WANG QIONG v. RNA HOLDINGS LTD

HCCW 388/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. HCCW 388 OF 2004

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D E C I S I O N

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1.  This was the hearing of a winding-up petition presented in respect of RNA Holdings Limited (“the Company”).  The petitioner is a creditor of the Company in the amount of some HK$5 million.  The Company does not dispute that it is indebted to the petitioner, nor does it dispute that it is, in fact, insolvent.

2.  At the beginning of the hearing, Mr Maurellet, appearing for the Company, applied for an adjournment of the hearing for a period of about 2 months in order to enable the Company to pursue a restructuring of its debts.  As a fall back position, he sought a brief adjournment (of about 10 days to two weeks) to enable the Company to formulate detailed restructuring proposals to put before its creditors for their consideration.

3.  The Company is listed on the Stock Exchange of Hong Kong Limited (“the Stock Exchange”).  It is presently in the third stage of the Stock Exchange’s delisting procedures, and unless a valid resumption proposal is submitted to the Stock Exchange by 22 August 2005, its listed status will be cancelled on 3 September 2005.

4.  It appears that the Company’s current main business is trading in gold, pursuant to consultancy and supply agreements with a company called LOCO (Hong Kong) Limited (“LOCO”).  These agreements are dated 2 December 2003.  It appears previously to have had a gold trading business involving a rather wider customer base.

5.  The history of these proceedings can be summarised briefly as follows.  The petition was presented on 27 March 2004.  It was amended on 19 April 2004, before it was served on the Company.  It first came before the court on 9 June 2004, when Master Ho adjourned it to the Companies Judge for hearing on 14th June.  It was thereafter adjourned on four occasions to enable the Company to pursue a restructuring proposal involving an investor called Clear Prospect Limited (“Clear Prospect”), which had entered into a restructuring agreement dated 11 June 2004 made between itself, the Company, two of the Company’s principal directors, Messrs Raymond Chan and Alexander Chan, and RSM Nelson Wheeler Corporate Advisory Services Limited (“Nelson Wheeler”), the reporting accountant appointed for the purposes of the proposed restructuring.

6.  The matter then came before me on 15 November 2004.  At that stage, the Company had been placed in the second stage of the delisting procedures by the listing division of the Stock Exchange and had unsuccessfully appealed to the listing committee of the Stock Exchange against that decision.  On that occasion, the Company sought a further adjournment of the petition, which was opposed by the petitioner.  When I indicated that I was prepared to grant a further adjournment, the petitioner proposed that the petition should simply be set down for hearing, a course which was agreed to by the Company.

7.  The matter was thereafter fixed for hearing today, with directions given for the filing of further evidence by the Company and the petitioner, prior to the hearing, to enable the court to be informed of the position regarding the proposed restructuring.

8.  The Company did not file evidence in accordance with the directions given.  Instead, the petitioner filed an affirmation on 7 July 2005, to inform the court of the latest position as it understood it.  In essence, the petitioner’s understanding of the position was that the restructuring proposals involving Clear Prospect had fallen through, with no hope of those proposals being revived. 

9.  There was reference made to a meeting held between the Company and some of its creditors on 19 May 2005, at which an alternative restructuring proposal, involving some form of debt for equity swap appears to have been floated.  Reference was also made to a subsequent letter to the creditors attending that meeting, dated 23 May 2005, in which the Company had indicated that it was very doubtful that the restructuring involving Clear Prospect could be implemented, and that under the new suggestions it was most likely that the Company would be delisted.

10.  The Company today accepts that the restructuring proposals involving Clear Prospect are no longer viable and that they are no longer being pursued.  However, in an affirmation dated 11 July 2005, Mr Raymond Chan has suggested on behalf of the Company that there are, in fact, reasonable prospects of a restructuring being achieved either on the basis of:

(1)	a restructuring agreement entered into with a Mainland investor on 11 July 2005; or
(2)	the indications of support that had been given by a substantial number of creditors for the notion of a debt for equity swap that had first been raised in May 2005.

11.  Mr Chan’s evidence suggests that the Company could restructure its debts in one of the following ways: first, with the Mainland investor on the basis that the Company was able to maintain its listing on the Stock Exchange; second, with the Mainland investor but without the retention of the Company’s listing; third, with neither the Mainland investor nor the continued listing of the Company - that is, on the basis of the debt for equity swap introduced as a possibility on 19 May 2005.

12.  Mr Chan suggests that any of these alternatives would be preferable to a winding-up, on the basis that the unsecured creditors would be unlikely to recover anything at all if the Company were to be wound up.  I think that it is fair to say that in Mr Chan’s affirmation the impression is given that the preferred option to be pursued would be a restructuring involving the Mainland investor in one form or another.

13.  Although Mr Chan’s affirmation was filed very late in the day, Mr Au Yeung, appearing for the petitioner, has not objected to its being admitted in evidence together with two subsequent affidavits by Mr Pau,  the company’s solicitor, containing some further material in relation to the proposed arrangements with the Mainland investor.  I therefore give leave for such evidence to be filed out of time.

14.  Mr Au Yeung contends, however, that notwithstanding the further evidence filed, no adjournment should be granted and the Company should be wound up.  Mr Maurellet, however, submits that on the evidence now before me, the Company has demonstrated that there are “reasonable prospects of the scheme obtaining the approval of the majority of the creditors”, and that the Company should therefore be granted a further adjournment or adjournments to enable it to pursue a scheme of arrangement with its creditors.

15.  At today’s hearing, Mr Maurellet, I think, placed rather less emphasis on the restructuring or restructurings involving the Mainland investor, and focussed more on the form of restructuring canvassed in the Company’s meeting with its creditors on 19 May 2005 and the letter to creditors of 23 May 2005.  This is, perhaps, not particularly surprising, since an examination of the proposals involving the new investor indicates that there must be very real doubts as to how likely it is that those proposals will be proceeded with.

16.  The basis of those proposals is set out in what is described as a “provisional agreement” made between the Company and the Mainland investor dated 11 July 2005.  That provides for a scheme of arrangement by which the unsecured indebtedness of the Company is to be discharged in exchange for new shares of the Company at the rate of one new share for every HK$4.00 of debt.  The existing shares of the Company are to be consolidated, with 200 existing shares consolidated into one new share.  The claims of preferential creditors are, at some stage, to be settled by either cash or what are somewhat vaguely described as “other feasible means”.

17.  The investor is required to advance the sum of HK$200,000 to the Company for payment of initial professional fees in respect of the new arrangements.  This sum is to be repaid by the Company out of its own funds once these are released.  It appears that the Company currently may have about HK$2,000,000, or its equivalent, deposited with the Bank of Communications in Hong Kong and the Bank Von Ernst in Switzerland.  The balance of such funds is to be held by the proposed scheme administrators, for payment of professional fees in respect of the scheme.  Thereafter, a further sum of HK$1,000,000 is to be advanced by the investor to the Company for operational expenses.  Of this amount, half is to be advanced on the release of the deposits to which I have referred, and the remaining HK$500,000 will only be advanced on the Company obtaining in principle approval for the resumption of trading of its shares on the Stock Exchange.

18.  It is envisaged that the advances are to be capitalised on completion of the scheme at a price of HK$0.01 per share, with a view to giving the investor a 20 per cent interest in the Company.  If in-principle approval for resumption of trading is not obtained, the investor is to be given the option to subscribe for new shares, so as to result in his obtaining a 70 per cent interest in the Company.  However, nothing is said as to the terms of such option.  No details are given as to the strike price of the option, and thus no indication is available as to the funds which the Company will be able to raise by the exercise of such option, assuming that it is, in fact, exercised.

19.  If approval for the re-listing or resumption in trading of the Company’s shares is obtained, the Company is to raise a further HK$49,000,000 by a placement of new shares at HK$0.05 per share, to be underwritten by the investor.  The effect of this would be to give the investor an approximately 73 per cent interest in the Company if the investor is required to take up all the shares under this placement.  The proceeds of the placement are to be used towards settlement of preferential claims and professional fees up to an aggregate of HK$10,000,000.

20.  The Company is intended to continue with its existing business, although the existing directors are to resign and be replaced by other directors to be nominated by the new investor.

21.  Finally, it is made clear that the terms of the provisional agreement are not binding and are subject to incorporation into a formal restructuring agreement that is yet to be entered into with the investor.

22.  It seems to me that there are a number of difficulties with this proposal.  The first, and one of the most important, to my mind, is that the proposal is vague and lacking in detail in a number of important respects.  For example, there is no indication as to the terms on which the investor is to subscribe for shares under the option proposed to be granted to him in the event that no re-listing of the Company’s shares is achieved.

23.  Second, it is, as its description indicated, only a provisional agreement.  It is not binding on the investor at all at this stage.  It appears that the investor will only be bound as and when a formal restructuring agreement is signed, but there is no indication as to when, if at all, this can be expected to happen.

24.  Third, although re-listing may not be an essential component in the sense that it is a necessary condition of any agreement going through, it seems clear that the bulk of the benefits that might be realised by the Company from such a restructuring will only be obtained in the event of its maintaining its listing.  Thus, of the further advance of HK$1,000,000 to be made by the investor, half will only be advanced if in-principle approval for resumption of trading is given.  And the capital issue of HK$49,000,000 which would appear to be the main source of the Company’s prospects of revitalising its business in future, will only be forthcoming in the event of a resumption of trading in the Company’s shares.

25.  It seems quite clear from the Company’s own evidence as to the likely timetable for the submission of a resumption proposal to the Stock Exchange that, given that no agreement as yet has been signed with the Mainland investor, it will be quite impossible for such a resumption proposal to be submitted to the Stock Exchange in time for the 22 August 2005 deadline.  It therefore appears that the Company will almost certainly be de-listed on 3 September 2005.

26.  Mr Maurellet suggested that this was something of a chicken-and-egg situation, in that the investor would naturally wish to have some comfort as to the prospects of a successful re-listing before committing himself to a restructuring effort.  I might observe that the extent of the commitment by the mainland investor appears to be relatively minimal compared to many other schemes which have been before the courts in recent years.  Even compared to the scheme involving Clear Prospect, the extent of the commitment is a relatively small one, in that in the Clear Prospect scheme the funder who was to fund the restructuring exercise was to put up some HK$5,500,000.  Effectively, it was acting on a without recourse basis.  That is not the case in relation to this proposal.

27.  But be that as it may, it seems to me that if that is indeed the situation, it is difficult to see how these proposals have any real prospect of getting off the ground, since there seems to be no reason for optimism as to such comfort from the Stock Exchange being obtained.  The Stock Exchange’s position appears clear: without a binding restructuring agreement in place, there would appear to be no prospect of any re-listing or resumption of trading in respect of the Company’s shares.

28.  There is also a question, to my mind, of whether the Company will be able to obtain even the first HK$500,000 to be provided by the investor as part of the HK$1,000,000 loan for operational expenses.  The obtaining of this first tranche would appear to require the obtaining of a validation order to enable the Company to use its limited remaining assets for the fees and expenses involved in putting together a scheme of arrangement.  I do not think that it can be regarded as being by any means a certainty that such an order would be granted.  If it were not granted, there would not appear to be any funding available to the Company by which it could pursue such a scheme.

29.  Finally, it does not appear to be possible to say what, if anything, will be the return to creditors under any of the possible outcomes envisaged by the provisional agreement.  Although an attempt was made to quantify this in one of the exhibits to Mr Chan’s sixth affirmation, it became clear at the hearing that this attempt was, without any disrespect to those involved in its preparation, very much an exercise in guesswork, as the attributable value of the Company’s capital was worked out only by reference to what the investor was apparently prepared to pay for it, rather than by any consideration of the likely assets which the Company would have under the various scenarios put forward.

30.  On the basis even of those figures, it would appear that the return to the creditors, bearing in mind that the creditors would have to give up $4.00 of debt for every one new share issued, would be minimal to say the least.  It seems likely that the value of any shareholding on the part of the creditors would be less than HK$0.01 in respect of every HK$1.00 of debt that they were being asked to give up.

31.  Finally, no doubt because of the late stage at which this proposal emerged, there is no evidence at all to suggest that the creditors would favour a scheme along the lines involved in these proposals.  The proposals would involve the creditors in acquiring a minority stake - and in the case of each individual creditor a relatively small minority stake - in the Company, some 70 per cent of which would be controlled by the new investor, with shares which were worth, as I have indicated, a fraction of a cent per share.

32.  Given these difficulties, I do not think that it can clearly be said that the provisional agreement provides any basis for suggesting that it discloses the makings of a viable scheme which would have the support of the necessary majority of the Company’s creditors so as to justify the court in considering granting an adjournment to enable it to be pursued.

33.  That said, however, Mr Maurellet’s main submission today was that, even on the basis of what was described as “Plan 2”, the Company was able to demonstrate that there were the makings of a viable scheme, with the necessary degree of support from its creditors.  This scheme  was described as a “plain vanilla” debt for equity swap, and the nature of the proposals was said to be contained in the Company’s letter of 23 May 2005, which was sent to most of its major creditors.

34.  With respect, the information provided to the creditors in this letter is lacking in detail.  No indication whatsoever is given as to the terms of any debt for equity swap that might be proposed.  All that is said is that a debt for equity swap is being put forward as a possible alternative to the Clear Prospect restructuring scheme which had fallen through.  Apart from this, little is said as to the Company’s business plan, other than that it is intended to carry on its business of gold trading under the LOCO  agreements.

35.  But even as to this, no real indication is given as to the financial implications of carrying on such business.  Recent evidence supplied by the Company in Mr Chan’s sixth affirmation indicates that by contrast with the position as it was stated to be in about March this year, when it was said by Nelson Wheeler that this business had been producing profits of some HK$1,500,000 per month, figures recently supplied (apparently by LOCO) indicate that the largest amount of profit made in any of the six months to June 2005 was HK$113,000; that the profits were not consistent over this period, there being at least two months when losses were made; and that the overall profits or fees paid to the Company - or perhaps its subsidiary - amounted to slightly in excess of HK$250,000 in respect of the whole six-month period.  In these circumstances, it seems to me difficult to see how the creditors could be said to have given any real informed or considered consent to any scheme of arrangement involving a debt for equity swap.

36.  It seems to me, at this point, to be worth referring briefly to one or two authorities which have been cited to me today.  It seems to me the principles on which the court acts in considering whether or not to grant an adjournment of a winding-up petition, with a view to permitting the company concerned to pursue a debt-restructuring exercise, are as set out in a number of cases, the effect of which was summarised by Kwan J in Re APP (Hong Kong) Limited [2005] 1 HKLRD 272, at paragraph 26:

“What the company is required to demonstrate on the evidence for present purpose has been expressed in various terms: “reasonable prospects of the scheme obtaining the approval of the majority” (Re UDL Holdings Ltd [1999] 2 HKLRD 817); “the makings of a viable scheme with evidence of adequate support (both in number and value)” (Re Golden Dragon Land Development Ltd (unrep., HCCW No 236 of 1999, [1999] HKLRD (Yrbk) 110)); “the framework of a viable restructuring … and it had the ‘in principle’ support of a significant majority of the creditors who wished to see the restructuring proposal proceed further” (Re Hong Kong Brewing & Restaurants Ltd (unrep., HCCW No 664 of 1999, [1999] HKEC 637)).  I do not think the onus on the company to establish the viability of a proposed scheme at the present stage of the proceedings is unduly high.”

37.  It seems to me that where the court is considering a petition by a creditor who has an undisputed debt, and where there is no suggestion that the Company is not insolvent, it will be essential for good reason to be shown for adjourning the petition before even a relatively short adjournment should be granted.  On the authorities, there must be evidence of a viable scheme, or at least the makings of one, coupled with evidence of support for such a scheme by a sufficient number of creditors so as to make it appear likely that the scheme, if put to the creditors, would be approved by the necessary majorities.

38.  However, I think it is also important to note that in all of the authorities under consideration a detailed scheme - to a greater or lesser extent of detail - had already been formulated at the time when the court was considering whether or not to grant the further adjournment.  That was certainly true in the APP case, when the court was considering a detailed scheme which had been put forward in draft on what was the fourth, or perhaps the fifth, hearing of the petition.  The same was true in Re UDL Holdings Limited (supra), where the company had, at the time of the argument as to whether or not a further adjournment should be granted, already issued an originating summons seeking leave to convene the necessary scheme meetings.

39.  Even in cases such as Re Hong Kong Brewing & Restaurants Ltd and Re Golden Dragon Land Development Limited, in which further adjournments were refused, there appeared to have been put before the court at least some details of a proposed scheme, although the court considered and ultimately rejected such schemes as not being viable.

40.  By contrast, in this case, there is no indication at all as to the terms of any proposed scheme to be put forward.  Although the scheme is described as being a debt for equity swap, it seems to me that in order for the company to be able to say that there is before the court evidence of a viable scheme or the makings of one, it is necessary for the scheme at least to be formulated in sufficient detail for the court to see what the terms of the scheme are and what the possible benefits to the creditors might be. 

41.  It will generally be the case that creditors, when faced with a choice of a winding-up in which they are told that they will receive nothing, and the possibility of some other unspecified arrangement being made which might conceivably produce something, however small, will naturally be likely to indicate that they are inclined to the possibility of the alternative, rather than winding up.  However, it seems to me that for the court to consider the position, it is necessary for some details of a proposed scheme to be put forward so that the court is in a position to consider whether or not that scheme is viable.

42.  Given that in this case there is no indication given as to the terms of any proposed scheme by way of debt for equity swap, I do not think that it can properly be said that there is at present in existence a viable scheme, or even the makings of one, which the court can or should take into consideration in deciding how to exercise its discretion as to whether or not to grant an adjournment of the petition.

43.  In my view, the contrast between the position with which I am faced in this case and that of the courts in the authorities cited to me is stark.

44.  Mr Maurellet’s fall-back position was that, at the very least, a very short adjournment should be granted to enable the Company to put forward more detailed proposals to the creditors for their consideration and to obtain their responses to such proposals.  He suggested that the response of the creditors that had been obtained so far demonstrated that a majority of them would prefer such an approach to be adopted.

45.  In my view, the most that can be said of the responses we that have been obtained from the Company’s creditors is that they appear to show support for the idea of some form of restructuring.  While this may be sufficient to justify the adjournment of a petition in the early stages of winding-up proceedings, this will not normally be the position at a later stage of the proceedings.  It is clear from the authorities that if no concrete proposals that enjoy the support of a significant majority of creditors are forthcoming within a relatively short period, it will not be appropriate to grant repeated adjournments.

46.  In this case, the petition has been in existence for well over one year.  A restructuring proposal, which had, I accept, a sufficient degree of detail, has been put forward, which the court considered to be sufficiently viable to justify a number of adjournments of the petition.  That proposal has ultimately come to nothing, and it seems to me on the evidence that it must have been apparent by, at the very latest, March 2005 that this was the case.  It was only in May 2005 that the Company appears to have put forward the idea, in general terms, of a debt for equity swap.  Indications of support for such a proposal were received soon afterwards, but notwithstanding this, there remain no sufficiently detailed proposals available for the court’s consideration today.

47.  It seems to me that where an earlier detailed proposal has fallen through, while the court may be sympathetic to a short adjournment to enable the company concerned to put forward an alternative proposal, it is for the company to act promptly to do so.

48.  In my view, the Company in this case has had more than adequate opportunity to put forward proper proposals for the restructuring of its indebtedness in a sufficiently detailed form to be considered by the court but it has failed to do so.

49.  In these circumstances, it does not seem to me that there is any proper basis on which I should grant any further adjournment on these proceedings and I therefore refuse the application for an adjournment.

50.  Mr Maurellet accepted at the outset that if no adjournment were granted, the Company would not be in a position to resist the making of a winding-up order against it and I therefore make the usual winding-up order against the Company with costs.