RE CHINA SOLAR ENERGY HOLDINGS LTD

HCCW 108/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 108 OF 2015

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D E C I S I O N

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1.  This is the application of the Provisional Liquidators (PLs) for approval of various contractual documents which arose from amendments to the restructuring embodied in a number of agreements that had been approved by this court on 14 December 2016.

2.  As explained below, there is urgency in this application.

Background

3.  The relevant background can be briefly summarised as follows.  The Company is listed on the Hong Kong Stock Exchange (HKSE) but the trading of its shares has been suspended since 13 August 2013. Since the 2 September 2016, it has been placed by the HKSE in the final delisting stage with an expiry date of 1 March 2017. 

4.  On 26 March 2015, Crown Master International Trading Co Ltd (Crown Master) presented a winding up Petition against the Company due to its inability to answer a statutory demand for payment of a sum in excess of HK$36 million, which represented the outstanding principal of certain convertible notes issued by the Company.  On 12 June 2015, Crown Master assigned its debt to Ankang Ltd, and on 18 January 2016 Ankang was substituted as the Petitioner in place of Crown Master.  The debt in question is not disputed.  

5.  On 21 August 2015, the PLs were appointed by this court.  The application was supported by Ankang.  The usual power was granted to the PLs under the Appointment Order (Order), including :

Para 4(11) of the Order

“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 or the Subsidiaries, for purpose of, restructuring the Company and the Subsidiaries’ business and operations, restructuring or rescheduling the Company’s indebtedness, or for 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 to call meeting of shareholders and/or creditors and to do all things necessary to facilitate such actions including a review (and/or take into their custody or under their control where deemed necessary) of all the books, records, property and things inaction to which the Company is or appears to be entitled wherever situate provided that any such proposed restructuring, rescheduling or sale shall not be binding on the Company until approved by the Court.”

6.  It is uncontroversial that the Company was, and is, in a poor financial state.  From the outset, the PLs intended to procure a restructure of the Company and apply for resumption of trading in its shares. The Petitioner was 1 of the potential investors who had expressed an interest and engaged in discussions with the PLs to rescue the Company.  On 17 December 2015, the PLs entered into exclusivity agreement with Happy Fountain Ltd (HF) as potential investor for restructuring. 

7.  All along, the PLs had acted with appropriate transparency in the restructuring exercise.  The Companies Court was informed about it on 13 June 2016, and announcements had been published in respect of the same. 

8.  There was no complaint by the Petitioner of the restructuring exercise until the receipt of a letter by the PLs from the Petitioner’s solicitors dated 15 November 2016.  The letter questioned the power of the PLs under the Order to carry out the restructuring exercise.  The PLs disagreed with the Petitioner and informed it that an application would be made to the court for liberty to enter into the restructuring agreements so as to avoid needless dispute.

9.  On 14 December 2016, 4 agreements to restructure the Company and to facilitate a proposal to resume trading of its shares were approved by this court by way of paper application.  In a nutshell, the restructure was a reverse takeover or a backdoor listing by HF.   

10.  On 14 February 2017, the Company submitted a revised resumption proposal to the HKSE (Final Proposal).  This would entail consequential changes to the arrangements approved by the court in December, including amendments to the existing restructuring agreements and the entering into funding agreements.  For this purpose, the PLs have made an application by Summons dated 22 February 2017 (Summons 1).

11.  Very recently, the HKSE commented on a particular aspect of the Final Proposal.  In response, the Company needs to amend the funding agreements and to this end, the PLs have taken out another Summons dated 21 March 2017 (Summons 2).

Current state of affairs

12.  The position set out by the PLs is not open to dispute, namely :

(1) The Final Proposal is the Company’s last and only chance to salvage value in its listing status, its only valuable asset;

(2) If the Final Proposal is successful, the known debts owed to creditors (approx. HK$87.98 million) will be settled in cash in full from the funds raised.  Otherwise, the creditors are unlikely to obtain any substantial recovery.

(3) The court’s approval of the agreements in question is required urgently to ensure that the HKSE is satisfied that the Final Proposal is on a sound legal footing, and to maximize the chances of approval of the same.

13.  Summonses 1 and 2 are supported by the Company and HF.  This court has also been informed that 2 groups of Opposing Contributories had informed the PLs’ solicitors that they have no objection to these applications and had asked to be excused from this hearing.

Petitioner’s opposition

14.  The Petitioner is the only party resisting these applications.  Its’ arguments fall within a narrow compass and have been summarised by Mr Smith SC, appearing for the PLs with Mr Tang, as follows :

(1) The court’s approval is not required because it is simply for the abundance of caution;

(2) Approval should not be granted as the PLs are “acting outside the power and beyond what is permitted in liquidation” based on Re Legend International Resorts Ltd [2006] 2 HKLRD 192.

Analysis

15.  Before dealing with the arguments, it must be said that the position taken by the Petitioner is quite baffling.  Given the current state of affairs, what can possibly be gained by the Petitioner, being a major creditor of the Company?  The main opposing affirmation relied upon by the Petitioner contains little other than a technical challenge on the appropriate scope of power exercised by provisional liquidators.

16.  There can be little doubt that commercial entities are generally not interested in arguing over the high principles of law at great economical cost to themselves.  Mr Wong, appearing for the Company, submitted that the Petitioner is assuming the role of a spoiler because it is dissatisfied with the PLs’ rejection of its restructure proposal in favour of HF’s. 

17.  It is unnecessary for the court to speculate over the real motive of the Petitioner.  However, this court has not been informed by the Petitioner what its real objection or objective is.  It appears that the process of the court is being used for some ulterior purpose, and the court does not take kindly to such a situation.  See also the observation by Kwan J (as Kwan JA then was) in Re China Medical and Bio Science, HCCW 198/2008, unrep, 9 September 2009, §9.

18.  Litigation must not be treated as a game by resourceful parties.  Tactical moves have no place in court, especially when third party interest is involved.  In my view, the Petitioner is sailing very close to an abuse of process. 

19.  It should be added that the Companies Court deals with commercial crisis, which may affect the livelihood of many.  The Court has to be practical and realistic in its approach in order to provide effective relief. 

20.  The position presented by the Petitioner is quite unattractive, apart from being unmeritorious. 

21.  With respect, the Petitioner’s arguments can be dealt with swiftly.  In respect of the need to seek the approval of the court. I agree with Mr Smith that in light of the opposition of the Petitioner, it is sensible to seek the approval of the court. 

22.  This is not to be taken as an approval for provisional liquidators and their advisors to shift their responsibilities to the court.  The demand for the court’s limited resources always outstrips supply.  There should be good reason before an application is made to the court. I am satisfied that there is good reason here.

23.  As regards the argument based on Re Legend, there is an application on foot by the Petitioner to discharge the PLs which is to be heard in August 2017.  I shall therefore keep this part of the decision very brief. 

24.  First and foremost, there is nothing new with provisional liquidators entering into restructuring agreements to salvage the assets of the company under their charge.  Equally, it is well-known that the listing status of a company is a valuable asset.  In this case, it is the only valuable asset to speak of. 

25.  Secondly, I am satisfied that the PLs have the power to enter into the restructure agreements pursuant to the Order. 

26.  There is a subtle shift of the Petitioner’s Re Legend argument.  The current complaint is that, when the only remaining task for the PLs is to restructure the Company, this constitutes a misuse of the provisional liquidation regime.  The Petitioner also relies on a recent decision of Harris J in Re Kokin Ltd, HCCW 297/2014, unrep, 31 October 2016, where the court mentioned instances of misuse of provisional liquidation for restructuring.

27.  I agree with Mr Smith that the reliance on Re Legend is misplaced.  Re Legend was explained recently by DHCJ Le Pichon, who (as Le Pichon JA) was one of the two judges presiding over that case, in Re China Solar Energy Holdings Ltd, HCCW 108/2015, unrep, 1 March 2016, §25.  According to the learned Judge, Re Legend does not prohibit provisional liquidators from pursuing restructuring in the best interests of the Company and its creditors.  It stands for the narrower proposition that provisional liquidators should not be appointed solely for enabling corporate rescue :

“Reference was made to Re Legend International Resorts Ltd [2006] 2 HKLRD 192 at §35. Properly read, the distinction being made there was between the appointment of provisional liquidators on the basis that the company was insolvent and assets were in jeopardy (which is the present case) and the appointment of provisional liquidators solely for the purpose of enabling corporate rescue to take place. It does not follow that where it is appropriate to appoint provisional liquidators who are then given the requisite extra powers, they may not exercise those powers and explore whether corporate restructuring proposals are viable and in the interests of the creditors and the company.”

28.  I do not believe that Re Kokin is inconsistent with Re Legend as explained in Re China Solar.  I also agree with Mr Smith that Re Kokin is distinguishable from the present case.

29.  The Petitioner’s argument may be boiled down to this.  Notwithstanding that the PLs were properly appointed and were acting within the parameters of the Order when it embarked upon the restructuring exercise, there came a time when that exercise became the only purpose of the PLs and at which point their power came to an end.  Despite the eloquence of Mr Maurellet SC, appearing with Mr Chan for the Petitioner, I have great difficulty understanding the logic or the sense in the submission. 

30.  Mr Smith submitted that if the above proposition were correct, when a restructuring exercise has reached a mature state, the provisional liquidators would lose their power to bring it to fruition because by definition it would be the only purpose left for them.  This serves to expose the lack of rationale in the Petitioner’s argument, and I disagree with it. 

31.  Finally, I do not agree with the Petitioner’s proposal to adjourn this application pending the determination of its discharge application.  I see no reason to deprive the Company and its creditors the last opportunity to salvage the value of the Company’s only asset.

32.  In the premises, I grant the relief sought in Summonses 1 and 2.

33.  I shall hear the parties on costs.