RE CHINA HUIYUAN JUICE GROUP LTD

HCCW 298/2019

[2020] HKCFI 2940

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 298 OF 2019

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D E C I S I O N

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Introduction

1.  On 26 September 2019 SDF III Holdings Limited issued a petition to wind-up China Huiyuan Juice Group Limited (“Company”) on the grounds of insolvency.  The debt relied on by the Petitioner arises from a default under a convertible bond for the principal amount of HK$1,000,000,000 issued in January 2018.  The debt is not disputed.

2.  The Company is incorporated in the Cayman Islands and listed on the Main Board of the Hong Kong Stock Exchange.  Its business operations are conducted in the Mainland through companies incorporated in the Mainland and held indirectly by the Company through intermediate holding companies incorporated in the British Virgin Islands (“Group”).  There is no dispute that the Company is insolvent.  The Company seeks an adjournment of the Petition until the end of this year in order to progress a restructuring of the Company’s debt.  The Petitioner initially sought an immediate winding-up, alternatively if I am minded to grant an adjournment, appointment of provisional liquidators.  As the argument developed the Petitioner accepted that it would not be appropriate to adjourn the Petition and appoint provisional liquidators as the only purpose for doing so would be to take-over the board of the Company’s attempts to restructure its debt, which would be impractical in the circumstances and inconsistent with the current state of the law in Hong Kong on the purposes for which provisional liquidators can properly be appointed [1]. The decision to be made, therefore, is whether to make an immediate winding-up order or grant an adjournment.  Determining this issue requires consideration of the legal and commercial complexities of managing the restructuring or liquidation of Chinese business groups, which arise as a consequence of the common structure of such groups.

The Company and its Debt

3.  As I have mentioned in the previous paragraph the Company’s assets consist of its ownership of subsidiaries incorporated in the British Virgin Islands.  These intermediate subsidiaries own subsidiaries in the Mainland, which in turn own the Company’s underlying assets and carry on the manufacturing and other operations, which constitute the Company’s business and source of revenue.  That business involves the manufacture and sale of fruit and vegetable concentrate, puree and juice beverages in the Mainland. The Group’s headquarters are in Beijing.  As of 30 September 2019, the Group had over 60 subsidiaries, close to 3,600 employees, 42 production plants and over 200 production lines.  Almost 100% of the Group’s revenues are generated by its Mainland subsidiaries.  In the period between January and September 2019 its financial position was as follows:

	January to September 2019 (RMB)
Revenue	2,151,763,609
Profit before tax	(200,300,673)
Total assets (as of 30 September 2019)	18,773,804,851
Total liabilities (as of 30 September 2019)	10,853,564,012

During this period the Company says that it generated an operating cash flow of about RMB200 million.

4.  The Company’s total offshore debt[2] is approximately RMB3.6 billion (principal only) of which approximately 39% arises from defaults and cross-defaults under a series of notes and bonds representing approximately RMB2.32 billion of the offshore debt.  The balance of approximately RMB1.29 billion arises under a facility agreement dated 27 March 2017 with the Group’s bankers (“Facility Agreement”). In addition to the Facility Agreement it would appear from the evidence [3] that the Bank of China and the Agricultural Bank of China have provided loans of RMB1.1 billion and RMB1.45 billion respectively to the Company’s subsidiaries in the Mainland, which the Company has guaranteed.

5.  The Group’s total onshore debt amounts to approximately RMB4.9 billion (principle only) as at 30 September 2019.  Currently, approximately RMB3.3 billion is in default.  The majority of the default was due to default in interest payments as opposed to repayment of principle, while some of the default was due to technical or cross defaults.  RMB2.26 billion of this sum is the onshore bank debt I have referred to in the previous paragraph.

6.  It is the Company’s evidence that the Group’s high level of debt compared to its annual revenue is partly due to the Group’s capital expenditure and investments in sales and marketing for the purpose of business and market expansion in recent years, which has not resulted in the anticipated growth in revenue.

7.  The Company has engaged CITIC Securities and ICBC New York branch as financial advisors to assist it in identifying potential investors in the Company with a view to restructuring the Group’s business.  The Company has also engaged PwC as financial advisor to assist the Group’s restructuring.  However, the Company has not produced a detailed restructuring plan.  Its initial evidence about its restructuring efforts is contained in the 2^nd affirmation of Zhu Shengqin [4] (a director and the daughter of the major shareholder)  made on 31 October 2019, which describes in outline form the way a restructuring of the offshore debt and equity structure of the Company would be effected (which is largely conventional), but there are no details of what this would mean in terms of a return to offshore creditors.  So far as the onshore debt is concerned the way it is envisaged this will be dealt with is explained by the Company as follows:  The onshore debt will be restructured using out of court bilateral and consensual restructuring arrangements.  To effect   the restructuring, neither the Company nor the onshore creditors intend    to invoke any formal restructuring proceedings under the Enterprise Bankruptcy Law in the Mainland.  The term of the Group’s credit facilities may be extended to reduce the regular periodic principal repayments, grace periods in respect principal repayments may be granted or periodic repayments may be reduced to interest payments only for a limited period with a deferral of principal repayment, in order to make more cash available for interest servicing and create a prospect of full or improved recoveries in the foreseeable future.  It is also envisaged that there will be interest rate concessions. The current rate of interest may be reduced or, as an alternative, there may be a reduction of interest in combination with a margin ratchet, which allows for the interest rate to float upwards as the credit quality of the Group improves.  Ms Zhu says that the Group may also offer debt-for-equity swaps in order to reduce the debt by exchanging a portion of the amount owed by the relevant borrower or issuer for equity in the Group. I assume, although this is not stated, this would be equity in the Company.

8.  In her 3^rd affirmation, which Ms Zhu made on 28 November 2019, Ms Zhu updates the Court on the progress of the restructuring efforts in the Mainland during November 2019. Ms Zhu subsequently resigned as a director, along with her Father, because of the complaints made by the Petitioner about Mr Zhu’s use of the Company’s assets.  Further affirmations updating the court on the progress of the restructuring have been made by another director, Ju Xinyan, the first filed on 14 July 2020 and another shortly thereafter, which is unsworn.

9.  In the first of the affirmations Ms Ju informs the court that progress of the restructuring has been interrupted by Covid-19.  She also addresses the Listing Committee’s decision (which I deal with in [14]–[16] to cancel the Company’s listing).  In respect of the progress of the restructuring she explains that a number of companies, private and state owned, have been in negotiations with the Company about participating in the restructuring.  What is proposed is not clearly explained.  It would appear that there are three principal companies negotiating acquisition of an interest in the Company: Beijing Financial Holdings Group Co. Ltd, which is stated owned, China Orient Asset Management (International) Holdings Limited (“China Orient”) and Shanghai Wensheng Asset Management Co. Ltd (“Wensheng”).  In addition there are a number of other companies, who have apparently expressed an interest in investing, although I assume that their participation would be smaller than the companies to which I have referred.  In her 1^st affirmation Ms Ju explains that it is proposed that the offshore debt will be restructured through a scheme of arrangement, which involves issue of five-year zero coupon convertible bonds to the holders of offshore debt.  These will be convertible into new shares that (if all were to be converted) would represent 46.5% of the anticipated enlarged share capital of the Company.  Rather confusingly the details of the change this would cause to the current shareholding profile would appear to suggest that the investors to which I have referred would acquire no interest in the Company.  Ms Ju describes this restructuring as a “self-restructuring plan”.  If I have understood Ms Ju’s evidence correctly, despite the interests shown by the investors I have referred to, the self-restructuring plan does not involve a fresh injection of capital through subscription by the prospective investors for new shares, at least not at the listed holding company level.  What form the prospective investment would take is unclear.

10.  In the 2^nd unaffirmed affirmation Ms Ju explains that the   self-restructuring plan will not be implemented because discussions with China Orient and Wensheng have recently advanced on the basis of fresh injections of capital by these two investors.  This is all the information that Ms Ju provides about the progress of the restructuring: there are no details or timetable.  Ms Ju does say, however, that the Bank of China and the Agricultural Bank support the proposed restructuring.

11.  As is apparent from the preceding paragraphs the Company’s efforts focus on restructuring its Mainland operations, debt and the identification of an investor in the Mainland to inject fresh capital into the Group.  Once the Mainland restructuring is sufficiently advanced, and subject to what I have to say about the status of the Company’s listing in [31]–[33], a scheme restructuring the Company’s debt outside the Mainland will be introduced.  As will be apparent from this description, the restructuring is not being managed out of Hong Kong and with the involvement of offshore creditors; it is being managed in the Mainland with the focus, so far as debt is concerned, on the Mainland creditors, principally the Mainland banks, of the Mainland subsidiaries.  The majority of Mainland creditors support an adjournment of the Petition including, importantly, the Bank of China, which is the lead bank and agent for the lending under the Facility Agreement.  As I explain in [4] the debt arising under the Facility Agreement is offshore debt.  It is the Company’s position that a unitary restructuring of the Company and the Group is desirable as it will maximise value and that in order to achieve this the Company must remain out of liquidation and retain its listing. If either it is wound-up or its listed status is lost, the Group will be liquidated at the behest of the Mainland creditors and broken-up.  The Company says that in these circumstances the offshore creditors of the Company will receive nothing and thus a winding-up in Hong Kong is in the interest of neither the Petitioner and other offshore creditors nor creditors in the Mainland.

12.  The Petitioner’s case is that the way in which the Company suggests its debt is to be restructured is unrealistic and the evidence bereft of necessary detail.  It is the Petitioner’s view, that the Company’s listing will almost certainly be cancelled and if this is correct, on the Company’s own evidence it follows that there is no prospect of a unitary restructuring.  Inevitably any restructuring will be done on a piecemeal basis in the Mainland for the benefit of Mainland creditors.  The Petitioner says that the best prospect of the offshore creditors receiving anything is recovery of monies misappropriated from the Group by its majority shareholder, Zhu Xinli. This complaint is associated with a more general one about the integrity of the Company’s management arising from certain loans made to Mr Zhu’s personal companies and guarantees given in respect of certain of those companies’ obligations to banks.  I describe these in the next paragraph and shall refer to them collectively thereafter as the (“Loans”).

13.  On 29 March 2018 the Company issued an announcement that during the period between August 2017 and March 2018 the Company had made a loan of RMB4.282 billion to Mr Zhu.  The announcement acknowledges that in respect of these loans the Company failed to comply with reporting, announcement and independent shareholder approval requirements of the Listing Rules and these failures constituted non-compliance with Rule 13.16 and Chapters 14 and 14A.

14.  The Company’s shares were suspended in April 2018.  The Listing Committee decided on 14 February 2020 to delist the Company.  The Company is appealing that decision to the Listing Review Committee.  It is anticipated that the Listing Review Committee will meet to determine the appeal at the end of October.  Generally its decisions are issued promptly.  I shall assume that it is likely to be available by the end of November of this year. 

15.  The Listing Committee’s on reasons for determining that the Company should be delisted included the following failures to comply with a number of the resumption of trading conditions imposed after the shares were suspended before the resumption deadline of 31 January 2020 under Rule 6.01(A) of the Listing Rules.

(1) The failure to complete an independent investigation into the Loans and the circumstances in which the Loans came to be made and announce the results of the investigations.

(2) The failure to demonstrate adequate internal control systems including a failure to demonstrate that the review has taken into account the results of the investigations (necessarily as they had not been completed) into the Loans.

(3) Connected to the first matter, a failure to demonstrate that there is no reasonable regulatory concern about the integrity of the Company’s management as a result of the Loans.

(4) A failure to publish audited financial statements for the financial years 2017 to 2019 and address audit qualifications identified in earlier auditor’s reports.

16.  It seems inherently unlikely that if I make a winding-up order the Listing Review Committee will reverse the decision of the Listing Committee.  A winding-up would, as the Company argue, be likely to result in an immediate severing of the Group’s Mainland business and Mainland creditors from the Company and the offshore creditors.

17.  Against this background the matters that need to be considered are the following:

(1) The principles, which guide the court when exercising its discretionary jurisdiction to wind-up a company incorporated in a foreign jurisdiction.

(2) Whether a winding-up order would be consistent with the aforesaid principles.

(3) The grounds for seeking an adjournment.

(4) What order should be made.

Principles

18.  The principles that guide the court in considering how to exercise the jurisdiction that it has to wind-up companies incorporated in foreign jurisdictions has been considered in a series of decisions.  They culminate in the Court of Final Appeal’s decision in Kam Leung Sui Kwan v Kam Kwan Lai [5] contained in the joint judgment of Chief Justice Ma and Lord Millett NPJ.  As Ma CJ and Lord Millett NPJ explain in the following passage the most appropriate jurisdiction to wind-up a company is the jurisdiction where it is incorporated:

“18. Section 327(1) and (3) are in the following terms:

(1) Subject to the provisions of this Part, any unregistered company may be wound up under this Ordinance, …

(3) The circumstances in which an unregistered company may be wound up are as follows:

(a) if the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs;

(b) if the company is unable to pay its debts;

(c) if the court is of opinion that it is just and equitable that the company should be wound up.

19. As the courts below observed this is a discretionary jurisdiction, though this does not follow from the word ‘may’. This word merely means ‘is liable to’ and is appropriate to describe the conferment of jurisdiction.  Nevertheless the most appropriate jurisdiction in which to wind up a company is the jurisdiction where it is incorporated, and the jurisdiction to wind up a foreign company has often been described as ‘exorbitant’ or as ‘usurping’ the functions of the courts of the country of incorporation.[6] These expressions are, however, unhelpful and potentially misleading except as a reminder that there must be good reason to exercise an abnormal jurisdiction even though it is one which statute has expressly conferred on the court.  It is well established that there must be some connection between the foreign company and the jurisdiction other than the petitioner’s decision, which would be present in every case, to present a winding-up petition there rather than in the country of incorporation.[7]”

19.  Although Ma CJ and Lord Millett NPJ deprecate labelling the jurisdiction in exceptionalist language they acknowledge that the normal and most appropriate course for a person seeking to wind-up a company is to issue the necessary application in its place of incorporation.  It is only if good reason for doing otherwise can be demonstrated that a foreign incorporated company should be wound-up by the court in Hong Kong.  The courts have developed over time three criteria (commonly referred to as the “three core requirements”) by reference to which the court assesses whether or not a good reason for making a winding-up-order has been demonstrated.  They are summarised by Ma CJ and Lord Millett NPJ in [20] [8]:

“(1) there had to be a sufficient connection with Hong Kong, but this did not necessarily have to consist in the presence of assets within the jurisdiction;

(2) there must be a reasonable possibility that the winding-up order would benefit those applying for it; and

(3) the court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets.

20.  In [24] of their judgment Ma CJ and Lord Millett NPJ say this in relation to the operation of the second core requirement in the context of a creditor’s petition.

“24. In our view the question in the case of a creditor’s petition is whether there is a sufficient connection between the company and this jurisdiction to justify the court in ordering a company to be wound up despite the fact that it is incorporated elsewhere; and that in deciding that question the fact that there is a reasonable prospect that the petitioner will derive a sufficient benefit from the making of a winding-up order, whether by the distribution of its assets or otherwise, will always be necessary and will often be sufficient.”

21.  This tends to elide the first and second core requirements.  It seems to me that so far as the second core requirement is concerned what it does, however, identify is the need for the petitioner to demonstrate sufficient benefit that the petitioner will derive from a winding-up order to justify making an order in Hong Kong rather than requiring the Petitioner to take what will normally be the more appropriate step and seek to      wind-up the Company in its place of incorporation.  In the case of private companies incorporated in offshore jurisdictions such as the Cayman Islands, Bermuda and the British Virgin Islands this may be a straightforward task as the company’s assets and business affairs are commonly located in Hong Kong along with its management and officers.  This may not, however, be the case when dealing with Mainland business groups, which at their apex have a foreign incorporated company listed on the Hong Kong Stock Exchange.  As a consequence of their businesses being located in the Mainland commonly the officers are resident in the Mainland rather than Hong Kong and they are not subject to the in personam jurisdiction of the Hong Kong court.  As a consequence they cannot be compelled, for example, to execute documents necessary to change control of a listed company’s subsidiaries.  It is for this reason that Ma CJ and Lord Millett NPJ assume, in the context of a solvent foreign incorporated company with immediate subsidiaries also incorporated in an offshore jurisdiction, that it would probably not be possible for a liquidator appointed in Hong Kong to be able to change the board of the subsidiaries or alter the register of shareholders.  They say this in [39]:

“Although there is no doctrinal reason to exclude a connection of a foreign company with the jurisdiction through a wholly-owned subsidiary, there may be a practical reason for doing so where the subsidiary is also a foreign company. It is necessary that the assets within the jurisdiction should be capable of being made available to a liquidator appointed by the court. Counsel for the petitioner was confident that this was the case even without the assistance of the Court, since it would be sufficient for the liquidator to replace the directors of Long Yau by his own nominee. We not share his confidence, for a change in the composition of the board of a company must be effected by its shareholders, and we are not convinced that the registrar of companies in the BVI will alter the register of members of a BVI company in order to replace the shareholders by a liquidator appointed by a Hong Kong court. Every court, however, has an implied jurisdiction to make whatever orders are necessary to give effect to its own judgments. In the present case all the individual respondents reside in Hong Kong and are subject to the in personam jurisdiction of the Hong Kong Court. Accordingly were this Court to be of the view pursuant to the discussion which follows that a winding-up order ought to me made, we would propose to give leave to the petitioner or the liquidator to apply to the Court of First Instance for such further orders whether by way of injunction or otherwise as may be necessary to make the underlying assets of the Company available to the liquidator.”

As I demonstrate in [35]–[44] decisions of courts in the offshore jurisdictions show this scepticism to have been well-founded.

22.  Another material distinction is that although an order can be made for examination of the officers of a company incorporated in a foreign jurisdiction ordered to be wound-up in Hong Kong pursuant to s286B of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 [9], in practice the order is not enforceable and as a consequence a Hong Kong liquidator’s powers of investigation are diminished.

23.  After this Petition was heard the Court of Appeal handed down its judgment in Shangdong Chenming Paper Holdings Ltd v Arjowiggins HKK 2 Ltd [10]. This was an unusual case.  The Company is incorporated in the Mainland and has listings both in Shenzhen and Hong Kong.  It is solvent.  It refused to pay an arbitration award, which the Defendant was given leave to enforce in Hong Kong as a judgment.  The Company refused to pay the judgment.  The Defendant threatened to issue a petition to wind-up the Company on the grounds of insolvency.  The Company issued an application for a declaration that the Defendant would not be able to demonstrate that the three core requirements could be satisfied and, therefore, it should be enjoined from presenting a petition.  It was not in dispute that both the first and third core requirements were satisfied.  The Company argued that its only connection with Hong Kong was its listing and that no benefit would be derived by the Defendant if a winding-up order were to be made and thus the second core requirement could not be satisfied.  The Court of Appeal agreed with my decision that a benefit to the Defendant would result from a winding-up order by virtue, and I summarise, of the pressure that a liquidation in Hong Kong, or the prospect of such a liquidation, would put on the Company to settle the debt.  This effect largely arose from the fact that the Company was clearly solvent and wished to access Hong Kong’s capital and debt markets.  The only reason for not paying was recalcitrance.  It will be appreciated that the facts were unusual and, hopefully, are not likely to arise again.  The relevance of the Court of Appeal’s decision is the following statement in the judgment, which was given by Barma JA, about the second core requirement.  Barma JA says this at [27]:

“Moreover to insist on this requirement being met is clearly sensible, in that there would seldom be circumstances in which it would be justified to set in motion the court’s winding-up machinery where to do so could provide no reasonable prospect of benefit of any kind to the petitioner. That said, the overarching nature of the enquiry, the purpose of which is to ascertain whether it would be appropriate to put into motion the winding-up machinery in respect of a particular overseas company, would, I think, allow for some flexibility as to the nature or extent of the likely benefit to the petitioner that should be shown in order to satisfy the second core requirement, as long as the benefit can be said to be a real possibility, rather than a merely theoretical one.”

24.  I think it is accurate to say that the second core requirement had, until the Shangdong Chenming Paper case, given rise to less controversy than the first core requirement.  However, the significant increase in the number of winding-up petitions in respect of listed offshore holding companies of Mainland business groups makes the second core requirement of much greater significance.  The reason for this is as follows.  It is common for these business groups to be structured in a similar form to that in the present case, namely, a listed holding company incorporated in one of the offshore jurisdictions, which has a wholly owned subsidiary incorporated in another offshore jurisdiction, which in turns has a wholly owned subsidiary incorporated in the Mainland, which has underneath it a web of Mainland incorporated subsidiaries that hold the group’s assets and conduct its business.  Commonly these business groups, if they run into financial problems, come before the Hong Kong court in one of two ways.  First, as a consequence of a creditor’s petition of the sort brought in the present case.  Secondly, as a consequence of the group taking the initiative to restructure its debt and applying to the court of the place of incorporation for the appointment of soft-touch provisional liquidators, who then seek recognition and assistance in Hong Kong in order to facilitate rehabilitation and circumvent the difficulties caused by the Hong Kong Court of Appeal’s decision in Legend International Resorts Ltd [11]. I note in passing that since the High Court has reopened at the beginning of May of this year corporate insolvencies involving Mainland business groups listed in Hong Kong using offshore companies have generated the majority of the corporate insolvency matters coming before me.

25.  In practice the application of the three core requirements has not until the handing down of the decision in Shangdong Chenming Paper (which predates the current spate of cases by some years) been the source of controversy.  It is now well established that the listing of a company in Hong Kong is sufficient to satisfy the first core requirement and commonly there is more than one creditor subject to the jurisdiction of the Hong Kong court, which is sufficient to satisfy the third core requirement.  Little attention has been paid to the second core requirement.  In restructuring cases I have not yet had a company seek to have a petition dismissed on the grounds that the second core requirement cannot be satisfied.  Normally the company is only concerned to persuade the court to adjourn a petition in order to allow it to progress a restructuring.  I apprehend that this is largely because the company is insolvent and if it cannot successfully restructure it will have to be wound-up. There is little point in focusing on the second core requirement because this can always be circumvented by presenting a petition in the place of incorporation. A company’s object is to obtain time to restructure and commonly it will not be particularly concerned about having a petition hanging over it while it attempts to do so.  However, in a number of cases during the last few months one of the grounds that has been advanced for not making a winding-up order in cases in which it has not proved possible to persuade the petitioner to agree to an adjournment, is that it is not in the interests of creditors as a whole to make a winding-up order because, for reasons I consider in [34]–[44], the creditors will derive no benefit and any possibility of a restructuring and a return to creditors will be lost.  This takes me back to Barma JA’s decision in Shangdong Chenming Paper.

26.  As the passage I have quoted in [23] makes clear, in determining whether or not the second core requirement is satisfied the court will take a pragmatic approach.  It will not be necessary for a petitioner to identify with great precision what the benefit will be or quantify with exactness the value of the benefit.  But the petitioner must be able to point to a discernible and real benefit.  Hypothetical benefits that potentially arise in all cases will be insufficient to satisfy the second core requirement.  An example of such a hypothetical benefit would be the investigation of the affairs of a company by a liquidator, which might, but then again might not, identify a claim against officers of the company or locate an asset unidentified at the time of presentation of the petition, which would increase the assets available for distribution amongst creditors.  In my view, it is clear from Barma JA’s judgment that these possible benefits would be too theoretical to satisfy the second core requirement.  This analysis is, however, arguably called into question by an earlier Court of Appeal decision, which is not referred to in Shangdong Chenming, namely, Re Allied Weli Development Limited [12].

27.  In Allied Weli the Court of Appeal dealt with an appeal from a winding-up order made by me over a company, which was incorporated in the British Virgin Islands.  The company appealed my decision on the grounds that the petitioner had not satisfied either the first or second core requirement.  The Court of Appeal dismissed the appeal.  In addressing the second requirement Cheung JA says this at [6.9] to [6.11].

“6.9 Mr Ng argued that the second core requirement of benefit to the petitioner creditor is absent. In my view the investigation is tied up with the issue of benefit to the Petitioner. The test is whether there is a reasonable prospect of benefit. As the Court of Final Appeal had made clear in the Yung Kee case that :

‘24. In our view the question in the case of a creditor’s petition is whether there is a sufficient connection between the company and this jurisdiction to justify the court in ordering a company to be wound up despite the fact that it is incorporated elsewhere; and that in deciding that question the fact that there is a reasonable prospect that the petitioner will derive a sufficient benefit from the making of a winding-up order, whether by the distribution of its assets or otherwise, will always be necessary and will often be sufficient.’ (emphasis added)

6.10 Earlier the Court held that:

‘22. ...it is sufficient that the petitioner will derive significant benefit from a winding-up order in the local jurisdiction even though the company is incorporated elsewhere.’

6.11 In my view where there is proper basis to investigate, then one can safely say that the second core requirement of benefit to the petitioner creditor can also be satisfied.”

28.  The language used by Cheung JA in [6.11] suggests that it will be sufficient to satisfy the second core requirement for a petitioner to demonstrate that there is something to investigate.  If that is how the judgment is to be read it would seem to be inconsistent with the judgment of Barma JA, whose judgment in Shangdong Chenming I read as requiring a real possibility of benefit to be demonstrated, which in the context of investigation I think must be taken to require a petitioner to show a possible financial benefit to creditors of such an investigation such as the facilitation of a particular claim, which is capable of increasing the value of the insolvent company’s estate available for distribution to unsecured creditors. However, it seems to me that to read Cheung JA as suggesting something less stringent than Barma JA would be incorrect.  In [6.12] Cheung JA makes it clear that the grounds for investigation had not be gone into by me in the judgment because the point had not been argued.  It seems to me that Cheung JA’s judgment should not be read as a thorough exploration of the parameters of the second core requirement, but rather a robust rejection of an issue raised for the first time on appeal. 

29.  In conclusion, it seems to me that it is necessary for a petitioner to demonstrate by evidence that there is a real possibility of a tangible benefit to creditors.  The relevant facts and matters, which the evidence is adduced to prove should be set out in the petition and if it is not the petition is demurrable.

Have the Principles been met?

30.  Unfortunately, the decision in Shangdong Chenming was handed down the day after the petition was heard.  I think it fair to say that the Petitioner’s evidence and submissions had been prepared on the basis that other than for an issue concerning the ability of a liquidator to be able to obtain recognition in the Mainland over the Company’s subsidiaries, which I address in [34]–[35], the second core requirement would not feature significantly in the argument.  The Petitioner had framed its case on the basis that whatever the difficulties that a liquidator might face in obtaining recognition in the Mainland, protecting the listed status of the Company was sufficient benefit to satisfy the second core requirement.  In my opinion, the Petitioner’s assumption in this regard is incorrect for the reasons I explain in the next paragraph.

Realising the value of the listing

31.  Following the Asian Economic crisis in the late 1990s a technique was developed for realising the value of the listed status of insolvent companies listed on the Hong Kong Stock Exchange.  Often the value of the listing constituted the only asset of any value that a company had. Overtime the Hong Kong Stock Exchange has imposed restrictions on, what amounts to, the sale of the listed vehicle to an investor interested in acquiring a listed company without having to go through the complications and cost of an initial public offering.  It is not necessary to describe in detail the components of these kinds of restructuring and the issues that they commonly involve. However, the following are relevant.

32.  It has become increasingly challenging to realise the value of a listing by changing a company’s capital structure to facilitate control of the company passing to an investor once a winding-up order has been made.  Generally, those involved in such a restructuring seek to keep the company in provisional liquidation.  As I have already mentioned in the last few years this has been done by putting the company into soft-touch provisional liquidation in its place of incorporation [13].

33.  Since May the court has been faced with numerous petitions to wind-up listed companies or to recognise and assist soft-touch provisional liquidation of listed companies.  The value of the listings seems now to have dropped to approximately the costs of a conventional restructuring from what I can gather from evidence filed in other cases and information contained in the explanatory statements of schemes of arrangement that have come before me this year.  On the basis of what I have seen in the last six months it seems to me that it is highly unlikely that the listed status of the Company if it is wound-up has any residual value.  In my view, we have now reached a stage where the court will require evidence to demonstrate that there is a real prospect of a material financial benefit to creditors from realisation of a listing in order to satisfy the second core requirement.  It is no longer sufficient to invite the court to assume that the value of a listing can be realised and realised at a value that proves to be more than an insignificant benefit to creditors.  I understand why evidence was not adduced by the Petitioner in the present case to demonstrate that there was real prospect that the value of the listing could be realised by liquidators following a winding-up order for an amount, which would produce something more than a de minimis benefit to the general body of creditors.  However, if in future a petitioner wishes to rely on the value of the listing as the benefit that satisfies the second core requirement it will be necessary for it to adduce evidence that demonstrates this.  The evidence will have to establish that there is a real, not hypothetical prospect of the listing being realised for an amount that produces a meaningful return to creditors not an amount so small that they are likely to be largely indifferent to whether they receive it or not.

Accessing assets in the Mainland

34.  It is the Company’s own case that the Group which it controls has a valuable business in the Mainland.  It might be thought that a benefit of appointing liquidators would be their ability to take control of the Mainland subsidiaries and realise their assets.  In my view, this is not the case.

35.  It is difficult to state with confidence and precision either the law in the Mainland that governs recognition and assistance of foreign liquidators or the practice of the Mainland courts.  I have considered the present state of the law in my decision in Re CEFC Shanghai International Group Ltd [14]. What can be said with reasonable confidence is as follows:

(1) The Mainland’s courts have not yet granted an order formally recognising the authority of a foreign liquidator to act as an agent for a foreign company within the Mainland.

(2) It is unlikely at present that the Mainland courts will recognise a liquidator appointed by the courts of a place other than the relevant company’s place of incorporation even if its centre of main interest (COMI) is located in the jurisdiction, which seeks recognition. In other words the Mainland courts will not recognise a liquidator appointed by the Hong Kong court over a company incorporated, for example, in the Cayman Islands.

(3) On occasions it has proved possible for Hong Kong liquidators to obtain recognition of their status as the legal representatives of a Hong Kong company for the limited purpose of taking control of a Hong Kong company’s Mainland subsidiary.

36.  It follows from this that in order to obtain control of the Company’s Mainland subsidiaries it is necessary for a liquidator appointed by the Hong Kong court to first be appointed as liquidator of the Mainland subsidiaries immediate holding company, which as I have explained in the present case is incorporated in the British Virgin Islands.  As far as I am aware recognition of a foreign liquidator in the British Virgin Islands is a matter of common law.  I explain what I understand to be the common law principles in [24]–[28] of my decision in Re China Fishery Group Limited [15]:

“24. However, the courts of common law jurisdictions do not recognise and assist all foreign proceedings and holders of offices associated with insolvency or some form of corporate rehabilitation and the common law on the circumstances in which foreign insolvency proceedings will be recognised and assisted varies to some degree from jurisdiction to jurisdiction. For example, courts have differed on whether or not at common law recognition should be limited to liquidators or equivalent office holders appointed by the courts of the place of incorporation. Significant differences are to be found in the decisions of Lord Hoffman (preferred in Singapore [16]) in Re HIH Casualty and General Insurance Ltd[17] and those of Lord Collins writing for the majority in Rubin v Eurofinance SA[18] on this issue, with the current position in England and Wales appearing to be that the common law should not be extended beyond the established criteria that a liquidator appointed in the place of incorporation should be recognised.

25. There is one case in Hong Kong, BCCI (Overseas) Ltd v BCCI (Overseas) Ltd (Macau Branch),[19] a decision of the Court of Appeal, which touches on this issue. BCCI (Overseas) Ltd was incorporated in the Cayman Islands and had opened a branch in Macau. Officers of the Macau branch has placed monies with a bank in Hong Kong. The company was put into liquidation both in the Cayman Islands, its place of incorporation, and in Macau. The liquidators in both jurisdictions claimed the funds in Hong Kong. The court allowed the Macau liquidators to be represented and take part in an application by the Cayman liquidators seeking an order for a transfer of the funds in the Hong Kong bank account to them. The application was successful. However, it would appear from the report that very limited consideration was given to the Macau liquidators’ status and none to whether the Macau insolvency process should be recognised. The position in Hong Kong, therefore, remains undecided and this is not an appropriate case to determine it or express a view on the view the Companies Court might take.

26. Similar differences exist in relation to the recognition of liquidators appointed in voluntary liquidations. In Singularis the majority suggest obiter that the common law power to recognise and assist foreign insolvency proceedings would not extend to voluntary liquidations.[20] Singularis has not been followed in Singapore.[21] I declined to follow it in Supreme Tycoon Ltd.[22]

27. It is not, therefore, helpful to think of the significance of the Trustee’s office in the broad, unfocused way advanced by Mr Kwok. A more disciplined approach is required.

28. It is generally accepted in common law jurisdictions that determining whether or not a foreign office holder should be recognised and assisted requires a consideration of the following matters:

(1) Whether the office holder had been appointed in collective insolvency proceedings.[23]

(2) Whether the foreign jurisdiction in which the office holder has been appointed and the company have a relevant connection.[24]

(3) If the answer to these first two questions is in the affirmative one would normally expect the foreign proceedings to be recognised.

(4) If the foreign proceedings are recognised one would normally expect the office holder to be recognised unless the local court considers that there has been some irregularity in the office holder’s appointment.

(5) If a foreign office holder is recognised one would normally expect assistance, which may extend to granting orders that give the foreign office holder substantially similar powers to, for example, investigate the affairs of the company as would be available to a local liquidator if the foreign jurisdiction has similar provisions in its insolvency regime.[25]”

37.  This has recently been confirmed to be the view of the Supreme Court of Bermuda in the judgment of Chief Justice Hargun in Stephen John Hunt v Transworld Payments Solutions U.K. Limited [26], in which the Chief Justice says this at [32]:

“The general rule is that the court will recognise at common law only the authority of the liquidator appointed under the law of the place of incorporation of the company.”

There is apparently no British Virgin Islands authority, which suggests that the common law in the British Virgin Islands is any different from the generally accepted common law position.  It would also appear, unsurprisingly, that in the British Virgin Islands matters of shareholder and corporate management powers are governed by the law of the country of incorporation [27].

38.  The limited exceptions to the general rule that can be found in other authorities in offshore jurisdictions relate to recognition for the purpose only of a foreign liquidator introducing a scheme of arrangement in Cayman.  In Re Dickson Group Holdings[28] the Bermuda court recognised Hong Kong liquidators appointed over a Bermuda company only to the extent of permitting the Hong Kong liquidators to introduce a scheme of arrangement in Bermuda. Kawaley J made clear at [25] that the recognition did not displace the Company’s board as a matter of Bermuda law:

“… The practice has developed in jurisdictions such as Bermuda which lacks statutory corporate rescue rules of appointing a provisional liquidator to supervise the company’s management as it affects the restructuring under supervision of the local and any relevant foreign court. Where there are parallel restructuring proceedings, the company’s management will remain in place both in Bermuda and in the foreign forum. If a foreign winding-up order is made without an equivalent Bermudian order, the foreign order displaces the directors under the foreign law but does not displace them under Bermuda law. From a Bermuda regulatory perspective, it may be problematic to countenance a situation where the only persons responsible for a Bermudian company as a matter of Bermuda law are still in office yet have lost effective control of the company under the law which governs the company’s entire commercial operations. This suggests that it is probably accurate to regard the approach to recognition of foreign corporate rescue proceedings generally as being more generous than the approach to foreign winding-up proceedings, to this extent. The position would likely be less problematic if Bermudian directors stayed in place under local law while in their company’s principle place of business abroad their corporate powers were merely limited by the appointment of provisional liquidators appointed with ‘soft’ monitoring powers.”

39.  Similarly, in the Cayman Islands in Re China Agrotech Holdings Ltd [29] Segal J recognised Hong Kong liquidators over a Cayman Islands company only to the extent of permitting them to introduce a scheme of arrangement in the Cayman Islands  In his judgment Segal J also made it clear that the Hong Kong liquidators were not able to act for the company generally at [29(a)]:

“[B]ecause the liquidators are not appointed in the companies country of incorporation they are not, as a matter of Cayman private international law, treated as being empowered to act on behalf of the company.”

40.  The position has become clearer recently as a result of the handing down of the judgment of Chief Justice Smellie in the Cayman Islands in Sun Cheong Creative Development Holdings Limited [30] on 20 October 2020. As an aside I would note that the handing down of this decision has been delayed by various other matters that I have heard over the last three months as a result of the significant increase in cross-border related cases involving listed companies that have given rise to issues that impact on the reasoning in this decision.  Sun Cheong is the most recent example and is potentially of considerable impact.

41.  Sun Cheong is incorporated in the Cayman Islands, listed in Hong Kong and has the majority of its business located in the Mainland.  It is subject to two winding-up petitions in Hong Kong.  On 13 December 2019 CTBC Bank presented a petition to wind-up Sun Cheong on the grounds of insolvency.  On 19 January Orix Asia (presumably in ignorance of the petition presented the month before) also issued a petition to wind-up Sun Cheong on the grounds of insolvency.  It was not until 27 July 2020 that Sun Cheong issued a petition to wind itself up in the Cayman Islands as a prelude to a successful application to appoint soft-touch provisional liquidators.  In his reasons the Chief Justice discusses in some detail the principles of Cayman Islands law that guide the court in dealing with the kind of cross-border matters that I consider in this decision.  It is convenient to quote the relevant parts of the judgment before commenting on them and their significance.

“53. As already discussed, the Company submitted and I accepted that any insolvency proceedings, including any restructuring or scheme or arrangement, should be supervised by the Grand Court of the Cayman Islands as the court of the place of incorporation of the Company. This was in light also of the circumstances where the Cayman Islands is an advanced and reputable international financial centre which frequently deals with international disputes involving Cayman Islands companies [31] and shareholders in and creditors of a Cayman Islands company may have a ‘reasonable expectation that the courts here are competent and able to resolve any complex dispute that may arise in an efficient and just manner.’[32]

54. I also had in mind that the common law jurisdiction to recognise and assist foreign insolvency officeholders appointed in the country of incorporation of a company is well established in Hong Kong. As explained by Mr Jacky Cheung: ‘There is an established line of case authority that the HK Court will provide recognition and assistance to offshore joint provisional liquidators in aid of offshore court proceedings’ and there are numerous examples of the Hong Kong Court recognising Cayman appointed restructuring provisional liquidators in Hong Kong (and adjourning petitions in Hong Kong to facilitate this); see for instance: China Oil Gangran Energy Group Holdings Limited (in Provisional Liquidation) [2020] HKCFI 825 and Moody Technology Holdings Limited (in Provisional Liquidation) [2020] 4 HKC 78.

55. On the other hand, while the Grand Court will also grant reciprocal recognition and assistance of foreign insolvency officeholders appointed in the country of incorporation, the jurisdiction of the Grand Court to recognise and grant assistance to liquidators of Cayman Islands incorporated companies appointed by the courts of another country is more limited. In the instances where the Grand Court has recognised insolvency practitioners appointed to Cayman Islands companies by foreign courts, the Court has identified the following relevant considerations having regard to one or other of the categories of circumstances identified at [7] above:

a. Whether parallel proceedings will only serve to incur additional and unnecessary delay. In Re China Agrotech above the Court recognised Hong Kong liquidators of a Cayman Islands company as having authority to act on behalf of the company for the purpose of presenting a petition for a scheme of arrangement in the Cayman Islands as part of a corporate restructuring, which involved a parallel scheme in Hong Kong.

b. Whether reputational, regulatory or policy reasons militate in favour of a Cayman Islands proceeding (China Agrotech).

c. The breadth of powers available in each jurisdiction. It is worth nothing that ‘soft touch’ provisional liquidation is not available under Hong Kong Law.[33] In Changgang Dunxin Enterprise Company Limited (Unreported, 1 March 2018), Mangatal J recognised the appointment of JPLs over a Cayman Islands company by the Courts of Hong Kong for the purpose of applying on behalf of the company for the same individuals to then be appointed as JPLs of the company in the Cayman Islands. It was proposed that the JPLs would then seek recognition of their appointment in Hong Kong and, if recognised, that they would be discharged as JPLs in Hong Kong and would conduct parallel restructuring proceedings in the Cayman Islands and Hong Kong in their capacity as Cayman Islands JPLs of the company. A relevant factor in seeking the application was the broader powers to effect a corporate restructure available to JPLs in the Cayman Islands. Mangatal J held that it was appropriate to grant the Hong Kong JPLs recognition for the purpose of making an application to the Grand Court for the winding up of the Company and to seek the Hong Kong JPL’s appointment as JPLs of the company in the Cayman Islands.

d. Whether comparable relief has been sought in the foreign jurisdiction. In the Bermudian decision of In re Dickson Group Holdings Ltd 2008 BDA LR 34 (‘Re Dickson’), Kawaley J (as he then was) approved the entry by the Company into a scheme of arrangement sanctioned by the Courts of Hong Kong (impliedly recognising the Hong Kong appointees), pursuant to which its creditors would receive part-payment of the debts owed to them, and the Company could then be returned to trading in the hands of new investors.

e. Whether the foreign petitioner is seeking to wind up the Company or avoid the need for a winding up; see Re Dickson.

f. The locus of the Company’s business.

56. Thus, it appears from the cases that the Grand Court has considered the purpose of the appointment on each occasion that it has been asked to recognise insolvency practitioners appointed to a Cayman Islands domiciled company by a foreign court. Where the purpose has been to facilitate a restructuring or otherwise avoid the need to wind up the company, the cases show that the Court will be more willing to grant recognition as being in the best interests of the company’s stakeholders.  Conversely, the Grand Court will be slow to give primacy to pure winding-up proceedings brought overseas in respect of a Cayman Islands company where it is satisfied that there is an intention on the part of the company to present a plan of reorganisation for the benefit of its creditors.”

42.  Particularly [56] makes it clear that a Cayman Islands court is unlikely to recognise a liquidator appointed in Hong Kong to wind-up a Cayman incorporated company other than for the limited purpose of a restructuring.  I would note in passing that when deciding, which of a choice of jurisdictions should be chosen to implement a restructuring regard will commonly need to be had to recognition and in this respect the place of incorporation can be of peripheral importance.  Jurisdictions which have enacted the UNCITRAL model will have regard to COMI when deciding whether or not an order made to facilitate a restructuring in another jurisdiction should be recognised and enforced [34].  This is highly relevant in the context of many Mainland businesses listed in Hong Kong, which commonly have US$ denominated debt.  Recognition in the US, normally New York, will be of central importance and as Winsway [35] and subsequent cases demonstrate, the New York Bankruptcy courts will recognise and enforce a Hong Kong scheme because the companies are listed here and that gives them sufficient connection with Hong Kong to support recognition as a matter US Bankruptcy law.  As I understand the position the fact alone that the jurisdiction sanctioning a scheme is also the place of incorporation of a company whose debt is being restructured is not sufficient connection to obtain recognition in the United States.  Similarly, regard needs to be had to the impact of the Rule in Gibbs [36], which is part of the law of Hong Kong.  A Cayman scheme will not be effective to compromise in Hong Kong debt governed by Hong Kong law or laws other than that of the Cayman Islands.

43.  In my view, it is clear from the authorities that a liquidator appointed in Hong Kong to wind-up the Company would be unlikely to be recognised in the Cayman Islands except for the purpose of introducing a scheme of arrangement.

44.  Liquidators appointed by a Hong Kong court would be unable to take control of the Company’s British Virgin Island subsidiaries which are the intermediate holding companies of the Mainland subsidiaries. Whether or not foreign liquidators are agents of a debtor company is governed by the law of the company’s incorporation (lex incorporationis): Re Moody Technology Holdings Limited [37]. As the cases from the offshore jurisdictions demonstrate as a matter of Cayman Islands law liquidators appointed by the court in Hong Kong over a company incorporated in the Cayman Islands are not.  It is for this reason that the comments of Ma CJ and Lord Millett NPJ to which I refer in [21] were in my respectful view prescient and correct.  In my view, it must be assumed that any liquidator appointed by this court would not be able to change control of the Company’s intermediate subsidiaries and obtain control of the Mainland companies.  It follows that if the benefit that is sought by winding-up the Company is to recover assets in the Mainland, it is not a benefit that can be obtained by winding-up the Company in Hong Kong.

Claims against Mr Zhu

45.  This leaves potential claims against Mr Zhu in respect of the Loans.  The Loans were made by Mainland subsidiaries of the Company.  For present purposes the precise details do not matter.  What is material is that the Company does not dispute that the Loans were not authorised.      In addition to the Loans further unauthorised transfers totalling RMB273 million were made by subsidiaries between April 2018 and October 2019 to companies related to Mr Zhu.  The Loans and transfers have been investigated by Grant Thornton acting as independent forensic accountant appointed by the Board and the results of the investigation published as a seven-page announcement dated 14 April 2020.  The announcement details the Loans and the subsequent unauthorised transactions. The Company’s position is that the Loans and other transfers have been fully repaid by Mr Zhu, the Loans and other transfers investigated by an independent accountant and the results announced.  Therefore, the Loans, so argued Mr Ho for the Company, do not justify a making a winding-up order.

46.  The Loans were made in the Mainland by Mainland subsidiaries.  For the reasons that I have explained it is very unlikely that a liquidator appointed over the Company in Hong Kong could carry out a meaningful investigation or commence any legal proceedings which required the subsidiaries involvement as their appointment would not be recognised in the Mainland.  It does not seem to me that liquidators appointed in Hong Kong over the Company would have any real prospect of being able to carry out an independent assessment of whether the announcement is accurate or take any action if the liquidators concluded that companies within the Group have valuable claims against Mr Zhu. 

47.  In conclusion, the Petitioner has not demonstrated a real benefit that it would gain from the appointment of a liquidator in Hong Kong over the Company and consequently the second core requirement has not been satisfied.

The Company’s application for an adjournment to allow it to restructure

48.  Mr Ho on behalf of the Company did not seek the dismissal of the Petition in the event that I was not satisfied that the second core requirement has been satisfied.  As I understand the Company’s position it recognises that if it is not able to introduce a restructuring through a scheme of arrangement it will have to be wound-up.  Therefore, there is no particular reason for it to do more than acknowledge this and consistent with the reality of its position seek an adjournment, which is what I shall order.  I say more about how this matter is to proceed in [54].

49.  If I had concluded that the second core requirement is satisfied I would have had to consider the Company’s submission that the Petition should be adjourned in order to allow it the opportunity to attempt a restructuring as this is in the best interests of both offshore and onshore creditors of the Company and the Group.  It is to this issue that I now turn.

50.  As the New Zealand Court of Appeal has recently observed “Insolvency law is a mix of principle and pragmatism.  The [insolvency legislation] is to be used in a practical way.  It does not require liquidation when that will not serve any useful purpose”[38].  The way in which the courts assess applications by financially distressed companies that seek adjournments of petitions reflects this.

“When the court considers the possibility of benefit resulting from an order, the normal starting point is to consider any possible benefit to the petitioner, whether it be a debtor or a creditor. In many cases, showing benefit to the petitioner will be sufficient to persuade the court to make the order… I do not see why a consideration of benefit should be restricted to the possibility of benefit to the petitioner; benefit to others should also be relevant. Conversely, disadvantages or unfairness to others may also be relevant. After all, the court is exercising a discretion and is surely required to consider the effect of the proposed order on all relevant persons. In such a case, as is normal, the court will consider the effect of making the order and the effect of not making the order and will then consider what to do, having regard to all relevant considerations, including the legitimate aspirations of all potentially affected persons.”[39] (emphasis added)

“I accept that as a general proposition, in the absence of good discretionary grounds to the contrary, an applicant for winding up who has proved its debt and has proved insolvency ought to achieve a winding up order. However, … the discretion can be exercised in favour of granting a stay where the refusal of a stay would be likely to work a substantial injustice.”[40] (emphasis added)

51.  I summarise how this balancing exercise is to be approached when, as in the present case, creditors take differing views about what is in their best interests in Re Chase On Development Ltd [41]:

“In cases in which a company is clearly insolvent and a petitioner’s debt is not in dispute an important consideration, when a court it being asked to adjourn a petition by a Company in order to allow it to attempt to restructure its debt, are the views of its unsecured creditors.

If the creditors are taking different views the Court will normally take into account all the circumstances including the following considerations:

(a) A qualitative assessment of the number of creditors for and against a winding-up order. It is not just a matter of counting the number of creditors in favour and those against or the proportion of the value of the debt they hold.

(b) The reasons proferred by the supporting and opposing creditors.

(c) The feasibility of the proposed restructuring.”

In practice the court is making a decision which commonly will be more commercial than legal.  In most situations the court takes the view that a party is best placed to assess what is in its best financial interests, but the nature of the insolvency process involving, as it frequently does, multiple creditors inevitably throws up situations where there are genuine differing views.  This may be explained by varying degrees of knowledge amongst the body of creditors about a company, its commercial prospects or the insolvency process.  In these circumstances the court has to decide, which view it considers preferable at the time the decision has to be made.  Snowden J provides an example in his judgment in Re Maud (No 2)[42] of how the court approaches this task in the analogous situation of personal bankruptcy:

“Taking all these factors into account, I am not currently satisfied that the interests of Mr. Maud’s creditors would be served by making him bankrupt immediately. Whilst there is no certainty, there does now seem to be some prospect of an imminent end-game to the Spanish insolvency which might bring a benefit to Mr. Maud and his creditors if he continues to be able to play a role in Spain. In contrast, there seems to be no real likelihood of any obvious, still less immediate, benefit to his creditors if a bankruptcy order is made now, and I have not been given any specific reason why a formal investigation of Mr. Maud’s past dealings needs to be undertaken immediately.

The majority in number and value of Mr. Maud’s creditors are also in favour of a further adjournment, and whilst I recognise that the creditors who have advocated or supported an adjournment may have other interests to serve, I cannot say that I find their approach unreasonable or irrational. I also have in mind that the only voice that I actually heard in favour of the making of such an order, that of Edgeworth, also comes from a party that is vigorously pursuing its own commercial agenda outside the bankruptcy proceedings” (emphasis added).

52.  The division between creditors in the present case falls largely between onshore and offshore creditors.  In the event of a winding-up of the Company the onshore creditors will enforce against the Mainland subsidiaries if they are debtors, which will be so in the case of many of the financial creditors in respect of which various subsidiaries will have either primary liability or liability under guarantees.  The onshore creditors are probably better placed to assess what course is most likely to maximise the return to creditors.  If the onshore creditors favour allowing the Company time to attempt to restructure its debt and rehabilitate its business it is unlikely that the offshore creditors will be better off it at the behest of the Petitioner the Company is wound-up in Hong Kong thus bringing to an end in my view any prospect of the Company retaining its listing and probably acting as a catalyst to the onshore creditors enforcing their claims in the Mainland at the likely expense of offshore creditors. In reaching this conclusion I have taken into account that some of the onshore creditors, in particular banks and any that are wholly or partly State owned, may be influenced not only by their own immediate financial interests, but the polices of the Central People’s Government and local governments and their understanding of a system that favours rehabilitation over liquidation where at all possible.  However, it seems to me that even if the considerations taken into account by Mainland creditors may differ to some degree from the offshore creditors the reality is that the Mainland creditors familiarity with the Mainland system and imperatives and their likely greater influence on restructuring and insolvency processes in the Mainland is a reason to give significant weight to their views rather than a reason to discount them.

53.  I accept that the information that the Company has provided, although of increasing detail, does not constitute a coherent plan with a quantified anticipated return to creditors and might, if the Company’s business and assets were located in Hong Kong, be insufficient at this stage to justify a further adjournment.  However, it seems to me that given that this is not the case and any assessment of what is the better course needs to give significant weight to the fact that the business and assets are located in the Mainland, if I had been of the view that the Petitioner had satisfied the three core requirements I would have adjourned the Petition for a further three months.

What order should the court make?

54.  I, therefore, adjourn the Petition to Monday 30 November 2020 at 9:30 am before me.  The Company shall file by 4:30pm on 20 November 2020 an affirmation reporting in detail on the progress of its proposed restructuring.  The Petitioner shall file any evidence in opposition on which it wishes to rely by 4:30pm on 25 November 2020.  The parties are to file their proposed order and brief written explanatory submissions by 4:30pm on 26 November 2020. Costs I shall reserve.  The parties should note that the court is unlikely to be able to deal with any substantive argument on 30 November 2020.

Conclusion

55.  As I explained at the outset of this decision the court is hearing many petitions to wind-up listed companies whose businesses are in the Mainland.  Since the court resumed hearings in May more than half the petitions I have heard have involved listed companies. Remarkably petitions to wind-up Hong Kong incorporated companies operating domestic businesses are currently a minority.  In addition I have received weekly applications for recognition and assistance by soft-touch provisional liquidators of companies incorporated in one of the offshore jurisdictions and listed here intending to use the Z-Obee technique described in [24] and footnote 11.  What is now quite clear is that the use of the group structures I have described present difficulties.  It will be useful if I describe these and what I anticipate will be their impact for creditors and shareholders in Hong Kong and other jurisdictions.

56.  Satisfying the court that the first and third core requirements are satisfied is normally straightforward if a company is listed in Hong Kong.  The listing alone constitutes in my view (and the alternative was not argued in Shandong Chenming Paper) sufficient connection with Hong Kong to satisfy the first core requirement.  There will normally be other creditors in Hong Kong, who will satisfy the third core requirement.  The Court of Appeal has clarified that the second core requirement must be satisfied in all cases and that involves demonstrating a real benefit to the petitioner if a winding-up order is granted.  In many, probably most cases, demonstrating a real benefit will be difficult because of the problems discussed earlier in this decision.  The facts and matters relied on as demonstrating a real benefit will have to be recited in the petition and evidence adduced that prove the facts and matters.  If, for example, it is asserted that the realisation of the value of the listing constitutes a real benefit it will be necessary to adduce evidence demonstrating that on balance this will prove to be the case if a winding-up order is made.  It will not be sufficient to file an affirmation in which the deponent simply recites this to be his belief.  Evidence from a witness familiar with the current practice of the Stock Exchange of Hong Kong and the current value of a listed company will be required.  If the assertion is disputed contrary evidence will need to be filed.

57.  I have endeavoured to deal with petitions in respect of listed companies and applications for recognition and assistance quickly and robustly.  However, the increasing complexity of the cases and the state of the list will result in petitions having to be adjourned for comprehensive argument.  This will inevitably lead to some delay.  This presupposes that creditors, or for that matter shareholders, consider it worth petitioning in Hong Kong rather than going straight to the relevant offshore jurisdiction.

58.  As will be apparent from this decision the practice has developed of Mainland businesses listing in Hong Kong using corporate vehicles which have no connection with the Mainland, which is commonly the COMI, or Hong Kong where the business is to be listed.  The structure is made more complicated by group architecture which involves inserting between the listed company and the mainland companies at least one, and my impression is commonly more than one, intermediate subsidiary incorporated in a different offshore jurisdiction.  As this decision demonstrates this structure creates a significant barrier to steps being taken by creditors and shareholders to enforce rights using the courts of Hong Kong, which is the legal system that they have probably assumed they will be able to access if they need to take steps to enforce their legal rights against a company listed here.  The realisation by creditors and shareholders of the impact of these structures along with the increasing familiarity of the advantages of the Z-Obee technique risks significantly reducing the role of the courts of Hong Kong I n regulating insolvency and the protection of shareholders’ rights.