RE LUEN CHEONG TAI CONSTRUCTION CO. LTD. ("the Company")

HCCW 190/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 190 OF 2002

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D E C I S I O N

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1. This is a hearing held pursuant to directions given by the court on 8 October 2002, on the application of the Official Receiver and provisional liquidator under r. 45(2) of the Companies (Winding-up) Rules, to consider the resolutions passed at the first meetings of the creditors and contributories of Luen Cheong Tai Construction Company Limited ("the Company") on 19 August 2002, and to make such orders as may be necessary for the appointment of liquidators and the members of the committee of inspection.

2. At the hearing today, apart from the Official Receiver, the petitioning creditor appeared by Mr Bartlett. Ms Linda Chan appeared for 33 trade creditors with an aggregate claim of about $67.5 million and 32 former employees with an aggregate claim of $5.8 million. The provisional liquidator of Luen Cheong Tai International Holdings Ltd ("International"), which is the parent company, is also represented today. In additional there is a trade creditor, China International Water and Electric Corporation, represented by a solicitor holding a watching brief.

3. In a hearing of this kind, it is well established that the court has a wide discretion in appointing liquidators and members of a committee of inspection. The court is not bound by the resolutions passed at the first meetings of creditors and contributories, notwithstanding they are valid and binding, although the court would naturally have regard to the determinations at those meetings. In deciding on the appointments, the court considers "what is in the best interests of all persons interested in the winding-up" (see Re Akai Holdings Ltd and Kong Wah Holidings Ltd [2001] 2 HKLRD 411 at 417-418).

4. The matter has come before me in this way.

5. On 15 July 2002, a winding-up order was made against the Company on the petition of a creditor, Hennabun Resources Ltd. The Official Receiver became the provisional liquidator. As mentioned earlier, the Company is the wholly owned subsidiary of International, the shares of which are listed on the Hong Kong Stock Exchange. A petition to wind-up International has also been presented by one of its creditors on 3 June 2002. This is HCCW No. 584 of 2002. On 5 September 2002, I made an order appointing provisional liquidators for International on the application of the Bank of China (Hong Kong) Ltd, which is the largest creditor of International. The reasons for appointing provisional liquidators were handed down on 13 September 2002 and I do not propose to repeat them here. The petition to wind up International has been adjourned for the provisional liquidators to identify and secure an investor to effect a restructuring of International or of the Luen Cheong Tai group of companies.

6. When the first meeting of the creditors was held on 19 August 2002, and this was before the appointment of provisional liquidators for International, the following resolutions were passed:

(1) it was passed by a majority in value of the creditors present and voting that Mr William Nicholas Giles and Mr Alan Hubert Day, both of H & G Services Ltd ("H&G"), be appointed joint and several liquidators of the Company;

(2) it was unanimously resolved that there should be a committee of inspection in this winding-up;

(3) it was resolved by a majority in value of the creditors present and voting that the petitioner, Nip Kin Keung, Ng Sau Po, Bank of America (Asia) Limited and Adrian Engineering Ltd would be the members of the committee of inspection; and

(4) it was resolved by a majority in value of the creditors present and voting that an application would be made to the court under s. 209A of the Companies Ordinance Cap. 32 for an order that the winding-up of the Company be conducted as if it were a creditors' voluntary winding-up.

7. Identical resolutions were passed by the first meeting of contributories on the same day. The Company is wholly owned by International, so the votes were exercised as directed by International, still under the control of the management at that time.

8. It seems to me that the above resolutions passed at the creditors' meeting were due to the vote cast by International on account of inter-company loans to the Company. The value of International's claims against the Company represented 42.59% in value of the creditors' voting at the first meeting.

9. A group of creditors, including the petitioner, whose aggregate claims amounted to approximately 27.3% in value of the creditors' voting, had proposed to appoint Mr Yeo Boon Ann and Mr Stephen Liu Yiu Keung, both of Messrs Ernst and Young, as liquidators and several other candidates apart from the petitioner to serve on the committee of inspection. However, they were out voted on their proposed resolutions and on the resolution to convert the winding-up into a creditors' voluntary winding-up.

10. A number of reasons were put forward why the resolution passed by the majority in value of the creditors appointing Messrs Giles and Day as the liquidators should not be upheld.

11. The Official Receiver initially adopted a neutral attitude. However in the 2nd report to the court dated 8 November 2002, the Official Receiver stated that he cannot support the appointment of Messrs Giles and Day. It has since come to the notice of the Official Receiver that Messrs Horvath and Giles, the firm of solicitors operating H & G, had an agreement with RSM Nelson Wheeler Corporate Advisory Services Ltd ("Nelson Wheeler") that in the event Horvath and Giles were successful in their tenders to the Official Receivers to act as provisional liquidators for summary cases of winding-up under s.194(1A) of Cap. 32, Nelson Wheeler will undertake the bulk of the work in these cases. The Official Receiver is currently investigating whether in so doing Horvath & Giles are in breach of the terms of tender. The Official Receiver has expressed concern whether H & G have sufficient staff in their direct employment to conduct the scheme liquidations. I say no more about the possible breach of the terms of tender but it does seem to me that the concern of the Official Receiver as to the resources of H & G to undertake the work of liquidators is a legitimate one.

12. Also arising out of the above is the apparently close working relationship between H & G with Nelson Wheeler. Nelson Wheeler are the former auditors of the Company and they themselves would be conflicted out of acting as liquidators for the Company because of this (see Rules of the Hong Kong Society of Accountants, Supplement to Statement 1.203, paras. 6 and 8(a) and Re Mount Everest Investment Ltd, CWU No. 249 of 1987, 25 January 1988, Jones J). This too seems to me to be a valid reason why Messrs Giles and Day should not be appointed liquidators for the Company.

13. Further, on behalf of the petitioner, it was submitted by Mr Bartlett that I should take into account that provisional liquidators were appointed for International on 5 September 2002, so that if a fresh meeting were to be convened for creditors to vote on the appointment of liquidators, the provisional liquidators of International would have voted in favour of appointing Messrs Yeo and Liu. The results would be reversed with 75% voting in favour of these appointments and as the Company is insolvent, the interests of creditors should prevail over those of the contributories. Even if the vote of the provisional liquidators were to be discounted as it would be unseemly for them to vote in favour of their own appointment, it would appear that the proposed resolution appointing them as liquidators of the Company would still have been carried albeit by a smaller majority of the external creditors. I should also mention that the external creditors whose claims amounted to about 27.3% in value of the creditors' voting have lost faith in the integrity and ability of the management of the Luen Cheong Tai Group and that was one of the reasons why the largest creditor had applied for provisional liquidators to be appointed for International.

14. Quite apart from the wishes of the majority of creditors, it would seem to me there are advantages in appointing Messrs Yeo and Liu. Under the order of 5 September 2002, the provisional liquidators are empowered to investigate the affairs of International and its subsidiaries, including the Company, which was the main operating arm of the Group. The investigation would be carried out in a more efficient and cost effective way if the provisional liquidators are also the liquidators of the Company. Further, as the provisional liquidators are empowered to formulate and implement a restructuring of International and its subsidiaries, and to attempt to realize value from the listed status of International, the process of doing so may be rendered more efficient and cost effective if provisional liquidators are also the liquidators for the Company, especially where there are indications it may be more attractive to potential investor if the subsidiaries of the Group are to be included in a global restructuring.

15. I turn to consider the possible conflict of Messrs Yeo and Liu, raised by the former management of the Company and by the creditors represented by Ms Linda Chan. It was submitted that as Messrs Ernst and Young had done a limited scope financial review of the Group and had formulated draft restructuring proposals for International in 2001, they would be placed in a position of conflict. I have considered this when the same objections were raised by International in the appointment of Messrs Yeo and Liu as provisional liquidators, I did not think these objections are of substance, I still do not think so.

16. The other possible ground of conflict is the inter-company debts. At the first meeting, Mr Yeo on behalf of the petitioning creditor had raised objection to the acceptance of the claim of International for voting purposes. The explanation for that step being undertaken was that the financial creditors had no detailed knowledge at the time of the inter-company claims, and they were concerned to preserve their position, having regard to the clear intention of the former management of International to exercise the vote in a manner contrary to the wishes of the petitioner and other external creditors.

17. The reality of the situation is that Messrs Yeo and Liu would now assert and seek to exercise the rights of International as creditors of the Company on account of the inter-company loan. The court has taken a pragmatic approach in situations like this. It has been recognized there are advantages of having a single liquidator in a group liquidation scenario. If a real and actual conflict should arise when it comes to the adjudication of the proofs of debt, the liquidator could always apply to the court for directions. That has been the approach adopted by the English courts (see Re Arrows Ltd [1992] BCC 121and Re Maxwell Communications Corporation plc [1992] BCC 372). The English decisions have been followed in Hong Kong.

18. I would also endorse the statement of principle in the Australian decisions that Mr Bartlett has referred me to. They are Re Bruton Pty Ltd (1990) 2 ACSR 277 and Re Nida Pty Ltd (1993) 10 ACSR 195. In the latter decision, the court this has to say:

"It seems to me that in the ordinary course of things with a number of companies involved in the same group and in which, as I have been told it is the case here, the shareholding is much the same so that in each case the contributors will be much the same persons, other things being equal it is desirable from the point of view of ease of administration and expense that the liquidation of each of the companies should be undertaken by the same liquidator or liquidators. If, however, it is clear that there are serious conflicts bound to arise then it would be desirable that different liquidators should be appointed to wind up different companies."

19. One example of a serious conflict arising is where the companies are already engaged in litigation against one another, which is the position in Re Nickel Mines Ltd (1978) 3 ACLR 686.

20. In the present situation, I am satisfied that there is no such serious conflict of interest arising. For all the above reasons, I am of the view that it would be appropriate to appoint Messrs Yeo and Liu as the liquidators for the Company.

21. I turn to the question of the composition of the committee of inspection. It is not in dispute that there should be a committee and that it should be fairly representative of the general body of creditors.

22. The proposal of the petitioner is that Mr Nip Kin Keung, whose claim is only of HK$1,000.00 odd, should be removed from the committee, otherwise the four members voted to the committee by the majority at the first creditors' meeting should remain. In addition, it is proposed that two financial creditors should serve on the committee. There are the largest creditor, the Bank of China (Hong Kong) Ltd, and East Asia Credit Co. Ltd.

23. It seems to me that this is a sensible proposal and one that would achieve a balanced representation of the general body of creditors. I would therefore make an order to give effect to this.

24. Lastly, regarding the resolution passed to convert the compulsory winding-up into a creditors' voluntary winding-up, it does not seem to me necessary to deal with this at this stage. It would be up to the liquidators to decide if they want to apply to the court under s. 209A or to convene another meeting to ascertain again the wishes of the creditors and contributories.

25. The orders I make are as follows:

(1) Mr Yeo Boon Ann and Mr Stephen Liu Yiu Keung, both of Messrs Ernst and Young, be appointed joint and several liquidators of the Company;

(2) there be a committee of inspection in this winding-up comprising the following members:

i) a representative of Hennabun Resources Ltd;

ii) Ng Sau Po;

iii) a representative of Bank of America (Asia) Ltd;

iv) a representative of Adrian Engineering Ltd;

v) a representative of Bank of China (Hong Kong) Ltd; and

vi) a representative of East Asia Credit Co. Ltd.

(3) the liquidators shall receive such remuneration as may be determined by agreement with the committee of inspection, failing agreement such remuneration be determined by the court;

(4) the liquidators are to give security to the satisfaction of the Official Receiver under s. 195 of the Companies Ordinance within seven days hereof;

(5) the appointment of the liquidators be advertised in one issue of an English newspaper and in one issue of a Chinese newspaper and be gazetted by the Official Receiver; and

(6) the costs of the Official Receiver in this hearing and one set of costs for the petitioning creditor and the provisional liquidators of International are to be paid out of the assets of the Company.