RE NEXT DIGITAL LTD

HCCW 359/2021

[2021] HKCFI 3087

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP)  PROCEEDINGS NO 359 OF 2021

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D E C I S I O N

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1.  There is before the Court a summons dated 7 October 2021 issued by the Financial Secretary for appointment of Ms Koo Chi Sum and Mr Clifford Tsui, both of Ernst & Young Transactions Limited, as provisional liquidators (“PLs”)  of Next Digital Limited (“Company”)  pursuant to s.193 of the Companies (Winding Up and Miscellaneous Provisions)  Ordinance (Cap. 32)  (“CWUMPO”).

2.  On 29 September 2021, the Financial Secretary presented a petition to seek a winding up order against the Company pursuant to s.879(1)  of the Companies Ordinance (Cap. 622)  (“CO”)  and s.177(1)(d), (f)  of the CWUMPO on the ground that it is just and equitable and in the public interest for the Company to be wound up. 

3.  The application for appointment of PLs is made on the bases that there is a good prima facie case for winding up the Company and that there is an urgent need for appointment of PLs to preserve its assets and manage its affairs pending determination of the petition. 

Background

4.  The Company was incorporated in Hong Kong on 12 June 1981 and its shares are listed on the Main Board of the Stock Exchange of Hong Kong Limited (“SEHK”)  (stock code: 0282).  Trading of the Company’s shares has since 17 June 2021 been suspended.

5.  The Company is the ultimate holding company of a group of companies which engage in the business of printing and reprographic services, magazine publishing and advertising and the provision of internet content and digital businesses in Hong Kong and Taiwan (“Group”). The Company holds 95 wholly owned subsidiaries incorporated in Hong Kong, the BVI, Canada, California, Taiwan, Macau. 

6.  Mr Lai Chee Ying (“Lai”)  (together with his wife)  controls 71.26% of the issued shares in the Company.  Lai is currently serving custodial sentence in Hong Kong, and there are pending charges against him under the Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region (“NSL”).  Pursuant to the notice issued by the Secretary for Security (“S for S”) under s.3 of Schedule 3 to the Implementation Rules for Article 43 of the NSL on 14 May 2021 (“Notice”), Lai has been prohibited from dealing with his assets including his shares in the Company.  Lai’s recent attempt to obtain a declaration to the effect that he is entitled to exercise the voting right attached to his shares in the Company for the purpose of winding up the Company was dismissed by Anthony Chan J on 17 September 2021 (Lai Chee-Ying v Secretary for Security[2021] HKCFI 2804). 

7.  As at the date of the petition, the Group has ceased most of its business operations in that:

(1)  on 24 June 2021, the Group ceased its media business in Hong Kong including the publication of Apple Daily (蘋果日報)  and Next Magazine (壹週刊)  (both in print and digital forms), which had hitherto been the cornerstone business of the Group;

(2)  the only remaining businesses of the Group are (a)  the book printing services business carried on by Paramount Printing Company Limited in Hong Kong (“HK Business”), and (b)  the publication of the digital version of Taiwan Apple Daily (台灣蘋果日報)  (“Taiwan Business”)  (the print form having ceased operation with effect from 18 May 2021)  run by the Taiwan branch of Apple Daily Publication Development Limited (“ADPDL”);

(3)  although the HK Business hired around 80 staff as at 30 August 2021, many of them resigned in early September 2021 and their last working day was 7 October 2021.  As from 8 October 2021, there was no employee working for the Company or the Group in Hong Kong; and

(4)  there has been ongoing negotiations to dispose of the Taiwan Business, as disclosed in the Company’s announcements on 29 June 2021, 22 July 2021 and 26 August 2021. 

8.  Since 5 September 2021, there has been a management vacuum in the Company in that:

(1)  Mr Cheung Kim Hung (“Cheung”), an executive director and chief executive officer of the Company, resigned with effect from 30 June 2021.  Mr Royston Chow Tat Kuen (“Chow”), an executive director, chief operating officer and company secretary of the Company, and Mr Dennis Hung (“Hung”), the chief financial officer of the Group, both resigned with effect from 2 July 2021;

(2)  the remaining 4 directors namely, Mr Ip Yut Kin (non-executive director and chairman of the Company), Mr Lam Chung Yan Elic, Mr Mark Lambert Clifford and Mr Louis Garden Crovitz (“Crovitz”), all independent non-executive directors, resigned with effect from 5 September 2021;

(3)  following the resignation of Chow, the Company does not have any company secretary;

(4)  the Company’s former solicitors gave notice to the Inspector (as defined in §12 below)  and the Securities and Futures Commission (“SFC”)  on 6 September 2021 that they no longer represent the Company;

(5)  the Company’s auditors suspended the audit process on 24 June 2021;

(6)  until 5 September 2021[1], at least 59 subsidiaries which hold substantial assets were controlled by 2 persons[2] residing in the US (“2 US Persons”)  as their only directors.  The 2 US Persons were only appointed as their directors between 6 and 12 August 2021, and there is a lack of information about their background or experience, other than that they were introduced by Crovitz; and

(7)  the Company’s General Accounting Manager responsible for handling of accounts payable, Mr Lee Chung Man (“Lee”), remains an authorised signatory of many of the Group’s bank accounts. 

9.  The Group still holds substantial assets including (1)  cash at banks in Hong Kong in excess of HK$70 million, (2)  property, plant and equipment and (3)  landed properties in Taiwan.  In addition, the Group has 2 leased premises in Tseung Kwan O, one of which (located at No. 8 Chun Ying Street)  is currently subject to forfeiture proceedings instituted by the Hong Kong Science and Technology Parks Corporation (“HKSTP”). 

10.  There has been substantial deterioration in the liquidity of the Group in that between March and September 2021, the cash/bank balances was reduced by HK$50 million, in part due to an early voluntary repayment of HK$150 million made by the Company to its majority shareholder, Lai, on 1 April 2021.  The loan was advanced by Lai to the Company (“Loan”)  pursuant to a loan agreement dated 8 November 2021 (as subsequently amended by 3 supplemental agreements)  (“Loan Agreement”)  on, inter alia, the following terms:

(1)  the Company did not have to provide any security or pay any interest on the Loan;

(2)  the Loan (up to HK$756 million)  was advanced for the purpose of financing the general working capital requirements of the Company and its subsidiaries;

(3)  any advance shall be repaid 3 years after the advance is made.  The maturity dates of the amounts advanced are as follows:

Date of advance	Amount (HK$)	Maturity date
25/6/2019	100 million	24/6/2022
26/9/2019	100 million	25/9/2022
10/1/2020	100 million	9/1/2023
30/3/2020	100 million	29/3/2023
2/7/2020	100 million	1/7/2023
8/10/2020	150 million	7/10/2023

(4)  Lai has to give 12 months’ notice of any demand for repayment before its maturity date.    

11.  Taking into account the following facts and matters, it appears that the Group is now balance sheet insolvent with net deficiency in excess of HK$247.2 million:  

(1)  an impairment of HK$658,039,000 on the value ascribed to the intangible assets (comprising masthead and publishing rights)  following the cessation of most of its publishing business. A similar impairment was made when the Group suspended publication of Sudden Weekly back in August 2015 when the intangible asset in the carrying amount of HK$96,928,000 was fully written off;

(2)  an impairment of HK$104.17 million on the book value of the leased property and the equipment located thereat if HKSTP succeeds in forfeiting the lease and the equipment located therein;

(3)  the claims for outstanding wages and staff costs in Hong Kong in the amount of HK$120.4 million;

(4)  the redundancy costs of HK$47.7 million following the cessation of the print form of Taiwan Apple Daily; and

(5)  the consolidated net loss of the Group in April and May 2021 in the amount of $38.24 million.

12.  According to the interim report dated 14 September 2021 (“Interim Report”)  issued by Mr Clement Chan, the inspector appointed by the Financial Secretary pursuant to ss.841(2)-(3)  of the CO to investigate the affairs of the Company (“Inspector”), there were the following questionable transactions undertaken or approved by the former management of the Company:

(1)  early repayments of the Loan in the amounts of HK$16 million and HK$150 million in December 2020 and 1 April 2021 respectively, when there was no proper basis or commercial justification to do so, having regards to the terms of the Loan Agreement;

(2)  allowed Lai to use the Group’s resources for his private companies.  These included permitting (a)  Lai’s company, Dico Consultants Limited, to operate at the premises leased from HKSTP; and (b)  Hung to act as the authorised signatory of some of the bank accounts of Lai’s private companies; and

(3)  poor corporate governance in that the Board failed to (a)  disclose material or accurate information about the Company including the early repayments of the Loan; (b)  publish preliminary financial statements of the Company for the year ended 31 March 2021 by 30 June 2021; (c)  seek the auditors’ endorsement on the accuracy of the 18-month cash flow forecast before announcing the same on 26 May 2021; (d)  put in place a system to monitor and identify related party transactions; and (e)  arrange insurance cover in respect of possible legal actions against the Company and its officers.   

13.  Having taken into account the matters stated in §§7-12 above and the obstacles encountered during his investigation and a lack of authorised or experienced personnel to handle the disposal of the Taiwan Business, the Inspector considers that it is necessary for the Financial Secretary to take steps to preserve the assets, books and records of the Company by presenting a petition under s.879(1)  of the CO and seeking appointment of the PLs over the Company so as to protect the interests of all the stakeholders.

14.  Further, there are the following recent developments also gave rise to concerns over the state of the Company:

(1)  Although the Board stated in the announcement dated 5 September 2021 that “the best interests of the shareholders, creditors, employees and other stakeholders will be served by an orderly liquidation” and that “the liquidators will be able to conclude value-creating transactions that would generate funds to benefit creditors”, no step has been taken to put the Company into liquidation;

(2)  The Company and its former directors have been the subject of ongoing investigations by the SFC, the SEHK, and the Financial Reporting Council, but no one has the authority to respond to their inquiries or produce documents on behalf of the Company; and

(3)  Prior Success Investments Limited, a subsidiary of the Company, was able to transfer HK$30 million to the Company on 31 August 2021.  The authorised signatories of the bank accounts were Cheung, Hung, Chow and Lee, and a transfer must be approved by at least 2 of these signatories.  However, by 2 July 2021, Cheung, Hung and Chow had already resigned from their office, and Prior Success did not have any director.  It is unclear who authorised the transfer.  Similar concern arises in relation to the balances kept at the other bank accounts of the Group.

15.  Against the above background, the Financial Secretary takes the view that it is expedient in the public interest that the Company should be wound up. 

Applicable principles

16.  The principles governing application for appointment of PLs are well established.  It is incumbent upon the applicant to satisfy the Court that (1) there is a good prima facie case for a winding up order at the hearing of the petition; and (2)  in the circumstances of the case, it is right that a provisional liquidator should be appointed (Re Union Accident Insurance Co Ltd [1972] 1 All ER 1105, at 1110a-c; McPherson & Keay, The Law of Company Liquidation, 4^th ed., §6-011).

17.  The basis for appointing provisional liquidator has been explained by Rogers VP in Re Legend International Resorts Ltd [2006] 2 HKLRD 192, §§25-27, 35-37, 49-50 in this way:

“27. … The purpose of the appointment was to protect the assets of the Company and hence some danger to the assets, not limited to malfeasance, had to be shown.”

“35. … the appointment of a provisional liquidator must be for the purposes of the winding-up. Provided that those purposes exist there is no objection to extra powers being given to the provisional liquidator(s), for example those that would enable the presentation of an application under s.166 …”

“49. Even if it were established that the assets of the Company were in jeopardy it would be necessary for the court to consider whether the appointment of provisional liquidators would serve any useful purpose …” (underlined added)

18.  Suspicious circumstances coupled with a need to preserve the status quo to ensure the least possible harm to all concerned pending the hearing of the petition, or a need for an independent investigation of the affairs of the company without delay are sufficient to justify appointment of PLs (Re Luen Cheong Tai International Holdings Ltd[2002] 3 HKLRD 610, §§11-12, per Kwan J (as she then was); Re China Metal Recycling (Holdings)  Ltd, HCCW 210/2013, 12 November 2014, §29, per Harris J).

19.  Appointment of PLs may also be justified where there is paralysis of the company, or where a company has no directors to manage its affairs (McPherson & Keay, §§6-012 to 6-013; Tickle v. Crest Insurance Co of Australia Ltd (1984)  2 ACLC 493[3].

20.  Ultimately, whether PLs should be appointed has to be decided based on commercial realities, the degree of urgency and need established by the petitioner, and the balance of convenience according to the circumstances (Re Boldwin Construction Co Ltd [2003] 2 HKLRD 237, §29(4), per Kwan J). 

21.  I consider these in turn.

Good prima facie case for winding up

22.  The petition is presented by the Financial Secretary under section 879 of the CO, which provides as follows:  

“879. Proceedings on specified materials

(1)  If it appears to the Financial Secretary from any specified materials that it is expedient in the public interest that a body corporate which may be wound up under the Companies (Winding Up and Miscellaneous Provisions)  Ordinance (Cap. 32)  should be wound up, the Financial Secretary may present a petition for it to be wound up.

(2)  On a petition by the Financial Secretary under subsection (1), the Court may make a winding up order if the Court thinks it just and equitable for the body corporate to be wound up.” (underlined added)

23.  Section 879 of the CO is similarly worded to s.212 of the Securities and Futures Ordinance (Cap. 571)  (“SFO”), which gives the SFC power to present a winding up petition against a company in the following circumstances:

“212. Winding-up orders and bankruptcy orders

(1)  If—

(a)  a corporation, other than an authorized financial institution, is of a class of corporations which the Court of First Instance has jurisdiction to wind up under the Companies (Winding Up and Miscellaneous Provisions)  Ordinance (Cap. 32); and

(b)  it appears to the Commission that it is desirable in the public interest that the corporation should be wound up,

the Commission may present a petition for the corporation to be wound up under that Ordinance on the ground that it is just and equitable that the corporation should be so wound up, and that Ordinance shall apply to such petition as it applies in relation to a petition presented under that Ordinance.” (underlined added)

24.  Under both regimes, the petition is presented on the ground that it is in the public interest that the company should be wound up, and the Court needs to be satisfied that it is just and equitable to do so. It seems to me that, as submitted by Mr Benjamin Yu SC (leading Ms Sara Tong), counsel for the Financial Secretary, the same principles applicable to “public interest” petition presented under s.212 of the SFO should apply by analogy to a s.879 petition.  These principles are comprehensively set out by Harris J in Re China Metal Recycling (Holdings)  Ltd (No. 3)[2015] 2 HKLRD 415 at §§29-40, and may be modified for the purpose of a s.879 petition as follows:

(1)  The proper approach comprises 2 stages.  At the 1^st stage, the Financial Secretary has to form an opinion based on “specified materials” that it is expedient in the public interest that a company should be wound up.  At the 2^nd stage, the Court will have regard to all the circumstances as disclosed by the totality of the evidence before it, and carry out a balancing exercise as to the reasons why the company should or should not be wound up.  The inquiry is not confined to the information available to or considered by the Financial Secretary

(2)  As mandated by s.879, the Court has to be satisfied that it is expedient in the public interest that the company should be wound up and that it is just and equitable to make such an order.  As stated by Millett LJ (as he then was)  in Re Senator Hanseatische Verwaltungsgesellschaft mbH and Anor [1997] 1 WLR 515, at 526B-D, the expression “in the public interest” is of the widest import, and that the Secretary of State for Trade and Industry (the petitioner in that case)  ought to consider the interests of all parties, including present members and creditors of the company, and also the interests of the public who may deal with the company after the petition.

(3)  The Court must be able to identify the aspects of public interest which would be promoted by making a winding-up order in the particular case, even if the petition is unopposed.

(4)  In the context of s.879 petition, public interest would include advancement and achievement of the policy objectives of the Financial Secretary namely, to provide an appropriate economic and legal environment for the maintenance of the status of Hong Kong as an international financial centre[4]; and  to maintain an appropriate economic and legal environment for an open, fair and efficient market, to provide a level playing field, and to strengthen corporate governance standards with a view to fostering international confidence in Hong Kong financial markets.[5]

(5)  The more serious the legal contravention committed by a company, the more stringent the remedy necessary to address it. This is so even if the offending activities have ceased.  The court should express its disapproval of such misconduct by making a winding up order, with the further benefit that others will see that the Court will not hesitate to wind up companies whose standards of dealing with the investing public are unacceptable. 

25.  I am satisfied that there is a good prima facie case that it is expedient in the public interest to wind up the Company and it is just and equitable for the Court to exercise its jurisdiction to do so for the following reasons. 

26.  First, the Company has since 5 September 2021 been in a management vacuum in that it does not have any director or a Board to oversee or manage the affairs of the Company and the Group.  There is no evidence to suggest that such state of affairs will be changed.  It would be expedient in the public interest and in the interest of all shareholders and creditors to put the Company under a Court-supervised liquidation, to ensure that the assets of the Group can be collected, preserved and eventually distributed amongst its stakeholders.  This seems to be uncontroversial, as the former directors in their public statement announced on 5 September 2021 said that “the best interests of the shareholders, creditors, employees and other stakeholders will be served by an orderly liquidation”, while Lai said that he intends to exercise the voting right attached to his shares to wind up the Company. 

27.  Second, it would be in the public interest and just and equitable for the Company to be wound up so that the liquidators with proper authority can act on behalf of the Company to deal with and respond to the regulators’ ongoing investigations into the Company’s affairs.  These include the questionable transactions identified in the Interim Report and the ongoing investigations undertaken by the SFC and the Financial Reporting Council.  In particular, the failure of the Board to disclose the repayment of HK$150 million to Lai on 1 April 2021 is particularly egregious, given that:

(1)  in the announcement dated 26 May 2021, the Board stated that the bank/cash balances of the Group as at 31 March 2021 (i.e. one day before the repayment)  was HK$521.4 million and, on that basis, the management considered that the existing working capital of the Group would remain sufficient for at least 18 months from 1 April 2021 without additional funding from Lai;

(2)  following this announcement, when trading of the Company’s shares resumed on 27 May 2021, there was a very substantial increase in the volume of trading in the Company’s shares in that it increased from 1,020,000 shares on 14 May 2021 (last trading date before suspension of trading)  to 539,685,200 shares on 27 May 2021, while the price rose to HK$0.280/share, which represented an increase of 50.5% from the last trading price of HK$0.186/share; and

(3)  it is a matter of grave concern that the public investors had been given incomplete, if not misleading, information about the Company’s liquidity position and traded on the basis of such information. 

28.  It is well established that it is in the public interest for liquidators to investigate the causes of the company’s failure and the conduct of those concerned in its dealings and affairs, and to enable the authorities to take appropriate action against those guilty of misconduct in relation to the company (Re Kong Wah Holdings Limited (2006)  9 HKCFAR 766, at §23, per Lord Millett NPJ).  Such investigations is vital to maintaining public confidence in the Financial Secretary’s commitment to maintain an open, fair and efficient market, and to strengthen corporate governance standards with a view to fostering international confidence in Hong Kong financial market.   

29.  Third, the Group appears to be balance sheet insolvent and, as such, is unlikely to be able to discharge all its liabilities. It would be in the public interest to put the Company into liquidation to ensure that it cannot continue to operate as a going concern or incur further liabilities which it would not be able to meet. 

30.  Fourth, the Group does not have sufficient business to sustain its operations or the listing status.  The remaining HK Business may not be able to continue in view of the departure of the staff, while the Taiwan Business is in the process of being sold.  It would be in the public interest for liquidators to take charge of both business to ensure that they can be sold at the best price obtainable in the circumstances and that the proceeds of sale can be used for the purpose of the winding up of the Company.

Appropriate to appoint PLs

31.  I consider that there is an urgent need to appoint PLs over the Company, which is the only way to protect and preserve the books, records and assets of the Company and of the Group pending determination of the petition. 

32.  First, the considerations discussed in §§26 - 30 above are in my view sufficient justifications for the Court to appoint PLs over the Company.  In particular, the management vacuum means that there is a complete lack of mechanism or person with proper authority of the Company to oversee or control the use of the assets of the Company and of the Group, thereby putting such assets at risk of dissipation or misappropriation.  These include the substantial cash/bank balances at the bank accounts of the Company and of the subsidiaries, which remain under the control of person(s)  who are not directors of the Company and the other assets held by the Company or its subsidiaries in and outside Hong Kong. 

33.  Second, there is an urgent need for the Company and its subsidiary (Apple Daily Printing Limited, the holder of lease)  to handle the forfeiture proceedings brought by HKSTP as well other litigations which have been brought against the Company and the subsidiaries, whether in Hong Kong or elsewhere.  No notice of intention to defend the claim has been filed on behalf of the Company.  Nor has there been any negotiations with HKSTP in connection with an orderly removal of the equipment located at, or to handover the premises to, HKSTP if it is considered that there is no valid defence to the claim.

34.  Third, it is necessary to appoint the PLs to take over and carry on the negotiations for the sale of the Taiwan Business and possibly, the HK Business. 

(1)  It is not clear whether the 2 US Persons qua directors of ADPDL, the entity which operates the Taiwan Business, had any involvement in the negotiations or whether they have the necessary knowledge or experience in dealing with such negotiations.

(2)  The Group has bank balances and landed properties in Taiwan.  There is legal opinion from a Taiwanese legal practitioner to the effect that a Hong Kong Court order appointing PLs would be recognised by a Taiwan Court, enforceable against the Group’s Taiwan assets, and entitle the PLs to manage the business of the Company’s Taiwan subsidiaries by appointing directors.[6]  This is so provided that the order is final, binding, and not caught any of the statutory exceptions (none of which seems to apply on the present facts).  Thus, the appointment of PLs will be effective for the preservation and management of the Group’s Taiwan assets and affairs.   

35.  Fourth, there is a need to identify and preserve the Company’s books and records.  Although on 28 September 2021, the Inspector obtained and executed the Magistrates’ Warrants at 5 premises, it is unclear whether there are other books and records of the Company’s documents kept at other premises.

36.  Fifth, there is also an urgent need for the Company to handle the corporate affairs of the Group including compliance with reporting obligations and other requirements imposed by the regulators.  The Company already delayed in publishing its annual results for the year ended 31 March 2021, and the auditors had suspended the audit work since 24 June 2021.

37.  Sixth, it is necessary to appoint directors to manage the affairs of the subsidiaries and to protect their assets which hold substantial assets both in and outside Hong Kong. 

Undertaking as to damages

38.  It is well established that the Court has a discretion to dispense with a cross-undertaking in circumstances where a regulator is pursuing a claim in the public interest.  In Re Highfield Commodities Ltd[1985] 1 WLR 149, a public interest presented under s.35 of the Companies Act 1967 (the equivalent of s.879 of CO), Sir Robert Megarry VC held that the Secretary of State was to be exempted from being required to “offer an undertaking in damages as the price of obtaining the appointment of a provisional liquidator, save where the company can establish special circumstances which justify such a requirement being made” (at 155H-156A). 

39.  In Securities and Futures Commission v A, HCMP 1407/2007, 29 November 2007, Kwan J (as she then was)  considered the relevant authorities and held that “the SFC [was] exercising the function of law enforcer in the public interest” and “[was] charted with regulatory functions under [the SFO] and [had] a duty to enforce the law under its statutory powers” (at §§56-57).  The learned Judge did not require the SFC to provide an undertaking as to damages for granting the interim injunction made pursuant to s.213 of the SFO (at §59). 

40.  The present application is taken out by the Financial Secretary in pursuance of his public duties in the public interest.  Following the approach in Highfield and SFC v A, I consider that this is an appropriate case to dispense with a cross-undertaking as to damages for the appointment of PLs over the Company. 

Conclusion

41.  The Official Receiver has made submissions on the approach of the Court in dealing with an application for appointment of PLs, and confirmed that the proposed appointees are fit and proper persons to be appointed as PLs of the Company.  The Official Receiver made a number of comments on the draft order appointing PLs, which have been incorporated by the Financial Secretary in the revised draft order.   

42.  I make an order in terms of the revised draft submitted with further amendments made to the wordings and the addition of a section setting out the powers of the PLs in relation to the subsidiaries of the Company, which is vital as most of the assets of the Group are held in the names of the subsidiaries. 

43.  The Official Receiver’s costs in the sum of HK$17,400 be paid out of the assets of the Company.  The costs of the Financial Secretary be in the petition.