RE ZHU KUAN (HK) CO LTD

1.  On 10 October 2007, the liquidators of Zhu Kuan (Hong Kong) Company Limited (“ZKHK”) and Zhu Kuan Group Company Limited (“ZKG”) (collectively “the Companies”) presented these petitions on behalf of the Companies pursuant to section 166 of the Companies Ordinance, Cap. 32, seeking sanction of the schemes of arrangement between each company and its creditors.  The schemes are to resolve the protracted liquidations of the Companies.

2.  The schemes are inter-conditional.  If one scheme fails for whatever reason, then both shall fail irrespective of whether they were approved by the requisite majority of scheme creditors or sanctioned by the court.  Further, pursuant to the schemes, the ZKHK scheme creditors and the ZKG scheme creditors are combined or consolidated into one pool for dividend purposes.  The ZKG scheme is identical to the ZKHK scheme save that closing of the ZKG scheme requires additional steps to be undertaken in Macau. 

3.  At the same time as the Companies seek sanction to the schemes of arrangement, they have applied to stay permanently all further proceedings in the winding up of each of the Companies in HCCW Nos. 874 and 875 of 2003, under section 209 of Cap. 32.

The background

4.  ZKHK was incorporated in Hong Kong on 19 May 1992 as a private company.  Its present authorised and issued share capital is HK$50 million divided into 50 million ordinary shares of HK$1.00 each.  49,950,000 of these shares are owned by ZKG, and 50,000 are owned by Yu Jianhua. 

5.  ZKG was incorporated in Macau.  It began operations on 13 February 1988 as a private company limited by shares.  It present authorised and issued share capital is 3 million patacas, held in the following quotas: (1) one quota in the nominal value of 2.1 million patacas subscribed by the shareholder “Zhu Kuan Company of the Zhuhai Special Economic Zone”; and (2) one quota in the nominal value of 900,000 patacas subscribed by the shareholder “Zhu Kuan Investment and Development Company of the Zhuhai Special Economic Zone”.

6.  ZKHK and ZKG were established as “window companies” for the commercial activities of the Zhuhai Municipal Government (“ZMG”) of the People’s Republic of China (“the PRC”).  Until 1997, ZMG used the Companies to procure billions of dollars of loans from financiers, which the Companies then loaned to ZMG on an unsecured basis for transactions and investments.

7.  The Companies defaulted on the financial obligations they owed to their international financial creditors from November 1998.  The total liabilities of the Companies at the time were about HK$8 billion.

8.  With the assistance and support of ZMG, the Companies entered into discussions with their creditors for a restructuring of their debts.  The proposals considered at the time provided for restructuring of the Companies on a group or consolidated basis.  The assets of the Companies and all their subsidiaries (“the Group”) were to be realized and on a consolidated basis, and the unsecured creditors of the Companies would participate in the proposed distribution on a rateable basis without distinction between the different companies in the Group and their respective assets and liabilities.  The creditors considered this approach appropriate and necessary as it reflected the nature of the financial affairs of the Group, in particular the existence of many substantial guarantees between the Companies, which meant that many of the major unsecured creditors were creditors of both the Companies. 

9.  The restructuring negotiations subsequently broke down.  On 12 August 2003, Standard Chartered Bank (Hong Kong) Limited (“SCBHK”) presented petitions to wind up the Companies.  Provisional liquidators were appointed for the Companies on 13 August 2003. 

10.  The provisional liquidators took steps to assist SCBHK with the winding up of ZKG in Macau.  On 2 June 2004, the court in Macau appointed a liquidator of ZKG.

11.  On 4 October 2004, the court in Hong Kong ordered the Companies to be wound up.  On 21 March 2005, an order was made for the appointment of the liquidators of the Companies with a committee of inspection for each. 

12.  The liquidators and the Macau liquidator have worked closely.  The ZKG scheme will be followed by a scheme of arrangement or application in Macau. 

The assignment of the Companies’ indebtedness

13.  In mid August 2004, ZMG re-commenced discussions with the provisional liquidators and the creditors for the restructuring of the Companies. 

14.  On 31 December 2005, a Framework Agreement was executed pursuant to which Bank of China Group Investment Limited (“BOCGI”), Bank of China Limited Macau branch (“BOC Macau”) and Bank of China (Hong Kong) Limited (“BOCHK”) agreed to sell and/or assign all of the indebtedness of the Companies owed to them to Sun Kian Ip Holding Company Limited (“Sun Kian Ip”), Guoyuan Investment Limited (“Guoyuan”) and Sei Pou Real Estate Development Limited (“Sei Pou”) (collectively “the Assignees”). 

15.  On 25 January 2006, the Assignees entered into a Sale and Purchase Agreement in furtherance of the Framework Agreement pursuant to which the indebtedness owed to Shiny Way Holding Inc (an entity controlled by BOCGI) was assigned to Sei Pou, the indebtedness owed to BOCHK was assigned to Guoyuan and the indebtedness owed to BOC Macau was assigned to Sun Kian Ip.  The sale to Sei Pou was completed on 25 January 2006, the sale to Guoyuan was completed on 21 July 2006 and the sale to Sun Kian Ip was completed at the end of February 2007. 

The restructuring

16.  On 25 January 2006, the Assignees, the liquidators, a company incorporated in the PRC and wholly owned by ZMG for the purpose of the restructuring (known in Chinese 珠海市國源投資有限公司; “the Investor”) and SCBHK (on its own behalf and as a member of the committee of inspection of each of the Companies) executed a memorandum containing outline terms for a proposed restructuring of the Companies (“the Memorandum”). 

17.  In furtherance of the Memorandum, on 16 October 2006, the Companies, the liquidators, the Investor, the Assignees and ten secured financial creditors of the Companies (“the Secured Financial Creditors”) executed a restructuring agreement (“the Restructuring Agreement”), which set out the restructuring arrangements to discharge the entire indebtedness of the Companies.  The arrangements include the schemes.

18.  In summary, the arrangements involve:

(1)	the legal transfer of certain assets of the Companies (“the Restructuring Assets”) to the Investor (or its nominee) in consideration for the payment of a sum not exceeding RMB 3,110,000,000.00 by the Investor to the scheme administrators (“the Restructuring Proceeds”) and the settlement of all preferential claims arising by reason of the termination or stay of the winding-up proceedings against ZKG in Macau which may include, without limitation, the costs of the public prosecutor and Macau court which are estimated to be a sum not exceeding HK$1.5 million (“the Macau Preferential Claims”);
(2)	the Secured Financial Creditors releasing and discharging their respective indebtedness and security;
(3)	simultaneously, all other outstanding indebtedness owed by the Companies shall be compromised and discharged through the implementation of the schemes;
(4)	the liquidation of the Companies in Hong Kong and Macau will be permanently stayed or terminated.  If an application to stay the winding-up proceedings of ZKG in Macau is not possible, a scheme will be implemented in Macau to give effect to the Restructuring Agreement so far as applicable.

19.  In addition, during January 2006, each Assignee entered into an exchange arrangement by which they agreed to transfer or assign their rights to receive any distribution under the schemes to the Investor in exchange for the Investor procuring to transfer the Exchange Property (as defined in the Restructuring Agreement) to the Assignees and the Investor agreed to waive those rights to claim any distribution under the schemes.

The schemes

20.  Upon satisfaction of all the conditions precedent to the schemes, all liabilities under both the ZKHK scheme and the ZKG scheme shall be compromised and discharged in full in consideration for the scheme creditors receiving distributions paid in accordance with the schemes.

21.  The schemes provide for the establishment of a creditors committee, the initial members of which will be SCBHK and Sei Pou.  All distributions to scheme creditors shall be made from the scheme funds, which shall comprise all assets, chose in action and other property of the Companies in the possession of and available to the liquidators, including the Restructuring Proceeds and 40% of any realisation from the Companies’ four claims against third parties not related to ZMG (“the Retained Claims”), after deducting associated costs and expenses (“the scheme funds”).

22.  The scheme funds are to be distributed in this order:

(1)	the costs, charges and expenses of and incidental to the schemes, as defined in the schemes, shall be paid;
(2)	the Secured Financial Creditors shall receive a distribution in consideration for releasing and discharging their security (60% of the value of any existing security located in Hong Kong, 58% of the value of any existing security in Macau, and 45% of the value of any existing security in the PRC) (“the Redemption Monies”);
(3)	all claims of preferential creditors shall be paid in full; and
(4)	all other scheme creditors (including Secured Financial Creditors in respect of any Net Indebtedness as defined in the schemes) shall receive a distribution pro-rated to the extent of their scheme liabilities from the balance of the scheme funds.

23.  The liquidators’ current estimate indicates that the pro rata distribution to all other scheme creditors will represent approximately 18% of their claims as at the date of the winding-up orders.

24.  Although the schemes will constitute separate legal obligations of ZKHK and ZKG, the collection and realisation of the Companies’ assets, the payment of the scheme expenses, the payment of the Redemption Monies and the payment of any and all other distributions shall be made on a combined basis with the scheme creditors of each company ranking equally with the other.

25.  The Retained Claims will not form part of the schemes and any realisations thereof will not be aggregated with the general pool of assets to be distributed to the scheme creditors.  The Companies, Top Ease Limited (a subsidiary of ZKHK), the Investor, the liquidators and the scheme administrators shall execute a Management Agreement that shall describe and formalise the terms upon which the scheme administrators will be granted exclusive rights and powers to control and conduct all matters relating to the Retained Claims and to provide that net realisations in respect of the Retained Claims shall be distributed to the scheme creditors and the Investors in the proportion of 40% and 60% respectively.

26.  The liquidators believe the schemes will have these advantages:

(1)	the overall rate of recovery to scheme creditors is expected to be more certain than that which may be available to scheme creditors if each liquidation were to continue;
(2)	the primary alternative for the liquidators and creditors entails substantial litigation in Hong Kong and internationally which has time, costs and risk implications; and
(3)	the terms of the schemes have been designated to achieve the restructuring arrangements efficiently and effectively and the schemes are sufficiently flexible to enable modifications where necessary and appropriate.

27.  The liquidators also pointed out two disadvantages of the schemes.  Firstly, the scheme creditors will be barred from issuing proceedings against the Companies during the scheme period.  However, on the basis of the information available to the liquidators, this will have little practical effect on the scheme creditors.  Secondly, if the schemes should fail for whatever reason, the costs and expenses incurred by the liquidators in the preparation and implementation of the schemes shall be paid as liquidation expenses, which shall reduce any final dividend to the scheme creditors.  Additionally, under each scheme, the costs and expenses of the liquidators and the former provisional liquidators are proposed to be paid on a full time cost basis irrespective of whether such costs have been subject to a court taxation.

The creditors of the Companies

28.  The total indebtedness due by ZKHK as at the date of the winding-up order is HK$3,074,233,337.00.  The total indebtedness due by ZKG as at the date of the winding-up order is HK$7,595,016,602.00.  The liquidators have adjudicated all of the claims of creditors of each company as are known or identified.

29.  The Net Indebtedness of the Companies (all indebtedness due to Secured Financial Creditors as at the date of the winding-up orders by each company after deduction of any realisation of the existing security and the Redemption Monies) is estimated at HK$4,192,374,567.00.

30.  As at 16 October 2006, Secured Financial Creditors holding not less than 82% of the total indebtedness of ZKHK and 72% of the total indebtedness of ZKG have indicated their “in principle” agreement to vote in favour of the schemes and in any Macau application or Macau scheme.

31.  In view of problems associated with the security held by certain creditors and the realisation of their underlying security, certain liabilities have been excluded from the schemes with the consent of these creditors.  They are Banco Tai Fung S.A.R.L. (“Banco Tai Fung”) and Guangdong Development Bank Macau branch (“GDB Macau”) and ZMG.  Moreover, all claims of ZMG and its associates against any of the companies in the Group are excluded from the schemes, and none of ZMG and its subsidiaries and associates shall be permitted to prove and receive any distribution from the schemes.  Banco Tai Fung, GDB Macau and ZMG will not be scheme creditors.

32.  To safeguard the interests of the scheme creditors, the Investor has agreed to indemnify and hold harmless the scheme creditors from any loss or damage arising as a result of any act by Banco Tai Fung or GDB Macau, and to increase the amount of the Restructuring Proceeds by the same amount as that paid to Banco Tai Fung and   GDB Macau if they should become entitled to and any payment is made to them which reduces the amount available to the scheme creditors.

The scheme meetings

33.  As all the scheme creditors have the same rights in the winding up of the Companies, a single meeting was called for each scheme.

34.  Leave was given by this court on 1 August 2007 to the Companies to convene a meeting of the scheme creditors for each company and directions were given for publication of a notice of the scheme meeting in Hong Kong and Macau, and despatch of the notice and scheme document to all scheme creditors.  The directions were duly complied with.

35.  Following the granting of leave to convene the scheme meetings, a minor modification was made to the scheme document to clarify the definition of “scheme liability” to ensure that creditors whose claims had not been adjudicated by the liquidators were also subject to the schemes.  The liquidators notified all scheme creditors of the proposed modification by letter on 5 September 2007.

36.  On 10 September 2007, the scheme meetings were convened.  In respect of ZKHK, the scheme was approved by 100% in number of the scheme creditors who were present and voted; such scheme creditors represented 100% in value of the scheme liabilities due to the scheme creditors who were present and voted.  For ZKG, the scheme was approved by over 96% in number of the scheme creditors who were present and voted; such scheme creditors represented 99% in value of the scheme liabilities due to the scheme creditors who were present and voted.

37.  Thus, both schemes have been approved by the requisite statutory majority, being a simple majority in number of creditors representing over 3/4 in value of the scheme creditors.

Sanction of the schemes

38.  The scheme meetings were duly notified and properly convened.  The class of creditors had been properly constituted.  I am satisfied that the creditors have been given sufficient explanation of the schemes and their effects, to enable them to make a reasonable judgment how to vote at the scheme meetings.  I am further satisfied that the schemes of arrangement are such that an intelligent and honest man, being a member of the class concerned and acting in respect of his interest, might reasonably approve.

39.  I have therefore exercised my discretion to sanction the scheme for each company and made an order in terms of the draft order submitted in each petition.

Stay of the winding-up proceedings