RE LEGEND INTERNATIONAL RESORTS LTD

HCCW 1139/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1139 OF 2004

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D E C I S I O N

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The applications

1.  I have before me two applications. One is a summons issued on 3 November 2004 by the petitioning creditor, Morgan Stanley Emerging Markets Inc. (“MSEMI”), for the appointment of provisional liquidators to Legend International Resorts Limited (“the Company”), pursuant to section 193 of the Companies Ordinance, Cap. 32. The other is a summons issued by the Company on 16 December 2004, to strike out the winding-up petition presented by MSEMI on 3 November 2004 on the grounds that it discloses no reasonable cause of action, is scandalous, frivolous or vexatious or an abuse of the process of the court.

2.  The summons for appointment of provisional liquidators first came before me on 10 November 2004. On the evidence then before the court, I indicated that I was not disposed to appoint provisional liquidators to attempt a restructuring of the Company.  There were proceedings pending in Malaysia to effect a restructuring of the parent company, Metroplex Berhad (“Metroplex”) and proceedings in the Philippines for a rehabilitation of the Company. I did not think it desirable to take any precipitous action that might have a disruptive effect on these proceedings. Besides, any scheme of arrangement that required a reduction of share capital would need to be approved by the Hong Kong court. In due course, an application would be made to this court to sanction the scheme and the interests of creditors would be protected. With that indication from the court, MSEMI asked to adjourn its application sine die. I acceded to that request and gave permission to MSEMI if it should wish to restore the application to seek leave by letter. Costs of that hearing were reserved.

3.  On 15 December 2004, MSEMI’s solicitors wrote to the court seeking leave to restore the summons, after obtaining advice that recent events in the Philippines should not make any difference to its application to appoint provisional liquidators. As for Malaysia, Metroplex had failed in its application to seek an extension of a restraining order to give it protection from enforcement actions to enable it to implement a restructuring plan through schemes of arrangement. There was then a pending application of Metroplex to strike out MSEMI’s petition to wind up Metroplex.

4.  On 16 December 2004, leave was granted to restore the application for appointment of provisional liquidators to a date to be fixed upon compliance with directions for the filing of further evidence, there being no immediate urgency for the hearing. Following the issue of the strike out summons, by consent the two applications were ordered to be heard together.

5.  It is convenient that I should first set out the relevant background matters.

The Company and Metroplex

6.  The Company was incorporated in Hong Kong on 25 May 1990 as a private company limited by shares. Its name was changed to its present name on 30 May 1997. The nominal capital of the Company is HK$120,000,000.00, divided into 120,000,000 ordinary shares of HK$1.00 each. The amount of capital paid up or credited as paid up is HK$115,954,000.00. According to the latest filed annual return of the Company, showing the position as at 25 May 2004, the shareholders of the Company are Metroplex (holding 59.99%), Sinophil Corporation (“Sinophil”, holding 40%) and Metroplex Administration Sdn Berhad (holding 0.01%).

7.  Metroplex is a public company incorporated in Malaysia and its shares are listed on the main board of Bursa Malaysia Securities Berhad, the stock exchange in Kuala Lumpur. It is an investment holding company with numerous subsidiaries, including the Company. As for Sinophil, it was incorporated in the Philippines and its shares are listed on the Philippine Stock Exchange. Metroplex holds 22% of the issued shares of Sinophil. I gather that share transfer arrangements are being implemented which will result in the transfer of all Sinophil’s shares in the Company to Metroplex.

8.  All of the Company’s assets and business operations are in the Philippines. The Company holds a licence issued by the Philippine Amusement and Gaming Corporation (“Pagcor”) to operate a casino business in Subic Bay, Zambales. The business is operated under the name of “Legend Resort & Casino”, in premises leased by the Company from the Subic Bay Municipal Authority (“SBMA”). The principal place of business of the Company is at Waterfront Road, Subic Bay Freeport Zone. Its registered office in Hong Kong, at Massmutual Tower, Gloucester Road, Wanchai is the address of the company secretary of the Company. Of the four directors of the Company, two reside in Kuala Lumpur and two reside in the Philippines. According to a schedule of debts and liabilities of the Company as at 31 August 2004, the Company’s total bank loans made up most of its overall liabilities and of total bank loans of 7.9 billion Pesos, about 4.7 billion Pesos were owed to banks in the Philippines.

The proceedings in Malaysia

9.  In December 2000, Metroplex sought the assistance of the Corporate Debt Restructuring Committee (“CDRC”), a quasi-government body established in Malaysia in the aftermath of the Asian financial crisis, to restructure its debts. By the time CDRC had ceased to function in July 2002, the attempts at restructuring were still not successful. Metroplex continued to negotiate a debt restructuring with its creditors. To preserve the status quo while negotiations were going on, on 22 October 2002, Metroplex with 15 of its subsidiaries obtained a restraining order from the High Court of Malaya at Kuala Lumpur under section 176(10) of the Companies Act 1965 to restrain all creditors from taking legal action against those various companies for a period of six months. Up to October 2004, there had been four extensions of the restraining order.

10.  In 2003 and 2004, Metroplex circulated draft scheme documents to its creditors and held a series of meetings with them. One of the proposed schemes related to the indebtedness of Metroplex to creditors of the Company, such obligations of Metroplex arose by way of guarantees given by Metroplex to creditors of the Company. In the composite explanatory statement circulated to creditors in February 2004, the borrowings of the Company guaranteed by Metroplex were stated to be US$151,708,107.00.

11.  In mid 2004, at the request of some of the creditors, Metroplex appointed independent financial advisers and legal counsel for the scheme creditors. A revised scheme and proposal and composite explanatory statement were circulated to scheme creditors in mid October 2004, due to the fact that a second listed company would no longer participate in the scheme. Also circulated for discussion was a draft explanatory statement in respect of a proposed Hong Kong scheme dealing with the Company.

12.  On 21 October 2004, Metroplex applied for a fifth extension of the restraining order. The application was rejected by the High Court at Kuala Lumpur on 30 November 2004. It did not appear to the court that even if the restraining order were to be extended for three months as sought, Metroplex would be in a position to produce a viable, reasonable or feasible scheme of arrangement within that time. At the time of the application, only 48.52% of the creditors had agreed to the application for extension of the restraining order and only 21% in value of the creditors had approved the proposed scheme, whereas the legislation would require approval of the proposed scheme by at least 50% in value of creditors. It was mentioned in the judgment that Metroplex would have liberty to apply for a fresh restraining order, if it should be in a position to present a bona fide, viable or feasible scheme for ready approval by the required majority of creditors within a reasonable and ascertainable time.

13.  I have mentioned earlier there was a summons taken out by Metroplex to strike out the winding-up petition presented by MSEMI. On 16 December 2004, that application was adjourned to 12 January 2005, with leave to MSEMI to file only expert evidence, but not factual evidence, in reply. On 12 January 2005, MSEMI withdrew its petition to wind up Metroplex and abandoned its application to appoint provisional liquidators for Metroplex. According to the consent order of the High Court at Kuala Lumpur dated 12 January 2005, the winding-up petition was withdrawn and struck out without liberty to MSEMI to commence fresh winding-up proceedings against Metroplex based on the same debt (this is also the petitioning debt in the Hong Kong proceedings mentioned below), and without prejudice to MSEMI’s rights in any other proceedings in Malaysia or otherwise, including proceedings in Hong Kong and the Philippines.

14.  At the time of the present hearing before me, there were no proceedings in Malaysia relating to Metroplex or the Company. I understand that MSEMI has since filed a fresh petition to wind up Metroplex, based on another loan it has acquired, and this is due to be heard on 24 June 2005. On the basis of the fresh petition, MSEMI also filed a new application for the appointment of provisional liquidators, which was fixed for hearing on 10 May 2005.

The winding-up petition in Hong Kong

15.  MSEMI, which invests in defaulted bonds and non-performing loans in emerging markets, presented a petition to wind up the Company on 3 November 2004 on the basis of a debt of US$5,236,020.54 with interest. The debt is said to arise in this way.

16.  By a facility agreement dated 22 July 1997 (“the Facility Agreement”) entered into by the Company as the borrower, Societe Generale Asia (Singapore) Limited (“SocGen”) as the co-ordinating arranger and agent, and the banks and other financial institutions listed in Schedule 1 therein as the lenders (“the Lenders”), the Lenders agreed to make available to the Company a revolving credit facility up to an aggregate principal amount of US$33 million. From July 1997, the Company made drawdowns pursuant to the Facility Agreement on various dates and in various amounts.

17.  On or about 22 July 1998, the Company failed to make payment of the advances under the Facility Agreement and interest accrued and other monies outstanding, thereby giving rise to an event of default under Clause 14.01(a) of the Facility Agreement. Accordingly, on or about 8 December 1999, SocGen as the authorised agent under the Facility Agreement, through its solicitors served a written notice of demand on the Company under Clause 14.02(a), demanding payment within 10 days of the total amount then due to all of the Lenders in the sum of US$26,375,458.93. The Company did not pay the sum stated to be due under this demand or any sum at all.

18.  Keppel Bank of Singapore Limited, Labuan branch (“Keppel Bank”) was listed in Schedule 1 of the Facility Agreement as a Lender at the time that the same was executed. Keppel Bank merged with its parent Overseas Chinese Banking Corporation Limited (“OCBC”) with effect from 25 February 2002, so that the business and all property, asset, liabilities, rights and obligations of Keppel Bank were transferred to and vested in OCBC. On or about 8 February 2002, a novation certificate was delivered to SocGen under the Facility Agreement, confirming the transfer from Keppel Bank to OCBC of Keppel Bank’s commitment and participation as defined thereunder.

19.  With effect from 3 September 2004, OCBC sold and assigned to MSEMI the whole of its commitment and participation under the Facility Agreement. On or about that date, a novation certificate confirming the transfer was delivered to SocGen under the Facility Agreement. Further, by way of a fax dated 31 August 2004 from SocGen to, inter alios, the Company, the Company was notified that OCBC’s participation under the Facility Agreement was to be transferred from OCBC to MSEMI.

20.  Clause 2.03 of the Facility Agreement provided that the rights and obligations of the Lenders thereunder are several and the amount at any time owing to each Lender shall be a separate and independent debt and each Lender shall be entitled to protect and enforce its respective rights arising out of the agreement. On 29 October 2004, MSEMI’s solicitors in Hong Kong, Messrs. White & Case, served a written notice of demand on the Company and Metroplex, demanding payment of US$5,236,020.54 by noon on 1 November 2004. This sum was made up of principal of US$3.9 million, interest and default interest calculated up to 29 October 2004. No payment of this debt was made.

21.  The petition was presented on the grounds that the Company is unable to pay its debts and should be wound up under section 177(1)(d); further and in the alternative, the business and affairs of the Company are conducted in a manner detrimental to its creditors and third parties and should be wound up under the just and equitable ground pursuant to section 177(1)(f). Reliance was also placed on the fact that explanatory statements prepared on behalf of the Company in October 2004 concerning a possible scheme of arrangement stated that the Company has indebtedness of HK$137,157,735.00 to Metroplex and US$152,906,922.00 to its financial creditors, making a total of US$170,534,185.00 and that it is unable to meet such indebtedness. It is not in dispute that the Company is grossly insolvent.

22.  Subsequent to the presentation of the petition, MSEMI had purchased further significant debts of the Company. MSEMI had executed documents for the transfer of the entire participation of these Lenders under the Facility Agreement: the Development Bank of Singapore Limited, Labuan branch; Societe Generale, Labuan branch; and Bayerische Hypo-und Vereinsbank AG, Singapore branch. MSEMI acquired the entire participation of a consortium of lenders headed by N.M. Rothschild and Sons (Singapore) Limited in a credit agreement dated 14 June 1996 to grant facility to the Company. MSEMI also purchased the Company’s indebtedness to the Bank of the Philippine Islands. As at 17 November 2004, the total debt owed to MSEMI was calculated at US$60,927,224.00, which equates to approximately 39.6% of the Company’s total bank indebtedness. MSEMI is the largest financial institution creditor of the Company and, as mentioned earlier, the Company’s bank debts made up most of its overall liabilities.

The proceedings in the Philippines

25.  On 9 November 2004, the day before the hearing of MSEMI’s inter partes summons for appointment of provisional liquidators before me, the Philippine Court made an order (“the Stay Order”), on the ex parte application of the Company, appointing Mr. Celso Vivas as the rehabilitation receiver, staying enforcement of all claims against the Company by court action or otherwise, prohibiting the Company from disposing any of its properties except in ordinary course of business, prohibiting the Company from making any payment of its liabilities outstanding as at the date of filing of the Rehab Petition, prohibiting the Company’s suppliers of goods or services from withholding supply in the ordinary course of business for as long as the Company makes payment, and directing the payment in full of all administrative expenses incurred after the issuance of the Stay Order.

26.  The Stay Order is effective until the dismissal of the petition or the termination of the rehabilitation proceedings. The court may, on motion or upon its own instance, terminate, modify or set conditions for the continuance of the Stay Order and may declare void any transfer of property or agreement made in violation of the Stay Order or in violation of the Interim Rules. I understand that such kind of order is normally granted as an interim protection if the rehabilitation petition filed is sufficient in form and substance, as it would take time to evaluate the merits of the rehabilitation plan. It is provided in Rule 4 Section 14 of the Interim Rules that the rehabilitation receiver shall be considered an officer of the court, “primarily tasked to study the best way to rehabilitate the debtor and to ensure that the value of the debtor’s property is reasonably maintained during the determination of whether or not the debtor should be rehabilitated, as well as implement the rehabilitation plan after its approval.”

27.  On 17 November 2004, MSEMI filed an omnibus motion (“the Omnibus Motion”) to lift the Stay Order and to terminate the proceedings initiated by the Rehab Petition, on the grounds that the Interim Rules do not apply to foreign corporations and the Philippine Court has no jurisdiction to entertain the Rehab Petition; that the Stay Order should be lifted and the proceedings terminated as a matter of comity, in view of the insolvency proceedings commenced earlier and pending in Hong Kong, which is the place of incorporation of the Company; and that the Rehab Petition was presented in bad faith.

28.  On 30 November 2004, the Company filed an ex parte urgent motion to appoint a new rehabilitation receiver in place of Mr. Vivas who had not accepted the appointment within the stipulated time. Ms. Cynthia L. Picazo (“the Rehab Receiver”) was appointed as such by an order on 20 December 2004, without prejudice to the resolution of the Omnibus Motion.

29.  On 23 December 2004, MSEMI filed a verified comment by which it opposes the Rehab Petition on jurisdictional grounds and on the ground that the Rehab Plan is not feasible as being very prejudicial to the interests of creditors. Other creditors have also filed verified comment/opposition to the Rehab Petition.  Four have contended that the petition should be dismissed for lack of jurisdiction; they are Metropolitan Bank & Trust Company (“Metrobank”), Pagcor, Geahin Engineering Berhad and Geahin International (Subic), Inc (collectively “Geahin”).

30.  On 6 January 2005, there was an initial hearing of the Rehab Petition. The initial hearing was adjourned pending determination of the issue whether the Philippine Court would have jurisdiction to entertain the Rehab Petition. If the issue on jurisdiction is resolved in favour of the Company, the initial hearing of the Rehab Petition will be resumed and if the court is satisfied there is merit, it will give due course to the petition and immediately refer the Rehab Plan to the Rehab Receiver who will evaluate the same.

31.  Under the Interim Rules, the creditors or other interested parties are free to give further comments on the rehabilitation plan, with copies to the receiver, within 120 days from the initial hearing (the time limits with reference to the initial hearing will begin to run when such hearing is resumed if the jurisdiction issue is resolved in favour of the Company). The court will hold additional clarification hearings if necessary, in a summary and non-adversarial form. The receiver will submit his recommendations to the court not later than 120 days from the initial hearing. Upon the submission of the receiver’s recommendation, the court will approve, modify or reject the rehabilitation plan. The effect of the approval shall result in the plan being binding on the company and all persons who may be affected by it, including the creditors, whether or not they have participated in the proceedings. According to the Company’s lawyer in the Philippines, unless the receiver finds the plan inherently flawed, he will most likely recommend its approval by the court and give the plan a chance to work; the court, for its part, is likely to act favourably on the receiver’s recommendation unless the court finds the receiver’s findings and conclusions to be without factual basis.

32.  Under Rule 4 Section 22 of the Interim Rules, the debtor may modify its rehabilitation plan in the light of the comments of the receiver and creditors or any interested party and submit a revised or substitute plan for the final approval of the court. Such plan must be submitted not later than one year from the date of the initial hearing.

33.  It is provided in Rule 4 Section 11 of the Interim Rules that if no rehabilitation plan is approved by the court upon the lapse of 180 days from the date of the initial hearing, the rehabilitation petition will be dismissed. The court may grant an extension beyond this period only if it appears by “convincing and compelling evidence that the debtor may successfully be rehabilitated”. It is further provided that “in no instance, however, shall the period for approving or disapproving a rehabilitation plan exceed eighteen months from the date of filing of the petition”.

34.  On 7 February 2005, on the complaint of Pagcor against the presiding judge in the litigation with the Company concerning the licence fees and the exclusivity of the Company’s licence, the Supreme Court in the Philippines determined that investigation should be carried out and in the meantime placed the judge under preventive suspension from judicial duty. The judge concerned was also the presiding judge in the Rehab Petition.

35.  On 18 February 2005, MSEMI filed a motion for issuance of order of disclosure for the Rehab Receiver to disclose under oath her relationship to the senior partner of the Philippine law firm representing the Company in the rehabilitation proceedings. The application is resisted by the Rehab Receiver. Also on the same day, the Rehab Receiver filed a motion seeking approval of certain fees and expenses. MSEMI has opposed the application on inter alia the ground that the court should first rule on the jurisdictional objections in the Rehab Petition. I understand all the necessary evidence and submissions have been filed in respect of the Omnibus Motion and the decision on this is awaited. As a result of the preventive suspension of the presiding judge in the rehabilitation proceedings, these proceedings have been held in abeyance until the suspension is lifted or the re-assignment of the proceedings to another judge.

36.  On 19 April 2005, the Company filed a motion seeking the appointment of another presiding judge in the rehabilitation proceedings. The application was disposed of by the Executive Judge of the Regional Trial Court of Olongopo on 3 May 2005, the outcome was that the “Pairing Judge” of Branch 72 of that Regional Trial Court, who is the Presiding Judge of Branch 73, would take up conduct of the rehabilitation proceedings.

37.  The last communication I received from the solicitors for MSEMI on 1 June 2005 is that no decision has yet been made by the Pairing Judge on the dispute regarding jurisdiction in the Omnibus Motion.

The proceedings in England

38.  On 11 January 2005, the Company issued proceedings in the Commercial Court in London against MSEMI and OCBC, seeking a declaration that there was no effective transfer by way of novation of the debt from OCBC to MSEMI and that as a result of the attempted novation mechanism, the Company’s indebtedness to OCBC under the Facility Agreement was discharged absolutely and irrevocably. The Company decided to issue proceedings in England, as the Facility Agreement is expressly governed by English law, although the jurisdiction clause is expressed to bind the Company to the non-exclusive jurisdiction of the courts of Hong Kong and England. MSEMI had declined to appoint solicitors in England to accept service of the Amended Claim Form and Particulars of Claim. Subsequent to the hearing before me and on 11 May 2005, the Company obtained leave from the Commercial Court to serve the process on MSEMI and OCBC out of the jurisdiction in an ex parte application.

The first basis of the strike out application

39.  It would be just and convenient to consider first the Company’s application to strike out the winding-up petition before I consider the appointment of provisional liquidators.

40.  The first basis to strike out the petition is that MSEMI has failed to establish that it is a creditor of the Company and therefore lacks locus standi to present or maintain this creditor’s petition to wind up the Company. This turns on a question of construction of the Facility Agreement.

41.  The Facility Agreement was entered into by the Company as the borrower with inter alios “the banks and other financial institutions listed in Schedule 1, as lenders”. By Clause 1.01, “Eligible Transferee” is defined to mean “any bank, deposit taking company or other financial institution, wherever incorporated, duly authorised to carry on its business and to participate in the Facility”.

42.  Clause 21 is headed “Assignment, novation and lending offices” and the relevant provisions would need to be set out verbatim:

“	21.01	The Borrower. The Borrower shall not assign or transfer all or any part of its rights or obligations under this Agreement.
	21.02	Assignment and Novation. A Lender may:
		(a)	assign all or any part of its rights under this Agreement in accordance with Clause 21.03; or
		(b)	transfer by novation all or a portion of its rights, benefits and obligations under this Agreement in accordance with Clause 21.04,
		(any such assignment or transfer by novation being referred to in this Clause 21 as a ‘transfer’). The Borrower shall execute and do all such documents, acts and things as the Agent may reasonably require for perfecting and completing any such transfer.
	21.03	Assignment by Lenders. Any Lender may at any time without the consent of any person assign all or any of its rights under this Agreement and the corresponding benefit of the Guarantee to any other person (as ‘Assignee’) Provided that:
		(a)	any transfer of rights together with a novation of obligations to the same person may only be made in accordance with the novation procedure set out in Clause 21.04; and
		(b)	no such assignment shall take effect until the proposed assignee has (i) agreed with the Agent and the other Lenders that it shall be under the same obligations towards each of them as it would have been under if it had been a party hereto as a Lender, (ii) paid the Agent for its own account a fee of one hundred Dollars ($100) and (iii) paid all sums which have been demanded under Clause 21.07.
	21.04	Novation by Lenders. Any Lender may at any time transfer by novation all or part of its rights, benefits and/or obligations under or arising out of this Agreement and the corresponding benefit of the Guarantee to an Eligible Transferee (a ‘Transferee’). Such transfer shall be effected by:
		(i)	the Eligible Transferee delivering a completed Novation Certificate duly executed by such Lender and the intended Transferee to the Agent (for this purpose only, for itself and as agent for and on behalf of the Borrower and the other Lenders) together with a fee for the account of the Agent of one hundred Dollars ($100); and
		(ii)	the Agent executing such Novation Certificate to acknowledge receipt thereof.
		Upon delivery and execution of the Novation Certificate in accordance with the above conditions, all parties to this Agreement agree that, on the later of the date specified as the Transfer Date in such Novation Certificate and the fifth (5th) Banking Day following the date of receipt thereof by the Agent (unless the Agent agrees a shorter period):
		(a)	to the extent only that in such Notation Certificate the Lender which is party thereto seeks to transfer its rights, and/or its obligations under this Agreement and the Guarantee, the Borrower and such Lender shall each be released from further obligations to the other hereunder and their respective rights against the other shall be cancelled (such rights and obligations being referred to in this Clause 21.04 as ‘discharged rights and obligations’);
		(b)	the Borrower and the Transferee which is party to such Novation Certificate shall each assume obligations towards the other and/or acquire rights against the other which differ from such discharged rights and obligations only insofar as the Borrower and such Transferee have assumed and/or acquired the same in place of the Borrower and such Lender; and
		(c)	the Agent, such Transferee and the other Lenders shall acquire the same rights and assume the same obligations between themselves as they would have acquired and assumed had such Transferee been an original party hereto as a Lender with the rights and obligations acquired or assumed by it as a result of such transfer.
	…
	21.06	Reliance. The Agent and the Borrower may rely on and act in accordance with any Novation Certificate which has been delivered to and accepted by the Agent in accordance with Clause 21.04 and which appears to be complete and regular on its face.  Neither of them shall incur any liability to any party by so doing and the Agent shall not be obliged to check or enquire whether a purported Transferee is an Eligible Transferee Provided that if it has actual notice that any proposed Transferee is not an Eligible Transferee, the Agent is hereby authorised (but not obliged) to refuse to accept the relevant Novation Certificate.”

43.  The relevant Novation Certificate is defined in Clause 1.01 to mean a novation certificate in the form set out in Schedule 2 of the Facility Agreement. Clause 6 of the Novation Certificate provides as follows:

“	6.	By its execution of this Novation Certificate, the Transferee hereby represents to the Transferor and each of the other parties to the Facility Agreement and the Guarantee that:
		(a)	it is an Eligible Transferee; and
		(b)	it is duly incorporated, validly existing, has full power, authority and legal right to enter into the transactions contemplated by, and perform the obligations assumed pursuant to, this Novation Certificate and the Facility Agreement and the Guarantee and has taken all necessary action to authorise execution of this Novation Certificate.”

44.  In summary, the Company contended that the Novation Certificate of 3 September 2004 was ineffective to transfer by novation OCBC’s participation in the Facility Agreement to MSEMI, as under Clause 21.04 a transfer by novation may only be effected to an Eligible Transferee, and MSEMI did not come within an Eligible Transferee as defined in Clause 1.01, not being a “bank, deposit taking company or other financial institution … duly authorised to carry on its business and to participate in the Facility”. The Company also contended that there was no valid assignment of the rights of OCBC under Clause 21.03, as any assignment of a Lender’s rights cannot be achieved without compliance of the novation procedure in Clause 21.04, and one of the procedural requirements is that the transfer must be made to an Eligible Transferee.

45.  Mr. Barrie Barlow, who appeared for the Company with Mr. William Wong, submitted that it is not necessary for him to establish conclusively that the above contentions are correct in law. It would be sufficient if he could demonstrate these are arguable propositions for the winding-up petition to be struck out, as it would be an abuse of the process of the court to bring a creditor’s petition where there is a bona fide dispute on substantial grounds if MSEMI is a creditor of the Company.

The Argo Fund case

46.  Mr. Barlow placed heavy reliance on the decision of David Steel J in The Argo Fund Ltd. v. Essar Steel Ltd. [2004] EWHC 128 (Comm). That was an application for summary judgment. The relevant provisions in the facility agreement had some similarity with ours. The defence raised was that the claimant, The Argo Fund Limited, was not a qualifying transferee under the provision in question, as only banks and institutions akin to banks were intended to be covered by the clause, so this would only include institutions in which the making of loans constituted a substantial proportion of the overall business. The judge held that was an arguable defence and the action should go to trial, it would be right to accord the parties full opportunity to produce factual matrix evidence, together with material relating to the status and activities of The Argo Fund Limited and its subsidiaries. Mr. Barlow submitted that in view of that decision, it is unlikely that MSEMI would have obtained summary judgment on the petitioning debt, and as there are similarities between the test in an application for summary judgment and the test of bona fide dispute on substantial grounds in opposing a creditor’s petition, even though the analogy is not perfect, he should likewise succeed in striking out the petition on the basis of a substantially disputed debt.

47.  Mr. Michael Crystal, QC, who appeared for MSEMI with Mr. Charlie Manzoni, referred me to the judgment of Aikens J delivered on 12 April 2005 in the same case after a three-day trial in February 2005 ([2005] EWHC 600 (Comm)), in which the judge resolved the question of construction in favour of the transferee. Mr. Crystal submitted that the Company’s contentions, based on the judgment of Steel J, have been overtaken by events. As a result of the judgment of Aikens J, MSEMI should be considered an Eligible Transferee under the Facility Agreement as a matter of English law, which is the governing law of the Facility Agreement and of the Novation Certificate.

48.  I understand that Aikens J gave conditional leave to the defendant to appeal, upon payment into court of the sums claimed, the amount claimed excluding interest was US$29.5 million. There was no indication from the information I was given that this condition has been complied with.

The determination on the first basis of the strike out application

49.  The argument of Mr. Barlow on the proper construction of the Facility Agreement may be summarised as follows:

(1)	The facility granted under the Facility Agreement was in the nature of a revolving credit facility; this is so described in the title page of the agreement. Clause 4.10 provides that the Borrower may request the making of an advance “during the Availability Period”. By Clause 6.01, any amount of advance repaid by the Borrower shall “be available for further Advances”.
(2)	Where the Borrower has requested to extend the Availability Period by twelve months and a Lender has given notice it does not wish to extend its participation in the Facility, Clause 6.06 provides for the consequence where the Agent is not able to find “another bank or other financial institution acceptable to the Agent to replace such Outgoing Lender”. The replacement lender in this situation is similar to the definition of “Eligible Transferee” in Clause 1.01.
(3)	The identity and status of a proposed lender would be of real importance to the Borrower, as the Borrower would be dealing with the Lender on an ongoing basis in this revolving credit. It is essential that the rights of the lending banks to transfer their participation in a syndicated revolving credit facility should be restricted to banks or institutions whose business is analogous to that of a bank, a substantial proportion of whose business would involve the making of loans. The words “other financial institution … duly authorised to carry on its business and to participate in the Facility” in the definition of “Eligible Transferee” should be construed in this light. As stated in paragraph 19 of the judgment of Steel J,
	“	… any transfer to a financial institution which simply trades in investments but does not provide loans would obstruct performance of the agreement. Thus, from the perspective of the borrower, there is obvious commercial sense in limiting the range of transferees to banks or institutions of a like kind. Equally, from the perspective of the banks and other lending institutions who were the original parties to the agreement, such a limitation makes commercial sense, given the need for co-operation between the lenders (e.g. in regard to the responsibilities of the ‘Majority Banks’ (as defined) and the role of the Agent in giving notice of draw down and in receiving or distributing payments).”
(4)	By its constitution and by the law of its place of incorporation (the General Corporation Law of the State of Delaware, USA), MSEMI is not legally permitted to engage in banking or deposit taking business, as it is a “general” type corporate entity and not a “bank” type corporate entity. Section 126 of the General Corporation Law, which is under the heading of “Banking power denied”, provides in (b) that “corporations organized under this chapter to buy, sell and otherwise deal in notes, open accounts and other similar evidences of debt, or to loan money and to take notes, open accounts and other similar evidences of debt as collateral security therefor, shall not be deemed to be engaging in the business of banking.”
(5)	In any event, MSEMI’s assertion that it qualifies as a “financial institution … duly authorised to carry on its business and to participate in the Facility” for the purpose of Clause 1.01 would require full investigation in a trial whether it has satisfied the requirements of an Eligible Transferee, as had happened in the trial of the Argo Fund case.

50.  The Company also prayed in aid the fact that the Commercial Court in London has given leave to effect service of process out of the jurisdiction; this must mean that the court was satisfied, on the ex parte application, that it has a good arguable case against MSEMI and OCBC, notwithstanding the judgment of Aikens J in the Argo Fund case.

51.  Steel J’s conclusion on the proper construction of the provisions in the facility agreement was a provisional one, formed on the basis of the material then placed before him. The matter was fully canvassed before Aikens J, who heard factual evidence on the business activities of the claimant and received expert evidence on the secondary market in debt from the time the agreement was signed in March 1997 (the Facility Agreement in the present proceedings was signed in July 1997) down to the present. He had construed the agreement against the relevant commercial background, which was “the commercial world in which syndicated loans were made in 1997, and particularly the extent to which debts created by such loans were traded in a ‘secondary market’ of debt traders” (paragraph 30 of the judgment). He found on the evidence that the claimant is not an entity that is principally engaged as a provider of finance in the primary lending market, its principal activity is trading investments in debt securities and lending to emerging market governments and corporations in either the primary or secondary market (paragraphs 46 and 47).

52.  Aikens J rejected the argument of the claimant that the definition of “Transferee” in the agreement was descriptive rather than restrictive. Like Steel J, he considered that “it makes commercial sense to restrict the class of potential transferees in some way”, as the transferee undertakes obligations as well as obtaining rights. An original syndicate member could transfer its rights and obligations to another institution before a drawdown by the Borrower, so the Borrower would wish to ensure that the transferee was the type of institution that could provide the necessary funds at drawdown (paragraph 28). This is similar to the reasoning in paragraph 19 of the judgment of Steel J set out earlier.

53.  The phrase “other financial institution” must denote an entity different from “a bank”; otherwise the entire expression “a bank or other financial institution” would be a tautology (paragraph 36). The most important quality of a transferee that is an “other financial institution” must be its ability to lend the money in accordance with the terms of the agreement (paragraph 41). Whilst it is “possible to argue that ‘other financial institutions’ must share either many common characteristics with banks”, as would appear to be accepted by Steel J, or “only a few characteristics”, Aikens J rejected the former as there was no indication in the agreement that the transferee institution must have other critical characteristics, common with a bank, of providing finance in the primary lending market and being regulated and accountable (paragraphs 37 and 42). He set out his conclusion in these paragraphs:

“	38.	What characteristics must ‘other financial institutions’ share with banks to fall within the phrase in the Agreement? First, and obviously, they must be lenders of money. But institutions who buy debt in the secondary market thereby become lenders, by definition. They step into the shoes of the original lenders. Secondly, they should have a ‘Lending Office’ although the Agreement does not prescribe any particular form for that office. Indeed, banks are free to identify any office that they may from time to time select as their ‘Lending Office’. Thirdly, they must maintain accounts which will be evidence of money lent to the Borrower, and the amounts due by way of interest and capital by the Borrower. But, again, the institution is free to maintain the account or accounts ‘in accordance with its usual practice’. So the accounts do not have to be kept in the same way as those in a bank. Fourthly, because a transfer is permitted before drawdown, any entity that became a transferee must have the capabilities, financial, technical and legal, of lending money during the drawdown period, as ‘quasi-primary lenders’, in accordance with the terms of the Agreement. Lastly, the transferee must be a ‘financial institution’, which in my view means no more than having a legally recognised form or being, which carries on its business in accordance with the laws of its place of creation and business and whose business concerns commercial finance.
	39.	Provided the ‘other financial institutions’ have these characteristics, which they would share with banks, that is, in my view, sufficient to bring them within the definition. The original parties to the Agreement were well aware that debt could be traded; indeed that must be the underlying rationale for permitting a transfer of rights and obligations. The parties knew of the existence of a secondary debt market in which entities specialised in the purchase of distressed debt. The parties must have contemplated that if a potential transferee was an ‘other financial institution’ that had the characteristics I have identified, then it could legitimately take a transfer, even though it did not engage substantially in the business of providing finance in the primary lending market.”

54.  On the evidence, Aikens J found that the claimant did have the necessary characteristics and was an “other financial institution” properly construed.

55.  The status and activities of MSEMI, on the evidence before me, are broadly similar to the claimant in the Argo Fund case. MSEMI is a lender of money. MSEMI is entitled to and does, as part of its ordinary course of business, make loans and advance credit. It has bought and sold and holds positions in syndicated loans and other extensions of credit, including revolving credit facilities that require MSEMI to fund additional loan advances. Two transactions in 2003 were disclosed as examples in the evidence filed by MSEMI. There is nothing in the Articles of Incorporation or the By-Laws of MSEMI that prohibit or restrict it from buying and selling loans and making loans or other extensions of credit, see also section 126(b) of the General Corporation Law of the State of Delaware. In the language of Aikens J in paragraph 48 of his judgment, MSEMI is and was “financially, technically and legally capable of lending money on the scale required to be a participant in this syndicated loan”. Whereas in the Argo Fund case, “Transferee” was merely defined to mean “a bank or other financial institution”, the definition of “Eligible Transferee” in Clause 1.01 of the Facility Agreement is even clearer in that the “bank, deposit taking company or other financial institution” must be “duly authorised to carry on its business and to participate in the Facility”. There is no justification for reading into the definition a further qualification like “a substantial proportion of whose business is the provision of finance in the primary lending market”.

56.  To resist an application for summary judgment, a fair probability of establishing a bona fide defence would suffice. To wind up a company on a creditor’s petition, the court would need to come to a view that there is no bona fide defence (Re ICS Computer Distribution Ltd. [1996] 1 HKLR 181 at 183F to H). In the converse situation where a company seeks to strike out a petition on the basis that the creditor has no locus standi to present the petition, it is not sufficient for the company to show a fair probability of establishing a bona fide defence to the petitioning debt. I do not accept Mr. Barlow’s submissions that it would suffice if the Company could demonstrate arguable propositions such that it would have been granted leave to defend in an application for summary judgment. For a striking out application to succeed, the Company must show that it is plain and obvious MSEMI would have no locus standi to maintain the petition as a creditor.

57.  The Company has failed to establish a bona fide defence, not just a fair probability of one, as regards its contention that MSEMI did not come within an Eligible Transferee and that the transfer by novation of OCBC’s participation in the Facility Agreement to MSEMI under Clause 21.04 was ineffective. I am not persuaded that the reasoning and conclusion reached by Aikens J on the proper construction of an agreement similar in material respects to the Facility Agreement should not be applied here.

58.  That being the view I have reached, it is strictly unnecessary to consider MSEMI’s alternative case of an assignment under Clause 21.03 and the Company’s defence. But as submissions have been made on this issue, I would deal with it. MSEMI contended that even if it were not an Eligible Transferee, it would still be an assignee of all the rights of OCBC in the Facility Agreement by virtue of the Purchase and Sale Agreement dated 27 August 2004 entered into between OCBC as the seller and MSEMI as the buyer, as there was no restriction on the class of assignee in the Facility Agreement. The relevant provision in the Purchase and Sale Agreement reads as follows:

“	2.	Assignment and Assumption
		In consideration of the mutual covenants and agreements in, and subject to the terms and conditions of, this Agreement:
		(a)	subject to the satisfaction of the conditions in Section 3.2, Seller agrees irrevocably to sell to Buyer by novation those of the Assigned Rights that are capable of novation, and otherwise sells, transfers, assigns, and conveys the Assigned Rights to Buyer with effect from and including the Closing Date;
		(b)	subject to the satisfaction of the conditions in Section 3.1, Buyer acquires the Assigned Rights, and agrees to perform and comply with the Assumed Obligations, with effect on and after the Closing Date; and
		(c)	notwithstanding the foregoing, (i) Seller agrees to remain responsible for, and assumes and agrees to perform and comply with the Retained Obligations, and (ii) Buyer assumes no obligations other than the Assumed Obligations.
		This Agreement is intended to, and upon execution hereof and satisfaction or waiver of the conditions precedent set forth in Section 3 shall, effect a true sale of the Assigned Rights and the Assumed Obligations.”

59.  As mentioned earlier, the Company’s contention here is that the acquisition of MSEMI would, on any approach, require compliance with the novation procedure in Clause 21.04 and the Novation Certificate, and the latter contains a representation that the transferee is an Eligible Transferee. Notwithstanding the opening part of Clause 21.03 provides that a Lender may at any time without the consent of any person assign all or any of its rights under the Facility Agreement and the corresponding benefit of the guarantee executed by Metroplex to any other person, proviso (a) stipulates that “any transfer of rights together with a novation of obligations to the same person may only be made in accordance with the novation procedure set out in Clause 21.04”.

60.  It would appear from Clause 2(b) of the Purchase and Sale Agreement that the Assumed Obligations (defined in Clause 1 to mean OCBC’s obligations and liabilities with respect to or in connection with the Assigned Rights resulting from facts, events or circumstances arising or occurring on and after the closing date, excluding the Retained Obligations) were meant to be transferred to MSEMI as well as the Assigned Rights. The last sentence in Clause 2 has made it clear that the agreement was to effect a “true sale of the Assigned Rights and the Assumed Obligations”.

61.  I am inclined to agree with the Company that the only way by which a transfer of rights together with a novation of the obligations may be made in this instance was in compliance with the novation procedure laid down in Clause 21.04. I am satisfied that the Company has established a bona fide defence here. This, however, would not avail the Company, as I have ruled against it on MSEMI’s primary case that MSEMI was and is an Eligible Transferee.

62.  For the above reasons, I would dismiss the strike out application on the first basis. I hold that MSEMI has locus to present a creditor’s petition.

The second basis of the strike out application and the determination

63.  The other basis relied on to strike out the petition is that there was further abuse of the process of the court in that the winding-up petition was presented for a collateral purpose. The Company contended that the petition was not presented for the purpose of providing a class remedy for the general body of creditors who are to benefit rateably, but for the predominant purpose of obtaining a collateral benefit for MSEMI that could not be obtained under the petition. It was alleged that MSEMI is using the winding-up procedure improperly to exert pressure on the Company to prefer OCBC’s debt or to seize indirect control of the Company’s administration.

64.  In support of this contention, Mr. Barlow submitted that inferences could be drawn from the following as to the true purpose of MSEMI in presenting the petition:

(1)	The nature of business of MSEMI could be described in popular parlance as a “vulture fund”. It buys non-performing distressed assets at substantial discounts, hoping to make large profits by aggressive recovery efforts and leveraging better settlements than might otherwise be achievable.
(2)	Between September and November 2004, MSEMI had embarked on a course to purchase the Company’s debts and the corresponding obligations of Metroplex under its guarantees in the region of US$60 million.
(3)	These acquisitions were made at a time when Metroplex and the Company were preparing to restructure their debts and MSEMI must have knowledge of the existence of the corporate rescue schemes proposed by Metroplex and the Company and the financial state of each, as MSEMI would not have invested in such acquisitions without undertaking due diligence enquiries and an assessment that it could profit from buying up such debts.
(4)	Accordingly, MSEMI would have known that the proposed scheme provided for a compromise of the debts of the Company and that the OCBC loan was to be compromised at approximately 54% of the total principal outstanding at the proposed cut-off date.
(5)	With full knowledge of the proposed scheme of arrangement, on 29 October 2004 MSEMI sent a letter of demand to the Company demanding repayment of the OCBC debt of US$5.2 million odd by 1 November 2004 noon, failing which MSEMI would commence legal proceedings. Had immediate repayment been made, it would have constituted an unlawful preference over the other unsecured creditors.
(6)	When immediate repayment was not made, MSEMI alleged that the Company is insolvent, petitioned for its winding up and applied for the appointment of provisional liquidators to attempt a restructuring, thereby seeking to hijack the scheme of arrangement proposed by the Company.
(7)	To date, MSEMI has not proposed any improvement to the Rebab Plan in the proceedings in the Philippines.

65.  Mr. Barlow submitted that the commercial reality is that MSEMI is engineering a situation by a concerted plan to favour itself, under the guise of protecting the interest of all the creditors. As the petition was not presented for the purpose of invoking the winding-up jurisdiction to benefit the general body of creditors rateably but for the purpose of obtaining payment in priority to the other creditors, the petition is an abuse of the process of the court and should be dismissed on this ground also.

66.  Particular reliance was placed on the dicta of Harman J in Re a company [1983] BCLC 492 at 495c to i:

“The true position is that a creditor petitioning the Companies Court is invoking a class right (see Re Crigglestone Coal Co. [1906] 2 Ch 327), and his petition must be governed by whether he is truly invoking that right on behalf of himself and all others of his class rateably, or whether he has some private purpose in view. It has long been the law that a petition presented for the purpose of putting pressure on the company is not properly presented: see in Re a company [1894] 2 Ch 349 and in a slightly different context Re Bellador Silk Ltd. [1965] 1 All ER 667.

The question for me, therefore, is whether I am satisfied that the petitioner seeks this winding up for the benefit of his class. I am not concerned with his motives or with the past conduct of the company … The decision in Bryanston Finance [1976] 1 All ER 25 never sought to overrule the basic law that the only proper purpose for which a petition can be presented is for the proper administration of the company’s assets for the benefit of all in the relevant class. To hold otherwise would be to confuse motive, which is past, with purpose, which is future.

The question, therefore, is not ‘does the petitioner genuinely wish to wind up this company’ … In my judgment the true question is ‘for what purpose does the petitioner wish to wind up this company’. A judge has to decide whether the petition is for the benefit of the class of which the petitioner forms a part or is for some purpose of his own. If the latter, then it is not properly brought.

If the petitioner can show that he and his class stand together and will benefit or suffer rateably, then his ill motive is nothing to the point.”

67.  In that case, the petitioner would stand to obtain the benefit of the company’s lease, which was the major asset of the company, by presenting a petition to wind up the company before a certain date, whereas the rest of the class of creditors were likely to get nothing. As it was shown that the petition was presented not for the benefit of the class of creditors rateably, but for some private purpose of the petitioner, the petition was dismissed as an abuse of the process of the court.

68.  I am not persuaded I should strike out the petition for abuse of the process of the court on the second basis. My reasons are as follows.

69.  Firstly, the power to strike out a petition on this ground should only be exercised in a plain and obvious case, where there is cogent evidence to support a finding that the petition was indeed presented for a collateral purpose and not genuinely for the purpose of obtaining a winding-up order. The applicant has a heavy burden to discharge, not least because frequently there are “a multiplicity of motives behind the presentation of a petition”, as stated in another case cited by Mr. Barlow, Mincom Pty. Ltd. v. Murphy (1983) 1 ACLC 749 at 757:

“It must always be a question of degree whether or not one can conclude that a petition has not been presented with the genuine object of obtaining a winding up order but merely as a lever to exert pressure in order to obtain something to which the petitioner may not otherwise be entitled (say, for example, an inflated price for his shares).”

70.  I am not satisfied that the Company has discharged that burden on the available evidence. I see nothing improper for MSEMI to make a demand for the debt on 29 October 2004, knowing that the Company was insolvent. At that time, there were no court proceedings for the sanction and implementation of a scheme of arrangement for Metroplex or the Company, and MSEMI had not subscribed to or participated in any scheme of arrangement.

71.  Secondly, the true question is not whether MSEMI genuinely wishes to wind up the Company, but for what purpose does MSEMI wish to wind up the Company. Unlike the situation in Re a company presided over by Harman J, there is nothing to indicate that MSEMI and other creditors in the same class would not benefit or suffer rateably once the winding-up procedure was invoked. Whether the majority of creditors would also wish to wind up the Company is a different matter, the wishes of the majority would be taken into account under section 287(1) of Cap. 32 when the court comes to consider if a winding-up order should be made.

72.  Thirdly, it was contended that MSEMI has invoked the winding-up jurisdiction not to wind up the Company but to apply for the appointment of provisional liquidators to facilitate a corporate rescue and this constituted an abuse of process. I would deal with the question if the court does have jurisdiction to appoint provisional liquidators for this purpose in the next section. Leaving aside the question of jurisdiction, the present intention of MSEMI is to seek the appointment of provisional liquidators who are to take over the control of the restructuring process of the Company from the management. In the event that a viable restructuring proposal is not implemented through provisional liquidators, MSEMI would seek a winding-up order. This was made clear in the evidence filed from the start on behalf of MSEMI. I am unable to see in this situation there is any abuse of the process of the court. These words of Harman J in Re Esal (Commodities) Ltd. [1985] BCLC 450 at 459i to 460d are particularly apt in this situation:

“For my part I first thought that a petition presented for what old authorities call a ‘by motive’, that is not for its ostensible purpose but to gain some collateral advantage, might well be characterised as an abuse. Counsel for [the petitioner] vigorously argued that that was wrong. He asserts that a creditor can perfectly properly present a petition against an insolvent company for the purpose of holding the ring, and to prevent any piecemeal disposal of assets. Such a course of action is likely to be in the interests of all creditors and is a proper use of a class remedy. The fact that the petitioner does not intend to press for the winding-up order when the matter is called on, because it believes that an alternative remedy such as a scheme of arrangement will be better for the creditors generally, does not make the presentation of a petition with its consequent freeze on actions against the company improper or an abuse of process. The proper remedy, says counsel for [the petitioner] (Mr. Potts QC) lies in r 37 of the Winding-Up Rules 1949 and the court’s power to substitute another petitioner if at any hearing the original petitioner does not wish to press then for an order.

I entirely agree with and am convinced by counsel for the petitioner’s argument. … [The petition] was presented, it is true, for a ‘by motive’, but properly presented, because it was reasonably thought to be in the interests of all creditors, and was calculated to protect the class interest.”

73.  In summary, the Company’s application to strike out the petition fails. I turn to MSEMI’s application for appointment of provisional liquidators.

The jurisdiction to appoint provisional liquidators to facilitate a restructuring

74.  The Company has opposed the appointment of provisional liquidators on three broad grounds:

(1) there is no jurisdiction to appoint provisional liquidators to facilitate a corporate rescue;

(2) MSEMI has not established a good prima facie case for a winding-up order; and

(3) it is not right in all the circumstances that provisional liquidators should be appointed.

75.  There is no need to deal with the second ground, as this has been canvassed in the Company’s application to strike out the petition and I have ruled against the Company. There is a petition here that can lead to a winding-up order in due course. I turn to consider the jurisdictional objections.

76.  Under the statutory regime in Hong Kong, a corporate rescue can only be brought about through the procedure of a scheme of arrangement under section 166 of Cap. 32. The major deficiency of this is the lack of a moratorium or stay of proceedings against the company while the proposed scheme is being worked out, unlike the situation in which the winding-up jurisdiction is invoked. Although the Law Reform Commission in its report in 1996 on corporate rescue and insolvent trading had recommended a procedure called “provisional supervision” to replace in most situations the scheme of arrangement procedure and there were attempts at legislation firstly in the Companies (Amendment) Bill in 2000 and later in the Companies (Corporate Rescue) Bill in 2001, the latter bill was suspended at the end of 2001.

77.  In December 2001, Hartmann J in Re HIH Insurance (Asia) Ltd. & Ors., HCCW Nos. 337 to 340 of 2001, 21 December 2001 followed the practice developed in a line of English cases in which an insurance company would petition for its own winding up as the basis for appointing provisional liquidators to facilitate a scheme of arrangement, so as to mitigate the difficulties caused by the fact that the administration order procedure introduced by the Insolvency Act 1985 was not then available to such companies. In May 2002, Yuen J (as she then was) extended this to a company that was not an insurance company in Re Keview Technology (BVI) Ltd. [2002] 2 HKLRD 290, and made an order to extend the powers of provisional liquidators previously appointed to enable them to pursue a restructuring. In September 2002, I took this further in Re Luen Cheong Tai International Holdings Ltd. [2002] 3 HKLRD 610, and held that it would be a proper basis to appoint provisional liquidators to facilitate a rescue proposal. Other decisions at first instance in the next few months took the same line (Re I-China Holdings Ltd. [2003] 1 HKLRD 629; Re Fujian Group Ltd. [2003] HKEC 266). I will refer to this line of decisions at first instance as the “I-China cases”.

78.  This development of the law has proved to be useful, as borne out by the number of applications that have subsequently come before the courts. With the appointment of a provisional liquidator, a stay of proceedings against the company is brought about by section 186. This has mitigated the difficulty of the lack of a moratorium while a restructuring proposal is being worked out, until we have new legislation for a corporate rescue procedure. There is flexibility in the exercise of the power to appoint provisional liquidators, who are independent officers of the court. Whether an appointment is to be made and with what powers the provisional liquidators should be vested would depend on the circumstance of a particular case.

79.  Mr. Barlow submitted however the law has taken a wrong turn, the court has no jurisdiction to appoint provisional liquidators to carry out corporate rescue. His reasons are as follows.

80.  Hong Kong has no express legislative provision for any kind of temporary protection of insolvent companies from their creditors, pending re-organisation or the formulation of a plan for re-organisation. Even when an application has been made to the court to sanction a scheme of arrangement under section 166(2), there is no “standstill” provision to stay proceedings against the company generally or to give the company “breathing space” in respect of its obligations to creditors. There is no equivalent of corporate rescue regimes as found in Chapter 11 of the United States Federal Bankruptcy Code, the administration order procedure in Part II of the English Insolvency Act 1986, or legislation in Canada, Australia, Japan, South Korea or the Philippines.

81.  Under sections 193(1) and (2), the power to appoint a provisional liquidator may be exercised at any time after the presentation of a winding-up petition and before the making of a winding-up order. This is but an “interlocutory” power, not an end in itself, and can only be invoked in aid of a bona fide petition to wind up a company for the rateable distribution of its assets. The appointment under section 193 is temporary, for the preservation of the company’s assets during an interim period, until the company is wound up and a liquidator appointed. Hence, the appointment should be “subservient” to the purpose of the “substantive” relief in prospect, which is the winding up of the company and the appointment of a liquidator. The appointment must be made for the purpose of preserving or safeguarding the applicant’s access to the substantive relief.

82.  Mr. Barlow submitted that the Court of Appeal in Credit Lyonnais v. SK Global Hong Kong Ltd. [2003] 4 HKC 104 (Ma CJHC, Rogers VP and Cheung JA) has identified jurisdictional limitations that require a re-appraisal of the I-China cases. The judgment debtor in that case applied for a stay of execution on the ground that it was negotiating a restructuring with its creditors. At first instance a stay of execution of the judgment was granted. The Court of Appeal allowed the appeal unanimously, holding that whilst the court retains an inherent jurisdiction in very special circumstances to stay execution of a judgment apart from those situations expressly permitted under the Rules of the High Court, as neither a winding up nor a scheme of arrangement was imminent, the possibility or even reasonable prospect of a restructuring of the judgment debtor’s debts would not provide sufficient reason to order a stay.

83.  Mr. Barlow relied in particular on these passages in the judgment of the Court of Appeal:

“	10.	It is not up to the court to use its inherent jurisdiction to create a regime in which a judgment creditor or insolvent company is able to obtain a moratorium on its debts (or to put it more crudely, to give it some ‘breathing space’ to allow it to negotiate with creditors). This is a matter for the legislature to contemplate and if seen fit, to legislate on. The inherent jurisdiction of the court is only to be exercised in the circumstances set out above; it is not there to fill in perceived lacunae in the insolvency legislation.” (per Ma CJHC)
“	22.	Corporate restructuring may be effected by a scheme of arrangement under s 166 of the Companies Ordinance (Cap. 32). However, as the Law Reform Commission of Hong Kong noted in its Report on Corporate Rescue and Insolvent Trading (October 1996):
			The major deficiency with section 166 is the lack of a moratorium that can bind creditors while an arrangement plan is being formulated. There is nothing in section 166 to prevent a creditor presenting a petition to wind up the company, an event which could have the effect of ending the formulation of any proposal.  There is no comparison to be made between section 166 and the sophisticated corporate rescue procedures operating in jurisdictions such as the United Kingdom, Australia, Canada and the United States of America.
	23.	In answer to a question from the court, Mr. Reyes confirmed that he had been unable to locate any decision where there had been a stay ordered, preventing enforcement of a judgment, on the ground that one party or another wished to put forward a scheme of arrangement under s 166 or its previous United Kingdom equivalent. Whilst it is in the power of the court to adjourn winding-up proceedings, in order to enable a scheme of arrangement to be put in place, any such adjournment would generally only be ordered in the absence of opposition from the petitioning creditor.  Even then that should only be done in circumstances where the court can see that that would be a realistic probability that a scheme of arrangement would be approved and can be sure that no prejudice will be occasioned as a result of the order made.  It was emphasised in the course of argument that the court is not, however, empowered to invent a corporate restructuring regime outside the scope of the ordinance.” (per Rogers, VP)
“	48.	Under s 166(1) of the Companies Ordinance, the court may order a meeting of the creditors where a compromise or arrangement is proposed between a company and its creditors.  Under s 166(2), a compromise reached between the company and 75% of the creditors will be binding on all the creditors if it is sanctioned by the court.
	49.	Mr Reyes SC, counsel for the defendant, submitted that even if a s 166 application is invoked, until the court makes the order, a recalcitrant creditor may petition for winding up.  Section 166 lacks a moratorium (stay of proceedings) element. (See Tomasic and Tyler Hong Kong Company Law para 8151).
	50.	However in this case s 166 has not even been invoked. A compromise is not yet reached and an arrangement is not yet proposed which will enable the defendant to rely on s 166(1). What the defendant is seeking to do is to ask for time to finalise these plans.
	51.	This immediately highlights the problem faced by the defendant in seeking to stay the judgment under the inherent jurisdiction of the court. On the one hand, the plaintiff is prevented from enforcing the judgment. On the other hand, there is nothing yet in place to ensure an eventual equal sharing of the assets of the defendant.
	52.	In these circumstances, the court is not being asked to regulate its process but rather to impose a ‘standstill’ period when even the legislature has not chosen to enact any law on it.” (per Cheung JA)

84.  Drawing on the above statements, Mr. Barlow argued that judges have no jurisdiction to use their powers to fill in perceived lacunae in the insolvency legislation, such as the absence of a corporate restructuring regime with a moratorium. A winding-up petition cannot legitimately be issued solely to apply for an appointment of a provisional liquidator in order to facilitate a scheme of arrangement.

85.  The main difficulty about this argument is an earlier decision of the Court of Appeal in Re Luen Cheong Tai International Holdings Ltd. [2003] 2 HKLRD 719 (Rogers VP, Le Pichon and Ma JJA), in which the notice of appeal was struck out as the grounds of appeal were frivolous and plainly unarguable and not competent. The second ground of appeal was that the judge was wrong in law in concluding that provisional liquidators could be appointed for the purpose of facilitating a restructuring proposal. In rejecting this ground, Rogers VP had this to say at 722 to 723:

“	10.	The second ground of appeal is likewise fallacious. As already indicated, the grounds for the appointment of provisional liquidators are clearly sound. The provisional liquidators have been given authority to facilitate a restructuring proposal.
	11.	Those are powers which it is well within the jurisdiction of the court to grant to provisional liquidators provided the particular circumstances of the case warrant it.  Indeed, if they had not been granted and should a proposal have materialised for the restructuring of the Company in order to save it, application could have been made to the Court and the appropriate orders made.
	12.	The judge below referred to decisions in which similar orders had been made in circumstances where administration orders were not available.  In particular, the judge referred to in the decision in Re Keview Technology (BVI) Limited [2002] 2 HKLRD 290 where the application had the support of 100% of the company's outside creditors.  In that case, Yuen J (as she then was) held (at paragraph 19) that there was no jurisprudential objection to extending the powers of provisional liquidators in order to enable a corporate rescue to take place provided that a winding up order would be sought should the rescue attempt fail.  Once it has been established that the grounds for the appointment of provisional liquidators exist on the basis that it is likely that a winding up order would be made and that circumstances exist which justify the making of the appointment on the basis of the protection of assets, the fact that the applicant for the appointment wishes that provisional liquidators be granted powers to facilitate a restructuring of the company can be no bar to the appointment and is not intrinsically objectionable. Whether such powers should be granted and the scope of those powers including any restrictions would depend on the particular circumstances such as the support of the creditors.”

86.  The I-China cases were not referred to in the judgment of the Court of Appeal in SK Global, although they were referred to in the judgment of the court below at paragraph 15 ([2003] 3 HKC 569 at 574B to D). There was no indication they were disapproved of by the Court of Appeal in SK Global. The factual situation in SK Global was distinguishable in that a winding-up petition had not been presented, nor was a scheme of arrangement imminent; there was no process on foot which by its nature would require the court to take into account broader interests beyond those of the named parties to the action when considering the question of execution of the judgment. There was no conflict between the I-China cases and SK Global, the latter was in a very different context. As Mr. Crystal has put it, until there is a process on foot, whether it is for liquidation or rehabilitation, the court cannot have a “twilight insolvency regime” which is not catered for by legislation. I should add that two days after the appeal was allowed by the Court of Appeal, SK Global Hong Kong Limited presented a petition for its own winding up and obtained an order for appointment of provisional liquidators to ensure that its assets were preserved and made available to all unsecured creditors equally, pending either the successful implementation of the group restructuring or the liquidation of the company. The winding-up petition was adjourned and later dismissed after a debt restructuring was implemented. This seems to me a legitimate and proper use of a class remedy and was calculated to protect the class interest of the general body of creditors.

87.  The existing legal framework does not prohibit the extension of provisional liquidators’ powers to carry out a corporate rescue role. As Yuen J had stated in Keview Technology, supra. at 293C:

“I accept of course that it is not the role of the Court to legislate. That is the exclusive right and duty of the Legislature. The duty of the Court is to see what, in the circumstances of each case, within the existing framework of the law, can be done, which is just and fair to all the parties involved in a winding-up petition, in particular, creditors seeking to maximise recovery.”

88.  The presentation of a winding-up petition triggers off the statutory process which will lead to orderly distribution of the company’s assets on a pari passu basis among its unsecured creditors. Provisional liquidators, who may be appointed once a petition is presented, operate within that statutory scheme.

89.  As for Mr. Barlow’s contention that the power of appointing provisional liquidators is “interlocutory” in the sense that it is exercised in aid of or is referable to the substantive litigation, namely the winding up of the company concerned, and so may not be exercised if it is not in aid of the application for substantive relief, I do not find it necessary to come to a definite view whether it is right to categorise this as an interlocutory kind of order. In the passage cited above from the judgment of the Court of Appeal in Luen Cheong Tai,the court approved the statement of Yuen J at paragraph 19 in Keview Technology and did not find it “intrinsically objectionable” for provisional liquidators to be appointed to facilitate a restructuring on the basis that it is likely that a winding-up order would be made.

90.  Mr. Barlow also submitted that provisional liquidators could be appointed for the purpose of pursuing a scheme of arrangement only where a good prima facie case was made out on these matters:

(1)	an actual proposed scheme;
(2)	the scheme has reasonable prospects of satisfying the criteria in section 166, namely support by a majority in number of the creditors and of at least 75% in value of the company’s indebtedness; and
(3)	support by the creditor that has presented a winding-up petition.

91.  As I understand Mr. Barlow, these would appear to be jurisdictional limitations on the exercise of the power to appoint provisional liquidators, perhaps as an alternative to his contention there is no jurisdiction to appoint provisional liquidators to carry out corporate rescue for the reasons canvassed earlier. I reject his submissions. I see no basis for such jurisdictional limitations. They are not in the I-China cases, nor are they supported by the passages in SK Global that Mr. Barlow relied on. There is no good reason to put the exercise of such a power, which is meant to meet the justice and demands of particular circumstances of each case, into a straitjacket. As Mr. Crystal has pointed out, creditors would not normally know enough about the company’s financial position to formulate and propose a scheme of arrangement; even after provisional liquidators are appointed, they would need to assess the situation to see if there could be a realistic proposal of a rescue. It would not be right to restrict the exercise of the power of appointment to a threshold where a creditor can demonstrate there will be a rescue proposal.

92.  I hold that it is within the jurisdiction of the court to appoint provisional liquidators to explore, formulate and pursue a corporate rescue.

The case for appointment of provisional liquidators

93.  The question whether it is right to appoint provisional liquidators in all the circumstances is to be decided on the basis of commercial realities, the degree of urgency and need established by the applicant and the balance of convenience according to the circumstances (ReFive Lakes Investment Co. Ltd. [1985] HKLR 273 at 284B).

94.  It was submitted on behalf of MSEMI that it would be appropriate to appoint provisional liquidators for the Company on the protection of assets basis and the corporate rescue basis.

95.  On the protection of assets ground, this was put on the basis that the licence issued by Pagcor to the Company to operate a casino business in Subic Bay, being a valuable asset, would need proper protection as a result of ongoing disputes between the management and Pagcor. The support of Pagcor would be important in obtaining any necessary approvals in the context of a proposed corporate rescue or renegotiation of the casino licence.

96.  Firstly, there was litigation between the Company and Pagcor and although litigation was resolved in favour of the Company, Pagcor has lodged a complaint against the presiding judge in February 2005, resulting in the preventive suspension of the judge from judicial duty pending investigation. The relationship between the parties has deteriorated to such an extent that Pagcor would appear to have no confidence in the management of the Company. Secondly, Pagcor does not support the Rehab Plan and, as mentioned earlier, has filed a verified comment/opposition to the Rehab Petition seeking termination of these proceedings. Thirdly, in its letter to MSEMI dated 2 November 2004, Pagcor stated that it would support in principle the application to appoint provisional liquidators in Hong Kong, provided that this would not prejudice a pending case of Pagcor against the Company in the Regional Trial Court of Manila, that its existing claims against the Company for failure to remit revenues to the Philippine government since March 2001 be satisfied or compromised, and that the provisional liquidators would cause the Company to withdraw its action against Pagcor in the Regional Trial Court of Olongapo. Pagcor also stated it would wish to appoint its nominee or agent as one of the provisional liquidators or as a special manager to take charge of the Company’s affairs in the Philippines.

97.  On the corporate rescue basis, MSEMI says it has lost confidence in the ability of the management to put forward a viable restructuring plan. Metroplex has had more than four years to put forward a restructuring plan of the group and of the Company to creditors and notwithstanding drafts were circulated, none got as far as being put to creditors for approval. There is no dispute that restructuring is likely to provide a much greater return to creditors than if the Company were to be wound up. MSEMI considers it in the best interests of all creditors for a restructuring to be effected under the control of provisional liquidators who are independent third party professionals, who will progress the implementation of a restructuring plan in an expeditious and transparent manner. In all matters affecting the winding up of an insolvent company, the Hong Kong courts pay great attention to the views of creditors, as they are the persons with the only economic interest in the company as opposed to the management or the shareholders and can normally be expected to decide for themselves what is in their best economic interests. The provisional liquidators will consult the wishes of the creditors and ascertain if there are any real prospects of a restructuring, this would also assist the court in deciding whether to make a winding-up order against the Company.

98.  MSEMI seeks in particular these powers for provisional liquidators to be appointed in Schedule A to its summons:

“	(i)	To consider and, if thought to be in the best interests of creditors of the Company, to enter into discussions and negotiations for and on behalf of the Company, for the purpose of, but not limited to, restructuring of the Company’s business and operations, restructuring or rescheduling the Company’s indebtedness, or for a sale of the Assets, including, as deemed appropriate, to draft, with a view to implementing, a scheme of arrangement to be entered into between the Company and its creditors and/or shareholders, and to call meetings of shareholders and/or creditors and to do all things necessary to facilitate such action.
	(j)	Further to consider and, if thought appropriate, to form an informal committee of creditors of the Company (including [MSEMI]) to report and consult upon the progress of such a scheme or other restructuring at intervals to be agreed between that committee and the Provisional Liquidators.
	(l)	To consider and, if thought to be in the best interests of the creditors of the Company, to take steps under any relevant insolvency or restructuring legislation in any appropriate jurisdiction including, without limitation, Malaysia and the Philippines.
	(m)	So far as is necessary for the purpose of restructuring the Company’s business, operations, or indebtedness or to implement a scheme of arrangement between the Company and its creditors as provided for in paragraph (i) herein, to compromise all calls and liabilities to call, debts, and liabilities capable of resulting in debts, and all claims present or future, certain or contingent, ascertained or sounding only in damages, subsisting or supposed to subsist between the Company and a contributory, or alleged contributory, or other debtor or person apprehending liability to the Company, and all questions in any way relating to or affecting the Assets, or the winding up of the Company, on such terms as may be agreed, and take any security for the discharge of any call, debt, liability or claim, and give a complete discharge in respect thereof.
	(n)	So far as is necessary for the purposes of restructuring the Company’s business, operations, or indebtedness or to implement a scheme of arrangement between the Company and its creditors as provided for in paragraph (i) herein, to review and determine the claims of creditors of the Company, including determining their respective priorities, and to pay any classes of creditors of the Company in full.
	(o)	So far as is necessary for the purposes of restructuring the Company’s business, operations, or indebtedness or to implement a scheme of arrangement between the Company and its creditors as provided for in paragraph (i) herein, to make, without further order or other approval or formality, any compromise or arrangement with debtors or creditors or persons claiming to be creditors, or having or alleging themselves to have any claim, present or future, certain or contingent, ascertained or sounding only in damages against the Company, or whereby the Company may be rendered liable.”

99.  As for the rehabilitation proceedings in the Philippines, Mr. Crystal made the following submissions:

(1)	The Rehab Petition was filed just two days after MSEMI had presented the winding-up petition against the Company in Hong Kong and applied for the appointment of provisional liquidators. The proceedings were brought belatedly. The Philippine Court was apparently aware at the time it made the Stay Order that the Hong Kong winding-up jurisdiction has been invoked. Insolvency courts in an international context should not be prepared to encourage or tolerate a race to the courthouse approach.
(2)	Notwithstanding that the rehabilitation process in the Philippines involves judicial participation as the Rehab Plan requires to be sanctioned by the court upon the recommendation of the Rehab Receiver, the process is one of a “debtor in possession”. The Rehab Receiver does not take management control of the Company, that control remains vested in the current management. Under Rule 4 Section 14 of the Interim Rules, it is provided that the receiver “shall not take over the management and control of the debtor but shall closely oversee and monitor the operations of the debtor during the pending of the proceedings”. The Company can thus continue with its day-to-day operations pending evaluation and approval or disapproval of the Rehab Plan. Mr. Crystal disavowed that it is any part of his argument to suggest that the provisional liquidators regime (in which they may take over the management and control of the company) is better than the debtor-in-possession regime and this is quite beside the point. The two regimes merely reflect a difference in culture, depending on what view one takes about whose interests should be prioritised as a matter of public policy, which is then reflected in the applicable local law.
(3)	There are very substantial issues which would need to be determined by the Philippine Court on the Rehab Petition, among the most significant issues are the following:
	(i)	Is the Philippine rehabilitation law capable of applying to the Company at all in the circumstances of the present case? Does the Philippine Court have jurisdiction to adjudicate on the Rehab Petition at all in that the subject matter is within the sole remit of Pagcor as the regulating authority?
	(ii)	Are the requirements of procedural due process and transparency being complied with in the Philippine proceedings?
	(iii)	Are the concerns expressed by creditors as to the integrity of the Philippines process justified, such as the independence of the Rehab Receiver?
	(iv)	Is there any real prospect of the Company’s Rehab Plan succeeding? Is the Rehab Plan viable or feasible?
(4)	The above issues are matters for the Philippine Court to determine in the first instance. As the resolution of these issues is likely to take some considerable time, the Rehab Petition is going nowhere in the foreseeable future. The proceedings are uncertain and fraught with difficulty. Even if the issues in (3) are resolved at first instance, there may be further appeals.
(5)	Considerations of comity would lead the Hong Kong courts in the first instance to leave to the Philippine Court the resolution of the issues raised in and surrounding the Rehab Petition, such as those in (3). Cross border recognition of any rulings made by the Philippine Court in the future might raise other difficult issues and policy considerations in the context of comity. Hong Kong courts have been prepared to recognise foreign insolvency proceedings being conducted in the place of incorporation of non-Hong Kong incorporated companies in certain contexts, as in Modern Terminals (Berth 5) Ltd. v. States Steamship Company [1979] HKLR 512; and CCIC Finance Ltd. v. GITIC, HCA No. 15651 of 1999, Dep J Gill, 31 July 2001. But there is no suggestion in current Hong Kong jurisprudence that the Hong Kong courts would be prepared to recognise a foreign insolvency proceeding concerning a Hong Kong incorporated company where this is objected to by creditors of the company who wish there to be an additional insolvency proceeding in Hong Kong as the place of incorporation. In the current context, considerations of comity do not directly help to determine the issue before the court, namely, should provisional liquidators be appointed in this situation. Further, due deference should be given to the processes in Hong Kong as the law of the place of incorporation and creditors are entitled to have recourse to the courts of Hong Kong and its winding-up jurisdiction. It should also be noted that there is no express reference to extra-territoriality in the Stay Order.
(6)	There can be court appointed officers for an insolvent company in more than one jurisdiction. It is a common feature of the modern commercial world that companies incorporated in one jurisdiction carry on business, in whole or in part, in other jurisdictions. When such a company becomes insolvent, the courts of more than one country may have an interest in administering, or being involved in the administration of, its affairs. Save in cases of blatant and unjustified forum shopping or lack of competence, the courts of one jurisdiction do not normally assert they are the only forum capable of dealing with the insolvency. The existence of a rehabilitation receiver as part of the Philippine process can be no obstacle to the appointment by the Hong Kong court of its own officers in relation to the affairs of an insolvent Hong Kong incorporated company in an appropriate case. Experience has also shown that court appointed officers in different jurisdictions do try their best to cooperate with each other to do what is in the best interests of those concerned, subject to the approval of their sponsoring courts. The Guidelines Applicable to Court-to-Court Communications in Cross Border Cases adopted and promulgated by the American Law Institute in association with the International Insolvency Institute provide valuable practical addition to the processes of cooperation in cross border cases.
(7)	In considering what is the really in the best interests of creditors, the court should not approach this other than on a “bite-by-bite” basis, as it is difficult to foresee what would happen in this type of insolvency, so one should not explore problems that might or might not arise. Provisional liquidators do not take important steps without reporting to their sponsoring court and seeking its guidance. To the extent to which there is any opportunity for tension with proceedings in the Philippines, there is every reason to think this might be avoided as provisional liquidators would be expected to conduct themselves as experienced officers of the court and seek directions from the court if they should think any difficulty might be caused in the way they propose to exercise their powers. They could be directed to report to the court on a regular basis. So if provisional liquidators should think there is no real prospect of a scheme of arrangement within a realistic time frame, they would be obliged to report back to the court and a winding-up order will be made. There would be much opportunity to control the procedure after provisional liquidators are appointed and it should not be thought that this would necessarily give rise to tension with the proceedings in the Philippines.

The case against appointment of provisional liquidators

100.  The Company claims that although at one point it had contemplated applying to the Hong Kong courts to approve a scheme of arrangement, as the Company’s assets and business and most of its creditors are in the Philippines, it was ultimately decided to lodge the Rehab Petition in the Philippine Court in November 2004. It is contended that the interests of the creditors as a class are likely to be better served through the proceedings in the Philippines, where there is a regime for corporate rescue, with features that include a moratorium. Insofar as part of the Rehab Plan involves a proposed reduction of capital, if the Philippine Court were to approve the Rehab Plan, the Company avers that it will implement the plan in the manner legally advised and in accordance with the legal advice received on Hong Kong legislation.

101.  As recognised and acknowledged by MSEMI, whether the Rehab Plan is viable or not is a matter to be decided by the Philippine Court. It was submitted on behalf of the Company that any objection to the Rehab Plan should be ventilated through proper procedures in the Philippine Court. As there are pending rehabilitation proceedings in the Philippines, the Hong Kong court should not make any order appointing provisional liquidators that may have the effect of interfering with the judicial process in the Philippines as a matter of judicial comity. There would appear to be no decided case in which provisional liquidators were appointed to formulate a competing scheme of arrangement, when a competent court in a foreign jurisdiction was already seized of a corporate rescue or rehabilitation scheme. The court should not embark upon an uncharted voyage.

102.  Mr. Barlow drew my attention to Hong Kong Institute of Education v. Aoki Corp. (No. 2) [2004] 2 HKLRD 760, in which Reyes J considered the question of judicial comity if it should become necessary to enforce an arbitration award in Hong Kong notwithstanding that the debtor, Aoki Corp, was subject to a rehabilitation plan approved by the Tokyo District Court pursuant to Japan’s Civil Rehabilitation Law. The judge had adopted a two-stage approach, he granted leave to the Institute of Education for judgment to be entered in its favour against Aoki Corp, and deferred the question if the Institute should have leave to enforce such judgment through the intervention of the Hong Kong courts to another occasion. Mr. Barlow relied particularly on the following parts of the judgment at 805J to 807F in which Reyes J set out relevant extracts in these English cases:

“	125.	The attitude of comity in relation to foreign insolvency (or similar) proceedings is one which English and Hong Kong courts have espoused.
	126.	Lord Dunedin in Galbraith v Grimshaw  [1910] AC 508 (at 513) long ago observed:
			‘Now so far as the general principle is concerned it is quite consistent with the comity of nations that it should be a rule of international law that if the Court finds that there is already pending a process of universal distribution of a bankrupt’s effects it should not allow steps to be taken in its territory which would interfere with that process of universal distribution; and that I take to be the doctrine at the bottom of the cases of which Goetze v Aders [(1874) 2 R 150] is only one example.’
	127.	More recently, in Banque Indosuez SA v Ferromet Resources Inc. [1993] BCLC 112 (at 117), a bank obtained an ex parte injunction in England against UK plc, an associate company of Inc, to restrain dealing with certain assets which the bank claimed had been charged by Inc to the bank.  The bank (along with others) also commenced proceedings in Texas for the involuntary bankruptcy of Inc. As a result of the Texas action, there was an automatic stay pursuant to the US Bankruptcy Code of all proceedings against Inc and any attempt to obtain possession of Inc’s property.  UK applied to discharge the bank’s injunction.  Hoffmann J stated:
			‘The court is not of course bound by the stay under United States law but will do its utmost to cooperate with the United States Bankruptcy Court and avoid any action which might disturb the orderly administration of Inc in Texas under ch. 11 [of the US Bankruptcy Code].  The court has jurisdiction to make interlocutory orders for the preservation of Inc’s property in this country by way of assistance to the United States Bankruptcy Court but no such assistance has been requested here.  So far as the evidence shows, these proceedings are the individual act of a single creditor and, if successful, would enable that creditor to secure some of Inc’s assets outside the United States bankruptcy process.  Mr Neville-Clarke said that these proceedings had been taken with the consent of the other banks but a private sharing arrangement of that kind is no substitute for administration in accordance with the law of the jurisdiction seized of the bankruptcy.
			In exercising the discretion as to whether to grant or refuse injunctive relief, I therefore think that I should take into account the fact that the proceedings have not been authorised by the United States court.  I think that this is particularly significant in a case in which the United States proceedings have been initiated by, among others, the bank itself.  In my view the only justification for maintaining the injunctions in these circumstances would be, first, if I was satisfied that any assets recovered in the proceedings would be made subject to the ch 11 administration and secondly, if action without the authority of the United States court was necessary to prevent some dissipation of assets which would be to the prejudice of the bank’s rights under the United States bankruptcy law.  If these conditions were satisfied, it would then be necessary to examine the balance of convenience in accordance with the Cyanamid guidelines....’
	128.	Hoffmann J was more explicit on the need for comity in insolvency matters in Barclays Bank plc v Homan & Ors [1993] BCLC 680 (approved by the Court of Appeal at 694 ff.).  There he stated (at 691g - 692a):
			‘In other words, the normal assumption is that the foreign judge is the best person to decide whether an action in his own court should proceed.  Comity requires a policy of non-intervention not only for the same reason that appellate courts are reluctant to interfere with the exercise of a discretion, namely that in the weighing of various factors, different judges may legitimately arrive at different answers.  It is also required because the foreign court is entitled, without thereby necessarily occasioning a breach of international law or manifest injustice, to give effect to the policies of its own legislation.  Such legislation may have a broader reach than English legislation without necessarily attracting the international opprobrium which the United States anti-trust jurisdiction has done.  As the Vice-Chancellor said in Paramount Airways, the only satisfactory solution to the possibility of jurisdiction conflicts in cross-border insolvencies would be an international convention.  In the absence of such a convention, the only way forward is by the discretionary exercise of jurisdictional self-restraint.  But one cannot expect every jurisdiction to exercise that discretion in the same way.’”

103.  Mr. Barlow also pointed to doubts expressed by Philippine lawyers for the Company as to the enforceability in the Philippines of an order appointing provisional liquidators made by the Hong Kong court. He contended that the Hong Kong court should not exercise its discretion in vain. Once the Philippine Court has adjudicated on the merits of the Rehab Plan, and the proceedings there are at a relatively advanced stage, there should be no problem with enforcement of any order made by the Philippine Court, where the assets and most of the bank creditors are located.

104.  Last but not least, it is not apparent if any useful purpose would be served by appointing provisional liquidators, in view of the Stay Order, the appointment of the Rehab Receiver who is regarded as an officer of the court, and the work that has been done and will be done by the Rehab Receiver. It is pointless to appoint provisional liquidators when there is no plan of action.

The stance of other creditors

105.  None of the other creditors have participated in the application for appointment of provisional liquidators. On the available evidence, their stance to this application and the position they have taken in the Rehab Petition, would appear to be as follows.

106.  I will first mention the creditors that are not banks or financial institutions. I have already summarised the position of Pagcor in an earlier section.

107.  SBMA filed a comment seeking a modification or revision of the Rehab Plan.

108.  Geahin filed a comment/opposition raising lack of jurisdiction of the Philippine Court and complaining that the Rehab Plan had failed to disclose with particularity all the current obligations of the Company, including those with Pagcor and SBMA.

109.  Of the Philippine bank creditors, International Exchange Bank had written to the Company on 27 October 2004 confirming its support of the scheme proposed by the Company in May 2004, subject to its review and acceptance of any revisions therein and on its understanding that the Company was in the process of filing for court approval a rehabilitation petition in the Philippines to give effect to the same. Metrobank and United Coconut Planters Bank also wrote to the Company on 28 and 29 October 2004 to similar effect. On 8 November 2004 (two days before the first hearing of MSEMI’s application to appoint provisional liquidators in Hong Kong), these three banks wrote together to the Company stating that they cannot support the winding-up petition or the appointment of provisional liquidators or any other measure until they have been fully apprised of the details of these actions and have fully evaluated the merits. SBMA’s letter to MSEMI on 18 November 2004 was to like effect.

110.  Metrobank initially filed a comment/opposition to the Rehab Petition on 4 January 2005 seeking dismissal on the ground of lack of jurisdiction of the Philippine Court, alternatively denial of the petition for being clearly without merit. On 14 January 2005, it filed a manifestation stating that without necessarily abandoning its original position, it would prefer at this point to pursue instead the possibility of arriving at an agreement with the Company including a restructuring or other viable commercial solution.

111.  International Exchange Bank filed a comment proposing that a new or revised rehabilitation plan be submitted which will address its concerns and those of Pagcor and SBMA.

112.  United Coconut Planters Bank filed a comment stating that the Rehab Plan did not address the settlement of liabilities to Pagcor and SBMA, and that this is vital to the Company’s viability and operations.

113.  On 6 May 2005, MSEMI received a letter from Avenue Asia Special Situations Fund III, L.P. (“Avenue Asia”) that it has taken steps to acquire from United Coconut Planters Bank the whole of the debt owed by the Company to the bank and this debt represented 32.16% of the Company’s total indebtedness to financial creditors. Avenue Asia wrote to confirm its support of the winding-up petition in Hong Kong and the appointment of provisional liquidators to put forward a restructuring plan to creditors. As at 19 May 2005, the Company has not received notice from the bank concerned confirming that the sale to Avenue Asia has taken place.

114.  Under the Interim Rules, it is not necessary to have a threshold percentage of creditors approving the rehabilitation plan for the court to approve it. Further, as mentioned earlier, the plan once approved by the court shall be binding on all who may be affected by it, whether or not they have participated in the proceedings or opposed the plan or whether their claims have been scheduled.

The interim report of the Rehab Receiver

115.  The Rehab Receiver submitted an interim report to the Philippine Court dated 19 April 2005. This report covers the first phase of her task, which is to review the Company’s operation and past financial performance. The next phase will be to evaluate the Rehab Plan and submit comments and recommendations to the court.

116.  Due diligence work was undertaken by a team of independent auditors to validate and confirm the book balances and values of the assets and liabilities and to establish the estimated net asset value of the Company. The Rehab Receiver made initial recommendations and strongly advised the Company to come to terms on four items as listed, including the dispute with SBMA and Pagcor on past due licence fees and the exclusivity clause to operate the casino, and the dispute with SBMA on rental. The Rehab Receiver requested the court for full authority to discuss and facilitate an agreement with the relevant parties on the four items as a compromise could provide some relief and comfort to creditors and make the casino operations legally viable.

Exercise of the discretion

117.  I ask whether any useful purpose in the interests of the general body of creditors is likely to be served by appointing provisional liquidators now. The fundamental issue here, in the exercise of my discretion, is whether and how “jurisdictional self-restraint” as stated by Hoffmann J (as he then was) in Barclays Bank plc v. Homan & Ors, supra. should be exercised. As Mr. Crystal has put it, it is a question of what the circumstances of the particular case actually require as a matter of justice.

118.  For the present, I can leave out of account proceedings in Malaysia relating to Metroplex and the action brought by the Company in the Commercial Court in London.

119.  There is at the moment a Stay Order of the Philippine Court with the effect that I have described. Another judge has been presiding over the proceedings since 3 May 2005. A decision is awaited on the dispute as to jurisdiction, although further appeals may be expected. A rehabilitation receiver answerable to the Philippine Court has been appointed since December 2004. The Company continues to trade, payment to trade creditors is up-to-date, as the Stay Order imposes a standstill regime whilst safeguarding the trade creditors and suppliers dealing with the Company in the ordinary course of business. As mentioned earlier, the Rehab Receiver is tasked to study the best way to rehabilitate the Company and to ensure that the value of the Company is reasonably maintained pending the determination of the Rehab Petition. Specific and comprehensive powers and functions are given to the Rehab Receiver under Rule 4 Section 14 of the Interim Rules, including the following:

“	a)	To verify the accuracy of the petition, including its annexes such as the Schedule of Debts and Liabilities and the Inventory of Assets submitted in support of the petition;
	e)	To investigate the acts, conduct, properties, liabilities, and financial condition of the debtor, the operation of its business and the desirability of the continuance thereof; and any other matter relevant to the proceeding or to the formulation of a rehabilitation plan;
	f)	To examine under oath the directors and officers of the debtor and any other witnesses that he may deem appropriate;
	g)	To make available to the creditors documents and notices necessary for them to follow and participate in the proceedings;
	h)	To report to the court any fact ascertained by him preferences, dispositions, encumbrances, misconduct, mismanagpertaining to the causes of the debtor’s problems, fraud, ement, and irregularities committed by the stockholders, directors, management, or any other person against the debtor;
	i)	To employ such person or persons such as lawyers, accountants, appraisers, and staff as are necessary in performing his functions and duties as Rehabilitation Receiver;
	j)	To monitor the operations of the debtor and to immediately report to the court any material adverse change in the debtor’s business;
	k)	To evaluate the existing assets and liabilities, earnings and operations of the debtor;
	l)	To determine and recommend to the court the best way to salvage and protect the interests of the creditors, stockholders, and the general public;
	m)	To study the rehabilitation plan proposed by the debtor or any rehabilitation plan submitted during the proceedings, together with any comments made thereon;
	n)	To prohibit and report to the court any encumbrance, transfer, or disposition of the debtor’s property outside of the ordinary course of business or what is allowed by the court;
	o)	To prohibit and report to the court any payments outside of the ordinary course of business;
	p)	To have unlimited access to the debtor’s employees, premises, books, records, and financial documents during business hours;
	q)	To inspect, copy, photocopy, or photograph any document, paper, book, account, or letter, whether in the possession of the debtor or other persons;
	r)	To gain entry into any property for the purpose of inspecting, measuring, surveying, or photographing it or any designated relevant object or operation thereon;
	s)	To take possession, control, and custody of the debtor’s assets;
	t)	To notify counterparties and the court as to contracts that the debtor has decided to continue to perform or breach;
	u)	To be notified of, and to attend all meetings of the board of directors and stockholders of the debtor;
	w)	To bring to the attention of the court any material change affecting the debtor’s ability to meet the obligations under the rehabilitation plan;
	x)	To recommend the appointment of a management committee in the cases provided for under Presidential Decree No. 902A, as amended;
	y)	To recommend the termination of the proceedings and the dissolution of the debtor if he determines that the continuance in business of such entity is no longer feasible or profitable or no longer works to the best interest of the stockholders, parties-litigants, creditors, or the general public;
	z)	To apply to the court for any order or directive that he may deem necessary or desirable to aid him in the exercise of his powers and performance of his duties and functions”.

120.  I note further these provisions in the Interim Rules:

(1)	Under Rule 4 Section 18, the rehabilitation receiver is required to report to the court every three months or as often as the court may require on the general condition of the debtor.
(2)	Under Rule 4 Section 21, at any time before the receiver submits his evaluation on the rehabilitation plan to the court, he may, either alone or with the debtor, meet with the creditors or any interested party to discuss the plan with a view to clarifying or resolving any matter connected therewith.

121.  It does not appear to me that the protection of assets basis for the appointment of provisional liquidators is made out. There is no indication that the Rehab Receiver is not discharging properly the extensive powers and duties conferred under the Interim Rules for the purpose of protecting the assets of the Company pending the evaluation of the Rehab Plan. As for the disputes of the Company with Pagcor and SBMA, this problem is recognised by the Rehab Receiver and is the subject of the recommendation in her interim report, for which she seeks full authority from the court to discuss and facilitate an extra-judicial agreement with these parties.

122.  As to the corporate rescue basis, it seems to me that what provisional liquidators can do in this regard must be somewhat limited at this stage. I have no reason to think that the work cannot be done effectively, conveniently, and at less expense (without the involvement of another professional team) by the Rehab Receiver and the team of independent auditors engaged by her, in carrying out due diligence to establish the net asset value of the Company, in ascertaining the wishes of the creditors, and in studying the best way to rehabilitate the Company if rehabilitation is indeed feasible. The work done by the Rehab Receiver would not be wasted, even if it should be determined ultimately that the Philippine Court would not have jurisdiction to entertain the Rehab Petition.

123.  Mr. Crystal suggested at one point that the powers of the provisional liquidators can be confined locally at the initial stage, so that the provisional liquidators would be able to do such work as could be done in Hong Kong, such as in obtaining the books and records that the Company should have kept in its registered office as required by statute. I doubt if this would serve much use, it seems unlikely that any information to be derived from books and records kept in the registered office would not have been made available to the Rehab Receiver already. I also think Mr. Crystal is in somewhat of a dilemma. On the one hand, he is careful not to ask for too much power to be given to the provisional liquidators at the first instance, urging the court to take a “bite-by-bite” approach, to counter Mr. Barlow’s objection that the work of the provisional liquidators would lead to conflict or tension with the Rehab Receiver or the proceedings in the Philippines. On the other hand, if the powers of the provisional liquidators were to be so emasculated and confined that they would only be asked to gather such information as is available in Hong Kong, to liaise with the Rehab Receiver to obtain information as gathered by the latter, and to ascertain the wishes of creditors to a restructuring, one sees little useful purpose in appointing provisional liquidators at this point in time. I am inclined to approach the matter this way: I think it prudent to wait at least until the disputes whether the Philippine Court has jurisdiction to rehabilitate a foreign corporation and whether jurisdiction over the Rehab Petition is vested with Pagcor, not the courts, as the regulating authority have been decided at the level at first instance, before this court is to make another assessment if any useful purpose may be served by appointing provisional liquidators.

124.  MSEMI would have liked to be in the position to make suggestions as to a scheme of arrangement for the benefit of the general body of creditors. It has sought information from the Company’s solicitors on 9 December 2004 on the current financial position of the Company as listed in a schedule to the letter but has met with refusal. I wish to point out that under the Interim Rules, the rehabilitation receiver is empowered to make available to the creditors documents and notices necessary for them to follow and participate in the proceedings and he is to study not just the rehabilitation plan proposed by the debtor but any rehabilitation plan submitted during the proceedings, with any comments made thereon.

125.  Mr. Crystal submitted that the Rehab Plan, insofar as it involves a scheme of arrangement in Hong Kong, is bound to fail as we have a statutory requirement of approval by a majority of creditors in number and of 75% in value and the plan would not have the support of MSEMI, whose claim is 39.6% of the Company’s total bank indebtedness. It is not necessary to go into the details why MSEMI objects to the Company’s current proposals for restructuring. Whether the Rehab Plan is feasible or viable is to be adjudicated upon by the Philippine Court, and as acknowledged by Mr. Crystal, considerations of comity would lead this court to leave to the Philippine Court the resolution of issues raised in and surrounding the Rehab Petition.

126.  I have set out the procedures under the Interim Rules in some detail. The rehabilitation process is not going to drag on indefinitely, as there is an absolute bar that in no instance shall the period for approving or disapproving a rehabilitation plan exceed eighteen months from the date of filing of the petition. The Rehab Petition was filed in November 2004, by now six months have passed. If the jurisdiction issue were resolved in favour of the Company, it does appear from the various time limits laid down in the Interim Rules, which will run when the initial hearing is resumed, that the process of evaluation of the Rehab Plan and the submission of recommendations and revisions will proceed within a reasonable time frame.

127.  I am mindful of the exhortation of Mr. Crystal that this court should not send a wrong message internationally in declining to appoint provisional liquidators in what would otherwise have been an appropriate case merely because there is a foreign insolvency process going on. As he put it, this court should not practise a “self-denying ordinance” when it comes to consider whether and how to exercise jurisdictional self-restraint. I trust it should be tolerably clear from the way I have set out my thinking process that that is not the principle on which this court operates. Nor do I think I have turned conventional insolvency jurisprudence on its head by treating the place of incorporation as irrelevant or insignificant and giving pre-eminence to the commercial state of affairs. The winding-up jurisdiction of this court has been invoked, the petition for winding up will be heard in time, and it is recognised by all that if the proposed restructuring is to involve a reduction of the share capital, that too will have to come before this court.

128.  As stated by Professor Fletcher in Insolvency in Private International Law, 1999 ed., at page 108, there needs to be a balanced approach over the question of the effects to be accorded to analogous foreign insolvency proceedings. A rigid rule, which may be doctrinally sound, is an obstacle to the development of mature international relationships between legal systems, which should be based on even-handedness and mutual respect.

129.  For the above reasons, I decline to exercise my discretion to appoint provisional liquidators for the Company.

Orders

130.  On the summons of MSEMI for appointment of provisional liquidators, I make the following orders:

(1)	the application is dismissed; and
(2)	an order nisi that MSEMI is to pay the costs of the Official Receiver and of the Company in the application, including all costs reserved, in any event, with a certificate for two counsel.

131.  On the summons of the Company for striking out of the petition, I make these orders:

(1)	the application is dismissed; and
(2)	an order nisi that the Company is to pay the costs of MSEMI in the application, including all costs reserved, in any event, with a certificate for two counsel.

132.  For the purpose of taxation of costs, and if it be necessary, I would apportion 40% of the hearing time to the striking out summons.