable the Company to turn around its financial predicament;

(4)  It seems to this Court that it would be in the interests of all parties including the supporting creditors to grant a 2 months’ adjournment to allow the Company to formulate and implement restructuring proposals in respect of its debts, having regard to the following facts and matters:

(a)  The Company did not have the means to pay the debts owed to YM and the supporting creditors.  If leave to file Cheuk 1^st was granted conditional upon the Company’s paying the full amount owed to YM and the supporting creditors into court, it would in effect be denying the Company the opportunity to demonstrate to the court that the ongoing “restructuring effort” would have the support of the requisite majorities of creditors;

(b)  The Company had been progressing with the Exchange Offer which, if implemented, would extend the maturity dates of the Existing Notes.  This, in turn, would substantially improve the financial position of the Company and of the Group; and

(c)    At the request of this Court, the Company confirmed that (i) it would not dispute the Debt and would not contest HSBC’s application to be substituted as petitioner; and (ii) the Company would not take any “jurisdiction” issue and accepted that the 3 core requirements for the court to exercise its discretionary jurisdiction to wind up the Company are satisfied.  With this confirmation, the creditors would not be unduly prejudiced by the adjournment as the parties and the court would only need to focus on the question whether the Company is able to put forward a viable restructuring proposal which has the support from the requisite majorities of creditors. 

12.  The applicable principles and the approach of the court in dealing with winding up petition presented by a creditor on insolvency ground are well established[5]. In short:

(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 against it;

(2)  Where the company is insolvent and unable to pay its debts, it is the creditors who have a real interest in the company.  They can decide whether it is in their interest to have the company wound up.  It is not for the company to assert otherwise even if there are valid grounds in support of its assertion; and

(3)  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 creditor’s right in seeking an immediate winding up order against the company. 

13.  At the hearing on 2 May 2023, it is clear that despite the adjournment, the Company has not been able to come up with any restructuring proposal in respect of its debts, let alone one which has the support of the requisite majorities of creditors. 

14.  Worse still, the Company announced on 26 April 2023 that it intends to terminate the Exchange Offer, upon which the Company relied heavily in submitting that there was a reasonable prospect of being able to compromise the debts owed under the Existing Notes. 

15.  At the hearing, this Court orders HSBC to be substituted as petitioner and to file the re-amended petition in reliance on the grounds stated in §8 above.

16.  Both HSBC and OCM seek an immediate winding up order against the Company, relying on their entitlement to seek such an order in circumstances where:

(1)  the Company is admittedly insolvent and does not have the means to pay the debts fallen due;

(2)  the Company failed to cause its financial advisor, Deloitte, to issue any report in respect of any “viable debt repayable proposals in respect of [its] debts” by early March 2023 as stated in Cheuk 1^st;

(3)  the Company failed to put forward any concrete restructuring proposal in respect of the debts owed to the creditors, let alone one which has the support of the requisite majorities of creditors;

(4)  the Petition had already been presented for 8 months but no meaningful progress has been made by the Company to restructure its indebtedness.  In particular, during the adjournment, the Company only met with HSBC and OCM once and failed to come up with any proposal in respect of the debts owed; and

(5)  the overwhelming majority of the creditors appearing in the petition wish to have the Company be wound up immediately.

17.  Ms Rachel Lam SC[6] (rightly) does not dispute the points made by HSBC and OCM.  She urges the court to grant a further adjournment of 2 months “to allow the Company to take further steps to design and implement its restructuring proposals which would be in the best interests of all creditors”, relying on the following matters:

(1)  As of 6 March 2023, the Company received tender instructions from holders holding an aggregate principal amount of US$807.2 million of the Existing Notes, representing 61.86% of the total outstanding principal under the Existing Notes[7];

(2)  Although the Company announced termination of the Exchange Offer on 26 April 2023, that was done after carefully considered the sentiments of the holders of the Existing Notes in relation to the Exchange Offer and the (unspecified) “Scheme”, and “the Company will proceed with the Scheme, as contemplated under the Restructuring Support Agreement, in lieu of the Exchange Offer, to seek a more holistic resolution”[8];

(3)  The latest deadline for the holders to participate in the Exchange Offer is 6 May 2023.  The Company intends to terminate the Exchange Offer and proceeds with the Scheme upon expiry of the deadline[9];

(4)  Of the 10 supporting creditors, 6 of them are private placement bondholders[10], the Company has written to each of them on 4 April 2023 proposing to issue new notes in exchange for the bonds issued to them which will mature in stages between 15 months to 27 months from the date the restructuring becomes effective.  Amongst them, Chua indicated that the proposal is “agreeable” to him;

(5)  As regards the other supporting creditors, (a) Rich Resources Investments Ltd (“Rich Resources”) indicated that it would need to consider the report dated 3 April 2023 prepared by Deloitte which contains a liquidation analysis (“Deloitte Report”), and the report was exhibited to Cheuk 2^nd; (b) a meeting was held between the Company with each of HSBC, OCM and Seventy Eight Dragons Investments Limited (“Seventy Eight”) (i.e. remaining supporting creditors); and (c) the Company’s management “is actively exploring ways to restructure the debts with these creditors”[11];

(6)  The Company managed to secure a 3^rd supplemental agreement in respect of an extension of time to pay certain syndicated loan facilities of up to HK$3.9 billion, and the management “is actively communicating with other creditors” with a view to obtain a similar extension of time to repay[12];

(7)  There are 3 creditors who have signed letters to indicate their support of the Company’s pursuit of its intended debt restructuring and opposition to a winding-up.  These included CCB International Overseas Ltd, Broad Huqiu Investment Pte Ltd, Valuable Era Ltd with total alleged debt of US$108.5 million;

(8)  “At least around US$932.5 million of the Company’s outstanding debts opposes an immediate winding-up of the Company and/or supports the Company’s pursuit of debt restructuring”, which is 3.3 times of the total indebtedness claimed by the supporting creditors; and

(9)  According to Deloitte Report, the recovery rate to unsecured creditors is only 1.83%. 

18.  I do not think that the matters identified by Ms Lam are sufficient to displace the right of HSBC and the supporting creditors[13] to seek an immediate winding up order against the Company.  Nor do I think that there is any utility in granting a further adjournment sought by the Company for the following reasons:

(1)  The holders of the Existing Notes only indicated their support or acceptance of the Exchange Offer.  Their support has been overtaken by event as the Company already indicated its intention to terminate the Exchange Offer.  Although the Company refers to the so-called “Scheme”, no such “Scheme” has in fact been formulated or put forward to the holders of the Existing Notes;

(2)  As regards the private placement bondholders and creditors described in §17(4) above, the Company only provided a draft proposal in respect the debts owed, and only one bondholder indicated his support to the proposal;

(3)  The matters stated in §17(5) above confirm that the Company has not put forward any restructuring proposal in respect of the debts owed to HSBC, OCM, Rich Resources and Seventy Eight;

(4)  The 3^rd supplemental agreement (§17(6) above) relates a specific project undertaken by a subsidiary of the Company in Macau.  The parties only agreed to extend the maturity date of the facilities with conditions for drawing down including that the specified amount to be drawn down shall be “in line with the Construction Progress proved by the Quantity Surveyor acceptable by the Facility Agent for Construction Costs and/or other documentary evidence satisfactory to the Facility Agent”.  Neither the Company nor the Group is not at liberty to draw the facilities to finance the operation of the Group or to use them as general working capital as the Company suggests. 

(5)  As for the other 3 creditors described in §17(7) above, they have not explained what “intended debt restructuring” they seek to support.  There is no proper basis for the court to give weight to their view, particularly when they have not filed any notice of intention to appear in and oppose the petition;

(6)  The suggestion that creditors with aggregate debts of US$932.5 million (§17(8) above) supports the “intended debt restructuring” or oppose a winding up cannot be right. The holders of the Exchange Offer have not come forth to oppose the Petition, and their acceptance of the Exchange Offer has been overtaken by event;

(7)  Amongst the creditors who have filed notices of intention to appear in the petition, only Rich Resources to which the Company owed US$8,128,964 and RMB442,232.4, supports the Company’s application for an adjournment of 2 months; and

(8)  As to the estimated recovery rate to unsecured creditors upon liquidation of the Company, it is a matter for the creditors to decide.