RE 3D-GOLD JEWELLERY HOLDINGS LTD

HCMP 1196/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1196 OF 2009

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And

HCMP 1205/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1205 OF 2009

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And

HCMP 1206/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1206 OF 2009

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And

HCMP 1207/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1207 OF 2009

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And

HCCW 503/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 503 OF 2008

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(Heard together)

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REASONS  FOR  JUDGMEN T

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The applications

1.  I have before me four petitions under section 166 of the Companies Ordinance, Cap. 32 seeking sanction of four schemes of arrangement (“the Schemes”) identical in form in relation to 3D-GOLD Jewellery Holdings Limited 金至尊珠寶控股有限公司 (“Holdings”), 3D-GOLD Company Limited金至尊有限公司 (“3D-GOLD Company”), 3D-GOLD International Company Limited金至尊國際有限公司 (“3D-GOLD International”) and La Milky Way International Company Limited 銀河明星國際有限公司 (“La Milky Way”).

2.  There was also listed for hearing an application by the provisional liquidators of Hang Fung Jewellery Company Limited恆豐珠寶首飾有限公司 (“Hang Fung”) for leave to sell the stock owned by Hang Fung in the manner contemplated in the Schemes, pursuant to sections 199(2)(a) and 200(3) of Cap. 32 and paragraph 7(5) of the order for appointment of the provisional liquidators of Hang Fung.

3.  I have granted the applications sought at the hearing and these are the reasons for judgment.

The background

4.  Holdings was incorporated in Bermuda in 1997 under its former name and was registered in Hong Kong under Part XI of Cap. 32 in 1998.  Its name was changed to its present name with effect from 4 September 2008.  The shares of Holdings have been listed on the Main Board of The Stock Exchange of Hong Kong Limited since March 1999.  Trading in its shares has been suspended since 30 September 2008.

5.  Holdings has carried on business as an investment holding company.  Its subsidiaries were principally engaged in the manufacturing, wholesale, trading and retail of gold products, other precious metal products and jewellery products.  Such products were retailed in China, Hong Kong and Macau.

6.  On 17 October 2008, The Hongkong and Shanghai Banking Corporation Limited presented creditors’ petitions to wind up Holdings and one of its wholly owned subsidiaries, Hang Fung. Provisional liquidators were appointed for Holdings and Hang Fung the same day.  The winding-up petitions were adjourned to 3 August 2009.

7.  From their investigations, the provisional liquidators concluded that Holdings and all of its subsidiaries (“the Group”), other than 3-D GOLD Enterprise Development (Shenzhen) Company Limited (“3-D GOLD Shenzhen”) and Gold Ocean Jewellery Company Limited (“Gold Ocean”), were insolvent and the most likely way to maximise recoveries for creditors of the Group was by means of a restructuring which would realise value from the status and operations of Holdings and certain other Group entities.  The provisional liquidators sought expressions of interest from various industry players, finance houses and other potentially interested parties.

8.  After negotiations with various potential investors, a restructuring agreement was entered into between Holdings, the provisional liquidators and the investor China Gold Silver Group Company Limited (“the Investor”) on 23 December 2008.  The restructuring agreement was varied by a supplemental deed on 16 March 2009.  The Investor is a company incorporated in the British Virgin Islands and its majority shareholder is Ocean Grand Chemicals Holdings Limited (“OGC”), now known as Hong Kong Resources Holdings Company Limited.  As part of a restructuring of the OGC group of companies in September 2008, OGC became subject to new management and is owned by new contributories and it is OGC after restructuring that is the majority shareholder of the Investor.

9.  A necessary and integral part of the proposed restructuring was the scheme of arrangement herein in respect of Holdings and identical, parallel schemes in respect of Holdings in Bermuda and three of the subsidiaries incorporated in Hong Kong, being 3D-GOLD Company, 3D-GOLD International and La Milky Way.

10.  On 19 March 2009, the provisional liquidators made an application in the High Court for leave to convene a meeting of each of the creditors of Holdings, 3D-GOLD Company, 3D-GOLD International and La Milky Way to consider and approve the Schemes.  Orders were made on 3 April 2009 granting leave to convene meetings for the Schemes.

11.  Meetings were duly convened on 4 May 2009.  The creditors of each of the companies concerned passed resolutions unanimously approving the Schemes.

12.  On 24 June 2009, a petition was issued in Bermuda in respect of Holdings seeking sanction of the Bermuda scheme of arrangement.  On 26 June 2009, an order was made in the Supreme Court of Bermuda approving the scheme.

The proposed restructuring

13.  The proposed restructuring involved the Investor acquiring five subsidiaries of Holdings together with their assets save for excluded items as defined in the Schemes.  The five subsidiaries were 3D-GOLD Company, 3D-GOLD International, La Milky Way, Gold Ocean and 3-D GOLD Shenzhen.

14.  Gold Ocean, which was incorporated in Macau, and 3-D GOLD Shenzhen, which was incorporated in the People’s Republic of China, would not be subject to any scheme of arrangement.  They would continue as going concern businesses after the proposed restructuring and each would retain its respective creditors who would have their claims satisfied in the ordinary course of the business.

15.  The proposed restructuring provided for two mechanisms for completion, being either completion with share issue or completion with share transfer.  Pursuant to the Schemes, the provisional liquidators had exercised their discretion to proceed with the completion with share transfer, having considered a number of matters, including the serious lack of working capital, the decline of the Group’s previously profitable retail business, the high overhead costs of maintaining the retail business, the continuing differences of opinion between the current management of the Group’s retail business and the Investor on strategic direction, and that completion with share transfer would complete on an earlier date compared to completion with share issue.

16.  The consideration payable by the Investor was $430 million, subject to adjustment for movement in stock-in-trade.  This sum comprised $100 million being the value attributable to the business, assets and goodwill of the restructured group to be acquired by the Investor and $330 million being the value attributable to the stock of the Group owned by Hang Fung and 3-D GOLD Shenzhen.  The payment of $330 million would be apportioned between Hang Fung and 3-D GOLD Company, the immediate parent company of 3-D GOLD Shenzhen, via the mechanics of the scheme of arrangement of 3-D GOLD Company.  The creditors of 3-D GOLD Shenzhen would not be affected by the implementation of the proposed restructuring as the stock held by this company would not change hands even though its existence had featured in the pricing calculation for the consideration payable.

17.  On implementation of the Schemes, the existing Group would be divided into the restructured group, which would be maintained by the Investor following closing, and the excluded companies, which would form part of the assets of the Schemes to be realised for the benefit of creditors of the Group.

18.  The proposed restructuring provided for the retention within the Group following restructuring of a number of items defined as excluded items.  Insofar as excluded items were owned by excluded companies, they would remain with the respective excluded companies.  As regards the excluded items of the restructured group, they would be notionally transferred from the restructured group to the Schemes to be held by a special purpose vehicle for the benefit of creditors of the Schemes.

19.  Provision was made for the fund allocation of the consideration to be paid by the Investor and the proceeds of sale of the excluded items between the scheme trust accounts of each of the companies subject to a scheme of arrangement.  Funds credited into the scheme trust accounts would be dealt with by the scheme administrators in the order of priority as provided.  The balance would be used to pay ordinary unsecured creditors pari passu in respect of non-preferential claims that have been admitted for each of the companies subject to a scheme.

20.  Of the $330 million being the value attributable to the stock of the Group owned by Hang Fung and 3-D GOLD Shenzhen, the proportion attributable to stock owned by Hang Fung would be allocated to the excluded company trust account of Hang Fung (at about $112.2 million subject to adjustment due to movements in stock-in-trade), to satisfy the creditor claims of Hang Fung in the ordinary course of its winding up.

21.  The estimated recoveries by creditors of each of the companies subject to a scheme of arrangement were set out in the explanatory statement to the Schemes, and comparison was made with estimated recoveries under a liquidation scenario and in an orderly winding down scenario (assuming there would be necessary funding to restructure the Group and realise its assets in an orderly manner).

22.  The proposed restructuring would appear to be the most attractive option available in the circumstances for realising the best return to creditors in the shortest practicable time.  If the Schemes were not approved and implemented, it is likely that the subject companies would be placed into insolvent liquidation, resulting in a much lower return to unsecured creditors.

Sanction of the Schemes

23.  The Schemes were passed unanimously at duly convened court meetings.  The statutory requirements have all been complied with.  There was only one class of creditors for each of the Schemes, being the unsecured creditors of each of the subject companies.  The creditors were given a sufficient explanation of the Schemes and the effect thereof to enable them to make a reasonable judgment how to vote at the court meetings.  I am satisfied that the Schemes are such that an intelligent and honest man, being a member of the class concerned and acting in respect of his interest, might reasonably approve.  Accordingly, I have sanctioned each of the Schemes.

Leave to sell remaining stock of Hang Fung

24.  As mentioned above, part of the consideration payable by the Investor in the proposed restructuring represented the value attributable to the stock held by Hang Fung.  To give effect to the Schemes, the provisional liquidators of Hang Fung would need leave of the court to sell its stock to the Investor. 

25.  The proportion of the consideration attributable to the stock of Hang Fung, unadjusted for movements in stock-in-trade, was $112.2 million.  The book value of the stock as at 8 December 2008 was $235.3 million.

26.  Between 8 December 2008 and 30 April 2009, Hang Fung realised stock in the sum of $79.5 million in the ordinary course of business, leaving remaining stock to be sold at the book value of $155.8 million.  That was the stock for which the provisional liquidators required leave to sell.  The Official Receiver had no comment on the application.

27.  According to the book value of the stock held by Hang Fung and 3-D GOLD Shenzhen as of 30 April 2009, for the consideration of $330 million to be paid by the Investor, $74.3 million would be attributed to the remaining stock held by Hang Fung, which had a book value of $155.8 million.  The discounting factor applied was 47.69%.  Whilst this might appear to be a substantial discount, it was submitted on behalf of the provisional liquidators that the options open to them were limited and the Investor’s offer was already the best offer they could obtain.

28.  The provisional liquidators did not think it feasible to continue to operate Hang Fung as a going concern, due to the serious lack of working capital and declining profit margins.  The only real alternative to the proposed sale to the Investor was to place Hang Fung into formal liquidation and its stock would be sold in the course of liquidation. 

29.  In the liquidation scenario, the stock would be sold on the usual forced sale basis.  The only parties that might be interested in buying a bulk quantity of the stock would be other retailers within the industry.  These retailers had already been asked to express interest in the restructuring of the Group and the Investor was the party willing to pay the most.  In other words, the Group had already obtained the best offer from the limited pool of potential purchasers.

30.  According to the valuation obtained by the provisional liquidators from independent valuers, the forced sale value of the stock was estimated at between 37% and 40.8% of the book value of the stock appraised at $200 million.  This would give a forced sale value of the stock of between $74.2 million and $81.8 million.

31.  On a conservative estimate Hang Fung was expected to receive $84 million from the realisation of its stock in the ordinary course of business between 8 December 2008 and 30 April 2009.  It would receive $74.3 million for the remaining stock to be sold to the Investor.  The total value to be received for all its stock would be in the region of $158.3 million, which was greatly in excess of the estimated forced sale value of between $74.2 million and $81.8 million.

32.  Further, Hang Fung had sold part of the stock in the ordinary course of business over seven months.  Those items of stock which were marketable had been sold.  The remaining stock would be harder to sell with time, as they would become dated in terms of current trends and would further depreciate in value.

33.  In disposing of the remaining stock to the Investor, the consideration payable would be greater than that which would be achieved if such stock were to be sold at auction or otherwise as part of the ordinary course of business and the potential costs associated with marketing the stock for sale would be avoided.

34.  It is also pertinent to note that 97.65% in value of the creditors of Holdings, the ultimate holding company of Hang Fung, were also creditors of Hang Fung and that they represented 47.6% in value of the total claims of creditors of Hang Fung.  A further 48.1% in value of the creditors of Hang Fung were other Group companies, the largest of which was Holdings.  As such, a total of 95.7% in value of Hang Fung’s creditors were Group companies and/or were also creditors of Holdings.  Those creditors of Hang Fung that were also creditors of Holdings would have been aware of the terms of the proposed restructuring and those who attended the court meeting had voted unanimously in favour of the scheme of arrangement.

35.  I am satisfied that the proposed sale of the remaining stock to the Investor in the manner contemplated would be in the best interest of Hang Fung and its creditors.  I have therefore granted leave in terms in the summons.