GS HARVEST LTD v. FOREVER WINNER INTERNATIONAL DEVELOPMENT LTD

HCCW 80/2021

[2021] HKCFI 3029

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 80 OF 2021

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BETWEEN

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D E C I S I O N

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1.  Pursuant to a subscription agreement dated 20 December 2019 entered into by Prime Bloom Holdings Limited (“Issuer”), China Cinda (HK) Asset Management Co., Limited (“Subscriber”), Shandong Ruyi Technology Group Co., Limited (“Parent Guarantor”) and the Company (as subsidiary guarantor), the Issuer issued US$68,750,000 9.6% senior notes due 2020 (“Notes”) to the Subscriber under an indenture dated 20 December 2019 (“Indenture”).

2.  The Company executed a subsidiary guarantee in favour of the Subscriber on or around 20 December 2019 (“Subsidiary Guarantee”) to guarantee as principal obligor to the Subscriber (and its successors or assignees) all sums of money due to the Subscriber (and its successors or assignees) by the Issuer under the Notes.

3.  Pursuant to paragraph 13.08 of the Indenture, GS Harvest Limited (“Harvest”) issued a Notice of Assignment dated 13 January 2021 to the Issuer, the Parent Guarantor and the Company among others, to give notice of the assignment of the entirety of the Subscriber’s rights and obligations under the Notes and the Indenture to the Petitioner (“Assignment”).

4.  It is Harvest’s case that by virtue of paragraph 13.08(b)(iii) of the Indenture, the Assignment became effective on 27 January 2021.

5.  The Issuer did not pay the Notes in accordance with the Indenture. It is Harvest’s case that since 20 June 2020, US$68,750,000 has been payable to Harvest pursuant to the Indenture, Subsidiary Guarantee and the Assignment. On 29 January 2021, Harvest through it solicitors served on the Company a statutory demand dated 29 January 2021. The Company failed to pay the sums due.

6.  The Company advances two defences to the debt. The first is that the Assignment was ineffective and thus Harvest is not a creditor of the Company. The second is that prior to the Assignment Harvest’s ultimate parent company, China Cinda, had agreed to a two-year moratorium on enforcement by the China Cinda Group of debts due to it by the Ruyi Group of which the Company is a member.

7.  There is no controversy over the principles that guide the court in determining whether or not a company should be wound up on the grounds of insolvency. If a company opposes a petition on the grounds that the debt relied on by the petitioner is not payable, it is sufficient for the company to demonstrate that it has a bona fide defence on substantial grounds. Many authorities have considered what this means in practice. The parties’ counsel proceeded on the basis that an accurate summary of the principles that emerge from the authorities is to be found in a recent decision of DHCJ Sit SC, which for convenience I shall quote[1]:

“28. The applicable legal principles are not in dispute:-

(1) A petitioner who is owed an undisputed or indisputable debt is entitled to a winding up order ex debito justitiae.

(2) In order to successfully oppose a petition on the basis of a bona fide dispute to the debt on substantial grounds, the debtor has to adduce sufficiently precise evidence which is believable, and must establish that it has a defence of substance, not just a fair probability of one.

(3) Winding-up proceedings are summary in nature and are not meant to be used for the purpose of debt collection. If the court is satisfied that there is a bona fide dispute on the debt, it will not usurp the function of a civil court and decide the disputes between the parties.

(4) The burden is on the company to establish that there is a genuine dispute of the debt on substantial grounds. In this context, ‘substantial’ means having substance and not frivolous.

(5) The court should look at the company’s evidence against so much of the background and evidence that is not disputed or not capable of being disputed in good faith; in other words, the evidence is not to be approached with a wholly uncritical eye.

(6) The court should caution itself against unsubstantiated and unparticularized assertions. It is incumbent on the company to put forward sufficiently precise factual evidence to substantiate his allegations.

(7) The court does not try the dispute on affidavit but is to determine whether a substantial dispute exists. In so doing, the court necessarily has to take a view on the evidence, to see if the company is merely ‘raising a cloud of objections on affidavits’ or whether there really is substance in the dispute raised by the company.

See Re Hong Kong Investments Group Limited [2018] HKCFI 984, HCCW 63/2017 (unrep., 21 May 2018), §§11-14.”

8.  The Indenture is a comprehensive and sophisticated contractual document. It runs to some 84 pages. Paragraph 13.06 provides that each of the Notes, the Guarantee and the Indenture are governed by, and to be construed in accordance with the law of the State of New York. I have no expert evidence on the relevant law of the State of New York and, therefore, the Indenture is to be construed in accordance with Hong Kong rules of construction.

9.  Paragraph 13.08 deals with “Successors and Assigns”. I will quote it in full:

“Section 13.08, Successors and Assigns. (a) The provisions of this Indenture and the Notes shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that (i) neither the Issuer, the Parent Guarantor nor any Subsidiary Guarantor may assign or otherwise transfer any of its rights or obligations hereunder except as permitted under the terms of this Indenture without the prior written consent of each Holder (and any attempted assignment or transfer without such consent shall be null and void) and (ii) no Holder may assign or otherwise transfer its rights or obligations hereunder except in accordance with this Section. Nothing in this Indenture, or any Note, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby) any legal or equitable right, remedy or claim under or by reason of this Indenture and the Notes.

(b)     (i) Subject to the conditions set forth in paragraph (b)(ii) below and otherwise in this Indenture, any Holder may assign to one or more Persons all or a portion of its rights and obligations under this Indenture and the Notes;

(ii) Assignments shall be subject to the following additional conditions:

(A) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Holder’s rights and obligations under this Indenture and the Notes;

(B) the parties to each assignment shall execute and deliver to the Issuer an duly executed Assignment and Assumption substantially in the form of Exhibit F and where applicable, the relevant Notes which are intended to be fully or partly assigned; and

(C) the assignee of such assignment shall execute and deliver to the Issuer (x) a duly executed Joinder, whereupon such assignee shall become a ‘Holder’ as defined herein and (y) a duly executed supplement to the Indenture.

(iii) Except as otherwise agreed herein, the assigning Holder shall notify the Issuer in writing the occurrence of such assignment no less than ten (10) business days prior to the effective date of such assignment. The Issuer shall register such assignment upon receiving such notice and the duly executed Assignment and Assumption and the Joinder. Upon completion of an assignment, a new Note shall be issued to the assignee in relation to the amount of the Notes acquired by such assignee pursuant to the Assignment and Assumption and (if applicable) a replacement Note shall be issued to the assignor in relation to the remaining amount of the Notes held by the assignor.

(iv) Subject to acceptance and recording thereof pursuant to paragraph (b)(iv) of this Section, from and after the effective date specified in each Assignment and Assumption the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Holder under this Indenture and the assigning Holder thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Indenture (and, in the case of an Assignment and Assumption covering all of the assigning Holder’s rights and obligations under this Indenture; such Holder shall cease to be a party hereto but shall continue to be entitled to the benefits of any indemnification thereunder). The Issuer shall promptly update the Register as appropriate. Each Holder shall be entitled to inspect and obtain copies of the Register from time to time and the Issuer shall promptly provide copy of the Register to the Holder(s) upon request. All Notes issued upon transfer or assignment of Notes in accordance with Section 13.8(b) shall be valid obligations of the Issuer, evidencing the debt and entitled to the same benefits under this Indenture, as the Notes which were being transferred pursuant to the relevant Assignment and Assumption. Any assignment or transfer by a Holder of rights or obligations under this Indenture that does not comply with this Section 13.08(b)(ii) shall be as an invalid assignment or transfer.”

10.  As is clear from paragraph 13.08(a) and (b) there is no prohibition on a Holder (of the Notes) assigning his rights to a third party. A Holder is in fact given an express right by paragraph 13.08(b) to assign all or part of its rights under the Indentures and the Notes. This is in distinction to the position of the Issuer and Guarantors, who can only do so with the express consent of each Holder of the Notes. However paragraph 13.08(b) provides that certain procedures need to be followed

11.  Sub-paragraph 13.08(b)(ii) provides that assignments shall be subject to certain conditions. Only (B) and (C) are relevant to the present case. Paragraph (B) provides that any assignment and assumption has to be (i) executed substantially in the form of Exhibit F, (ii) and delivered to the Issuer along with “where applicable, the relevant Notes which are intended to be fully or partly assigned.”

12.  Paragraph (C) requires further documents to executed and delivered to the Issuer: (i) a “Joinder”, whereupon the assignee shall become a “Holder” and (ii) an executed supplement to the Indenture. Joinder is a document which has to be in the form of Exhibit G. Holder is a defined term meaning “the Person in whose name a Note is registered in the Note register”. A Joinder in the specified form was executed and delivered to the Issuer. I understand that no issue arises concerning the provision of a supplement.

13.  Sub-paragraph (b)(iii) provides that unless otherwise agreed (which is not the case here) the assigning Holder shall notify the Issuer in writing of the occurrence of such assignment no less than 10 business days prior to the effective date of such assignment. The effective date is referred to in the draft form of assignment in Exhibit F. The sub-paragraph then goes on to provide for registration of the assignment and issue to the assignee of a new Note.

14.  It is clear from sub-paragraph (b)(iv) that from the effective date specified in the Assignment and Assumption, the assignee has and may exercise the rights assigned to him. The sub-paragraph requires the Issuer to update the Register of Note Holders. The final sentence of sub-paragraph (b)(iv) states: “Any assignment or transfer by a Holder of rights or obligations under this Indenture that does not comply with this Section 13.08 (b)(ii) shall be as an invalid assignment or transfer.”

15.  The contentious point of construction is at what stage of the process I have described the Assignment is complete in the sense that the assignee has title to sue for non-performance of the Indenture (and consequently enforce the Guarantee and Subsidiary Guarantee). In my view there are two stages to the process, which when completed, has the result of allowing the assignee to enforce the terms of the Indenture. It seems to me clear that on completion of the conditions imposed by sub-paragraph (b)(ii)—in the present case (B) and (C), (A) not being relevant—the assignor has transferred his interests in the Notes to the assignee. This is stage 1. However, this does not immediately allow the assignee to demand such payment as may be due under the terms of the Indenture. This (stage 2) requires the Issuer to have been given the notice required by sub-paragraph (b)(iii); in other words 10 business days. This is, presumably, to allow the Issuer time to amend its records and, if it is relevant at the time of the Assignment, make arrangements for payments to be made to the new Note Holder. If the Issuer is not told of the assignment and as a consequence, for example, pays the original Note Holder, one would not expect the new Note Holder to be able to complain that the terms of the Indenture have not been complied with.

16.  Problems arose in both stages 1 and 2. For the purpose of the hearing before me, Harvest accepts that the first form of Assignment and Assumption that was sent to the Issuer on or about 13 January 2021 was arguably not properly executed. I note that it showed the effective date as 27 January 2021. A subsequent duly executed Assignment and Assumption was sent to the Issuer on 3 March 2021. I do not understand it to be argued by the Company that this was not properly executed as a deed. It also shows the effective date as 27 January 2021. In my view the revised form of the Assignment and Assumption was an effective assignment of the assignor’s rights under the Indenture and the Guarantee and Subsidiary Guarantee. Stage 1 was complete.

17.  The second point that is taken is that as the effective date was 27 January 2021, sub-paragraph (b)(iii) has not been complied with. It does not seem to me that the fact that notice of an assignment is not given to the Issuer at least 10 business days before the effective date stated in the Assignment means that the assignor cannot ever enforce his rights under the Indenture. Sub-paragraph (b)(iii) must sensibly be read as saying that 10 business days’ notice must be given by an assignor of the Notes before the assignee can enforce the rights that attach to them under the terms of the Indenture. Late notice has the effect of pushing back the effective date.

18.  The statutory demand was served on 29 January 2021 on the Company. The Petition was issued on 22 February 2021. It seems to me that it is arguable that at both these dates Harvest was not entitled to payment because sub-paragraphs (b)(ii) or (iii) had not been complied with. Harvest was not entitled to payment until 10 business days after 3 March 2021. Unfortunately, insufficient attention was paid to the form of the Assignment. Although it was not argued before me it seems to me that Harvest was arguably a contingent creditor on 22 February 2021.

19.  It was also argued by the Company that Harvest was not entitled to seek payment in 2021 because of a moratorium on creditor action reached by its parent company with the Ruyi Group in the Mainland as part of a reorganisation process that commenced in February 2020. This argument was not pressed by Mr Tai as there is no evidence that Harvest was a party to this arrangement. It does not seem to me that the documents that have been produced recording the arrangement are sufficiently clear to justify me concluding that Harvest was likely to have been a party to it.

20.  At the outset of the hearing an application was made to expunge part of the evidence that the Company contended was without prejudice, but it does not seem to me that anything turned on that issue and, in event, I read the evidence de bene esse. It is only relevant to costs and as it seems to me that the Company has been, subject to what I say next, substantially successful it should have its costs of the proceedings including the expunge application.

21.  For reasons, which are self-evident, if Harvest had waited until after the new Assignment and Assumption had been served before demanding payment and presenting a petition I would have rejected the Company’s arguments. It is, therefore, open to Harvest to present a new petition. I will not, therefore, immediately dismiss the Petition, but leave Harvest time to consider whether it wishes to argue it is a contingent creditor (and I should not be taken as finding that it is) or to commence new proceedings.

22.  The order I will make is as follows:

(1) The Petition be adjourned sine die with liberty to both parties to restore it.

(2) The costs of the proceedings up to and including 30 September 2021 to be paid by the Petitioner to the Company forthwith such costs to be taxed if not agreed.