RE DA YU FINANCIAL HOLDINGS LTD (formerly known as China Agrotech Holdings Limited) (In Liquidation)

HCMP 2196/2018

[2019] HKCFI 1730

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2196 OF 2018

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D E C I S I O N

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1.  This morning the Petition for sanctioning a scheme of arrangement between Da Yu Financial Holdings Limited, formerly known as China Agrotech Holdings Limited, (“Company”) and its creditors came on before me along with an application to stay its winding-up. I have adjourned the Petition and the stay application to be heard before DHCJ Wong on 22 July 2019 for the following reasons.

2.  The Company was put into liquidation in Hong Kong by an order dated 9 February 2015.  The Company is incorporated in the Cayman Islands and listed on the Main Board of the Stock Exchange of Hong Kong (“HKSE”).  Liu Yiu Keung Stephen (“Mr Liu”) and            Yen Ching Wai David (“Mr Yen”) of Ernst & Young China were appointed liquidators (“Liquidators”).

3.  On 27 December 2018 the solicitors for the Liquidators wrote to my clerk seeking dates for the hearing of an anticipated originating summons to convene a meeting of creditors to consider a scheme of arrangement and, on the assumption that the scheme would be approved, a date for the hearing of the petition.  A parallel scheme was also to be introduced in the Cayman Islands.

4.  As is well known to practitioners in this area I generally do not hear applications involving Ernst & Young China unless they are little more than hearings for directions because my Wife is a partner in      Ernst & Young China.  My clerk inquired to see if another judge with relevant experience was available during the periods in which hearings were sought.  Unfortunately, there were none.  As at the time the scheme appeared to be, as is the norm, uncontroversial I decided to hear it.

5.  Although, when I had read the papers filed for the originating summons I had some reservations about certain aspects of the proposed scheme, in particular the costs involved, which resulted in amendment to the explanatory statement, I did not consider that they necessitated me recusing myself.

6.  Unbeknown to me there was a shareholder of the Company, Perfect Gate Holdings Limited (“Perfect Gate”), which is a distressed debt fund, which had acquired 23% of the Company’s share capital after the winding-up order had been made.  The transfers were approved by Godfrey Lam J on 6 May 2016.

7.  It is Perfect Gate’s evidence, in the form of an affirmation filed by a director Lee On Wai (“Mr Lee”), that it has tried to engage the Liquidators unsuccessfully in discussions about the substance of the scheme.  Mr Lee says that Perfect Gate is concerned about its dilution effect and believes that there are better alternatives.  As a consequence of its concerns it gave proxy forms to Hong Kong Securities Clearing Company Limited (“HKSCC”) to vote against the special resolution necessary to reduce the capital of the Company at an extraordinary general meeting (“EGM”) on 22 May 2019.  The capital reduction is an integral and necessary part of the implementation of the scheme.  Without its approval the scheme in its present form will be abandoned.

8.  If Perfect Gate’s shares had been counted the special resolution would have failed by a large margin.  It would appear that a shareholder present at the meeting objected to Perfect Gate’s shares being counted on the ground that to vote against the resolution would be irrational. The Chairman of the EGM, Mr David Yen, disallowed the votes and recorded the special resolution as passed.

9.  Perfect Gate found out that the resolution had been passed as a result of the public announcement published on 29 May 2019.  Proceedings were subsequently issued, I understand, in the Cayman Islands by the Liquidators seeking a declaration that the special resolution was validly passed.  Perfect Gate were informed of this by            a letter from the Company’s solicitors in the Cayman Islands dated 12 June 2019.  A hearing was fixed before Segal J on 5 July 2019.  Perfect Gate did not attend the hearing.  Segal J has reserved judgment.  When the Petition came on before Segal J on 8 July 2019 it was adjourned to Tuesday 16 July 2019.

10.  On 26 June 2019 Perfect Gate issued proceedings in       Hong Kong seeking a declaration that the decision to exclude its votes was unlawful and the purported special resolution is unlawful.

11.  Unfortunately, the Company did not inform me of these developments until last Friday 5 July 2019.  At that stage all that     I received was a letter.  It would appear that Perfect Gate did not become aware of the date of the hearing of the Petition until the end of last week.  I received its evidence on 8 July 2019.

12.  Generally, shareholders can vote their shares as they wish.  In Sunlink International Holdings Limited [2010] 5 HKLRD 653 I held after considering the relevant authorities, and I quote from [35],    “….the authorities do demonstrate that the court will intervene to prevent a shareholder voting in a way which will result in the destruction of the economic value of other shareholders’ shares for no rational reason.”[1] Perfect Gate says that its decision was rational and that as a distressed debt fund it is inherently unlikely that it would act casually to destroy the value of its investment.  I do not need to consider the merits of this argument.  It is sufficient to say, first, that if the law in the Cayman Islands is the same as the law in Hong Kong there is something to argue      about, and, secondly, that as Perfect Gate has expressly called into question Mr Yen ’s bona fides in excluding its votes, it undesirable that    I adjudicate the issue.  Mr Ko on behalf of Perfect Gate, having been alerted to the conflict issue invited me to recuse myself.

13.  In these circumstances I have adjourned the Petition and the stay application to DHCJ Wong on 22 July 2019 and made the following further directions:

(1)   Perfect Gate has leave to file further evidence by 4:30pm on 12 July 2019;

(2)   The Company has leave to file evidence in reply by 4:30pm on 17 July 2019;

(3)   The Company is to serve a further skeleton argument by 4:30 pm on 17 July 2019;

(4)   Perfect Gate is to file a further skeleton argument by 4:30pm on 18 July 2019;

(5)   Costs of both applications be reserved.

14.  It may be that it is necessary for there to be further coordination of these proceedings between the courts.  In the first instance this should be directed to my clerk.