SHEEN BENEFIT INTERNATIONAL LTD. v. THE HONG KONG AND SHANGHAI BANKING CORPORATION LTD.

CACV 351/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 351 OF 1999

(ON APPEAL FROM HCCW 665 OF 1999)

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J U D G M E N T

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Hon Chan CJHC:

1. This is an appeal by the appellant Sheen Benefit International Limited (the Company) against the order of Rogers JA made on 24 December 1999 whereby it was ordered that the appellant do on or before 28 January 2000 give security for the costs of the respondent, the Hong Kong and Shanghai Banking Corporation (the Bank) in the sum of $150,000.

2. The events which led to the present appeal are as follows. On 26 July 1999, the Bank petitioned for the winding-up of the Company on the ground that the Company was insolvent and unable to pay its debts. As at 13 September 1999, the Bank was owed by the Company approximately US$1.4 million in respect of banking facilities granted to the Company. It was not disputed before the Company Judge that the debt was due and owing.

3. The hearing of the petition was adjourned twice on 4 October and 25 October 1999 to enable a proposal of a rescue plan to be formulated and put to the creditors. On 15 November 1999, at the resumed hearing, a financial report was placed before the court but it showed no concrete rescue plan. In any event, the Bank did not find the plan acceptable. The Company asked for time to put further materials before the court. The Judge refused to grant a further adjournment, apparently having been satisfied that the Company was insolvent and unable to pay its debts. The Judge granted a compulsory winding-up order.

4. On 4 December 1999, the Company lodged an appeal against that order. The only ground of appeal was that there was new evidence of a restructure plan and the major creditors' support which was significant to the opposition of the winding-up order. On 20 December 1999, the Bank filed an application seeking security for costs of the appeal. On 24 December 1999, Rogers JA made the order to which I have referred. The Judge also ordered that in default, the appeal do stand dismissed.

5. On 27 January 2000, the Company lodged a Notice of Appeal against the order for security for costs. The Notice of Appeal referred to two matters: (1) it was stated to be an appeal out of time, and (2) it was stated to be pursuant to leave granted by Rogers JA. In fact, no leave was granted by the Judge. In any event, it turned out that the Company failed to put up the required security on 28 January 2000 and a formal order was made on 29 January 2000 dismissing the appeal with costs.

6. When the appeal against the order for security for costs came before this Court on 9 March 2000, the Company was then represented by counsel. We were informed that the security could now be provided within a very short time. Counsel is in effect asking for extension of time to comply with the security for costs order. Counsel also presented to us a document in Chinese which was named "A proposal for the debt restructuring and repayment". We heard some arguments and found the proposal to contain some unsatisfactory aspects. I shall deal with those aspects at a later stage. What happened was that counsel sought a further adjournment in order to put some of the matters beyond doubt and to clarify the queries raised by the court and followed up by counsel for the Bank. Today, counsel for the Company was able to present to us a further document which was prepared by Sino-Reality, a firm of certified public accountants in China. The document was called "An assessment and proposal of the investments in China by the Company and an assessment of the restructuring proposal of the Company".

7. It is not disputed that the Company had been in serious financial difficulties for some time. In fact, it had ceased active trading since December 1998, i.e. for over one year. Negotiation had started since January 1999 for a restructuring and repayment of its debts. The debt due to the Bank was slightly over US$1.4 million. Before the Company Court, despite efforts to rescue the Company, no concrete proposal was put forward or found to be acceptable by the Bank. It cannot be said that the Company Judge was wrong to have made the winding-up order. As mentioned above, the only ground of appeal is that new evidence showing that a more concrete proposal is now available.

8. I am conscious that in this appeal the court needs to consider: whether the order for security can be complied with and whether there is any arguable appeal so that there is a reasonable chance that the winding-up order would be discharged. Having considered the two Chinese documents placed before this court, it would appear that the position is as follows.

(1) It is the policy of the Central Government to develop on a large scale the north western parts of the Mainland. The Company has the exclusive petrol licences in China and a vast potential of business profit in the future. It would run 100 petrol stations in China.

(2) According to Sino-Reality, because of these businesses, the Company would have an income of about RMB103 million in the next few years. There would be money representing debts due to and receivable by the Company of about $18 million within a short time and proceeds of sale of two assets, one in Shenzhen and the other one in Guaizhou yielding a capitalization of about $10 million.

(3) The major creditors (as stated on page 8F) are three banks and one company and the total debts amount to $177 million. There is another creditor Full Data Limited which was not included in the documents and which was owed US$13.5 million which is equivalent to about $100 million. These four creditors with total debts of over $230 million have indicated that they would re-open the negotiations and they would support any proposal to restructure and to make repayment of the debts. In other words, they would be prepared to consider any viable proposal which the Company may put up.

(4) The debt due to the Bank is approximately 5% of the total debts owed by the Company. It would appear that from the very beginning, the Bank was not interested in any negotiation and had not taken part in any meeting.

(5) Counsel also informed us that one of the banks was prepared to inject a further loan into the company provided that there was no winding-up order.

9. Before the Company Judge, the Company was then not represented by any lawyer. This was a fact which the Judge had obviously considered as relevant but as evidence against the Company that it did not even have the funds to instruct a lawyer. At that stage no concrete proposal to rescue the Company was put forward. The Company, through an officer, asked for time to prepare a further proposal which would be presented to the creditors. Most of the major creditors were willing to keep an open mind and to consider any viable proposal. They were opposing creditors but none of them were active enough as to file any evidence in support of the Company. There was a solicitor present in court before the Company Judge representing Full Data Limited which was a creditor which was owed in the region of $100 million. Unfortunately, because that creditor had not filed any evidence and was only represented by a solicitor, the Company Judge refused to hear it.

10. It would appear from the documents presented to this Court that it cannot be said that the new proposal, albeit only setting out some key features, would have no chance of being seriously considered and accepted by the major creditors. Hence, in view of the further documents and the support by the overwhelming majority of creditors, it cannot be said that there is no chance that the court would not exercise its discretion to discharge the winding-up order. It cannot be said that the appeal to discharge the winding-up order is doomed to fail or totally unarguable.

11. For these reasons, the Company now being able to put up the required security, I would exercise my discretion and extend the time to comply with the order for security for costs and set aside the order dismissing the appeal. The appeal lodged against the winding-up order is now restored.

Hon Leong JA:

12. I agree.