HCCW 1233/2000
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
COMPANIES (WINDING-UP) NO. 1233 OF 2000
____________
IN THE MATTER of ASEAN INTERESTS LIMITED (In Liquidation)
and
IN THE MATTER of Section 209 of the Companies Ordinance, Chapter 32 of the Laws of Hong Kong
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Before: Hon Kwan J in Chambers
Date of Hearing: 29 September 2005
Date of Decision: 29 September 2005
Date of Handing Down of Reasons for Decision: 5 October 2005
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REASONS FOR DECISION
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1. This is a summons issued on 28 September 2004 by Madam Kawita Mohan Vaswani (“Madam Vaswani”), Mohan K Vaswani (“Mr Vaswani”) and Jacky Chattaram Mulani (collectively “the applicants”), who are the contributories of Asean Interests Limited (“the Company”), to stay permanently all proceedings in the winding up of the Company, under section 209 of the Companies Ordinance, Cap. 32.
2. Notice of the application has been advertised in various newspapers circulating in Hong Kong, Asia, Europe and the USA. Solicitors for the applicants have written to all creditors of the Company seeking their formal written consent to the application.
3. The liquidators have provided reports to the court. The Official Receiver also appeared and provided reports because of the public policy issues involved.
4. The summons was adjourned on 3 occasions on 1 December 2004, 28 April 2005 and 2 August 2005, to enable the applicants to deal with various matters of concern raised by the liquidators and the Official Receiver.
5. The liquidators’ concerns have now been addressed. They support the application as a stay of the winding-up proceedings is in the best interests of the creditors of the Company.
6. The Official Receiver has reached a Carecraft settlement with Mr Vaswani, a director of the Company. By consent, leave was given to the Official Receiver to commence disqualification proceedings against Mr Vaswani out of time. I heard the disqualification proceedings under the Carecraft procedure prior to the stay application and made an order against Mr Vaswani to disqualify him from acting as a director for 2 years. The Official Receiver indicated that he is satisfied the concerns expressed in the first report of the liquidators relating to issues of public morality would have been satisfactorily dealt with once the disqualification proceedings have been disposed of, and would no longer object to the stay application, provided of course the court is satisfied the concerns of public morality have been properly addressed.
7. I have made an order granting a permanent stay of the winding-up proceedings and these are the reasons for decision.
THE BACKGROUND
8. The background to the application is set out in the supporting affirmations of Sajen Aswani (“Mr Aswani”) and Madam Vaswani and the first report of the liquidators.
9. The applicants are the current shareholders of the Company. Madam Vaswani is also the single largest creditor of the Company and a member of the committee of inspection.
10. The Company was incorporated in Hong Kong on 14 January 1977 as an investment holding company consisting of various international companies with investments in diversified fields of businesses (“the Group”) in a number of developing countries. The Group is managed by Mr Vaswani, the husband of Madam Vaswani and her nephew Mr Aswani. As mentioned, Mr Vaswani is a director of the Company. Mr Aswani is the managing director of the Group and was a shadow director of the Company at the material time.
11. The Company was ordered to be wound up on a creditors’ petition on 21 May 2001. In the statement of affairs, the demise of the Company was said to be due to aggressive expansion between 1994 and 1999. Following the winding-up order, the Vaswani family continued to explore avenues through which the Company could be reinstated and resume operation with the special managers, the liquidators and various creditors.
12. The first proposal for restructuring by way of a stay of the winding-up proceedings was made by the Vaswani family on 17 September 2001. The proposal was formally put to creditors at a meeting on 31 January 2002, but 3 of the largest creditors withdrew their earlier support and proposed a resolution that liquidators be appointed to replace the Official Receiver and the resolution was passed.
13. On 21 February 2002, a wholly-owned subsidiary of the Company, Tolaram Investments Limited (“TIL”) filed an application to challenge the validity of this resolution. On 21 August 2002, the special managers applied to court to be appointed joint and several liquidators of the Company. This was objected to by TIL. On 4 November 2002, the special managers were appointed liquidators of the Company. Thereafter, the Vaswani family, after consultation with the liquidators, put forward a proposal for a scheme of arrangement.
14. The scheme of arrangement was put to creditors at a meeting on 10 December 2002 and was approved by creditors. However, immediately thereafter, the liquidators suggested to the Vaswani family to consider restructuring the Company by making an offer for the purchase of assets of the Company. In response, the Vaswani family put forward a draft term sheet on 14 February 2003. This did not meet with the liquidators’ expectations. Further discussions were held with the liquidators and the views of the committee of inspection sought on alternate ways of restructuring the Company. There were protracted negotiations. The Vaswani family decided to purchase the debts of many of the creditors as most of the creditors preferred to sell their debts rather than remain as creditors of the Company. This process took considerable time.
15. In 2004, after discussion with the committee of inspection, the Vaswani family proceeded to complete the restructuring of the Company by way of an application to stay the winding-up proceedings, as all creditors support the form of restructuring proposed and this is faster and less costly than a scheme of arrangement.
REASONS FOR THE APPLICATION
16. The reasons for the application to stay the winding-up proceedings are as follows.
17. According to the liquidators’ report, as at 31 December 2004, there was a balance sheet deficit of HK$526,245,591.24. Notwithstanding this, subject to the repayment of the debts due to the Group’s financial advisor, Mr van Voorst and his company, Finance Partners Limited (“FinPar”), Madam Vaswani will subordinate her claim against the Company to the claims of all the other remaining creditors of the Company, bringing the total liabilities of the Company as per the admitted proofs of debt and excluding her debts to HK$284,834,184.22 as against its assets, the fair market value of which was estimated to be worth between US$43 million and US$46 million (between HK$335.4 million and HK$358.8 million). Each creditor is agreeable to receive, or has received, a payment in excess of what it would have received in the normal course of liquidation, estimated by the special managers to be between 1.9% to 10.5% for unsecured creditors. The family related creditors will subordinate repayment of their debts to non family related creditors. Each of the 5 non family related creditors has confirmed support for this application.
18. The Company is not a stand-alone entity, it controls directly or indirectly 28 companies in 12 countries. The stay of the winding-up proceedings is regarded as beneficial to the Company, its subsidiaries, the creditors of the Company and of the subsidiaries. The continued existence of the Company is pivotal to its subsidiaries, many of which are engaged in textile operations which rely on each other in terms of shared customers, suppliers, inter-company transactions, and exchange of management, staff and know-how.
19. The Company is expected to be financially viable in future and can meet obligations. All family related creditors are willing to defer repayment of their debts.
SUBORDINATION OF MADAM VASWANI’S DEBT
20. Madam Vaswani’s debt arises from a debt owed by the Company to Asean Holdings AG which was assigned to her. She submitted a proof of debt for HK$819,578,370.00. She in turn assigned the debt jointly to Mr van Voorst and FinPar to secure the outstanding principal, interest and fees owed to them by two family related companies, Brixton Investments Pte Ltd (“Brixton”) and Tolaram Corporation Pte Limited (“TCPL”). She has entered into a subordination agreement which provided that if the court should grant the stay application, she will subordinate her debt to the remaining creditors of the Company after the debts due to Mr van Voorst and FinPar have been repaid. Mr van Voorst and FinPar agree that Madam Vaswani may subordinate her debt to the remaining creditors and support this application.
21. Further, Madam Vaswani has offered to convert her debt to equity to address any concern the court may have regarding the solvency or commercial viability of the Company. On 8 July 2005, Madam Vaswani executed a deed confirming her undertaking upon full payment of the debts owed to Mr van Voorst by Brixton and TCPL in the aggregate sum of US$2.6 million plus interest, such sums to be repaid no later than 31 December 2005, she will convert all the Company’s debt to her into equity in the Company.
FINANCIAL STATUS OF THE COMPANY
22. On the basis of the proofs of debt admitted, and where not yet adjudicated, filed, the total liabilities of the Company are HK$1,104,412,554.22 (US$141,591,353.11), made up of Madam Vaswani’s debt of HK$819,578,370.00, the family related creditors’ debts of HK$127,517,759.09, and 5 non family related creditors’ debts of HK$157,316,425.13. In April 2005, the debts to non family related creditors were further reduced to HK$135.7 million odd.
23. The book value of the remaining assets of the Company is approximately HK$1,249,238,968.00 (US$160,158,842.00), based on the management accounts of the Company. However, based on the knowledge of Mr Aswani as the managing director of the Group and the assessment of the financial advisor of the Company, the estimated fair market value of the major assets is between US$43 million and US$46 million.
CREDITORS OF THE COMPANY
24. The Company had numerous creditors, most of which were institutional creditors. With the purchase of the debts by the Vaswani family, there are now a very large number of family related creditors.
25. Apart from the creditors who have submitted proofs of debt in the liquidation, there used to be two contingent creditors, State Enterprise State Property Fund of Lithuania (“SPF”) and International Finance Corporation (“IFC”). They have not filed any proof of debt.
26. SPF began an action against the Company in Lithuania, but the liquidators have reached an overall settlement with SPF, so the contingent liability is extinguished.
27. The Vaswani family and a subsidiary, Horizon Pulp and Paper, have agreed to enter into a sale and purchase agreement with IFC to purchase the shares of IFC and to remove the contingent debt of IFC, subject to the stay application granted by the court. An agreement has been executed on 20 July 2005.
PUBLIC POLICY CONSIDERATIONS
28. The liquidators indicated they have concerns of 4 specific areas after their investigation into the affairs of the Company. On 12 October 2004, they filed a report on the conduct of the directors of the Company. They expressed the view that the conduct of the 3 individuals who were directors of the Company and of Mr Aswani, a de facto director, in respect of the first 3 matters would make them unfit to be concerned in the management of a company.
29. The fourth matter related to the failure of subsidiaries to settle indebtedness to the Company. It is not relevant to the conduct of directors of the Company and I do not propose to consider this.
30. The three matters in question are as follows.
(1) Transfer of certain assets to the Company at a significant overvalue
31. The assets were:
(a)
the 48 shares representing a 96% shareholding at par value of DM500,000 in Markische Fraser AG (“MFAG”); and
(b)
a debt due from MFAG to West LB Bank of DM29.9 million.
The transfers were made to the Company in 1998 by the applicants. The liquidators were concerned if the assets were overvalued by DM50 million (US$28.9 million) and that the directors might have breached their fiduciary duty in entering into transactions on behalf of the Company.
32. The applicants have filed evidence asserting their belief in good faith that the assets had the increased value ascribed to them, based on an independent valuation report dated 27 August 1998 prepared by C&L Deutsche Revision of one of the three plants of MFAG. The applicants believed that with their management experience, they would add value to MFAG and successfully turn it around. Further, shortly after the sale to the Company, in November 1998, 20% of the shares in MFAG was sold at an arm’s length deal for DM10 million in cash.
33. To deal with the liquidators’ concerns, Madam Vaswani has reduced her claim on the Company from US$105 million by US$28.9 million to US$76 million and filed a revised proof of debt. On 8 July 2005, she executed a deed to confirm irrevocably that she will not increase her proof of debt to reinstate the amount of US$28.9 million.
(2) Statement of affairs incomplete for failure to mention a contingent claim
34. This was the failure to mention in the statement of affairs the contingent claim that SPF might have on the Company under a shares sale and purchase agreement, pursuant to which the Company was obliged to make capital injections into a company in Lithuania called Alytaus Tekstile, but did not do so. There had been litigation in Lithuania, resulting in a judgment confiscating the Company’s shares in Alytaus Tekstile.
35. The applicants claimed that failure to mention this potential liability was an oversight, there was no advantage to the Company or any of its directors by failing to mention this and was not a deliberate misleading of the liquidators. On 31 July 2003, the directors filed an amended statement of affairs at the request of the liquidators to rectify the omission. As an overall settlement has been reached with SPF, this contingent liability no longer exists.
(3) Use of receivables due to the Company from PT Lotus Indah Textile Industries (“Lotus Indah”) to repay part of the debt owed to Madam Vaswani by the Company
36. In the statement of affairs, there was recorded a claim of US$3,096,964.00 due from Lotus Indah, a company indirectly owned by the Company, in 2000 and 2001. Arrangements were made and instructions given by Mr Vaswani for the net sum of US$1,877,865.00 to be paid by Lotus Indah on behalf of the applicants to various third parties, reducing the debt owed to the Company by this amount, and was recorded as part payments by the Company of the debt due to the applicants.
37. The liquidators stated that these are voidable dispositions and constituted an unfair preference.
38. Mr Aswani deposed that the arrangement had been put in place before the petition for winding up was presented on 27 December 2000. He claimed it was an oversight that the arrangement was not terminated after the presentation of the petition. To remedy the situation, Madam Vaswani has repaid the entire sum of US$1,877,865.00 to the Company, by two payments on 9 August 2005 and 9 September 2005.
39. As mentioned, this application was adjourned on 28 April 2005 and 2 August 2005 for the Official Receiver to carry out further investigation of the above matters reported by the liquidators and explore the possibility of reaching a Carecraft settlement with the directors concerned. After full consideration of the evidence available and the response obtained to various questionnaires issued by the Official Receiver to the directors, the Official Receiver has taken the view that on the available evidence, it would be appropriate to issue disqualification proceedings against Mr Vaswani in respect of the matter in (3) and also some accounting record offences. A Carecraft settlement was reached with Mr Vaswani and I have imposed a suitable period of disqualification against him.
LIQUIDATORS’ REMUNERATION AND FEES OF THE OFFICIAL RECEIVER
40. Agreement was reached by the applicants with the Official Receiver on his fees. The agreed sum for the Official Receiver’s costs in the winding-up proceedings and in the stay application will be paid out of funds held by the liquidators’ solicitors in escrow.
41. Similarly, the applicants have agreed that the liquidators’ fees and costs are to be paid out of the balance of the funds held by the liquidators’ solicitors in escrow and the funds held in the Company’s liquidation account.
A STAY SHOULD BE GRANTED
42. I consider in this instance the applicants have discharged the burden on them to make out a sufficient case for a stay of the winding-up proceedings.
43. I have set out in some detail what had happened after the winding-up order, as the liquidators initially raised concern of the delay in issuing the application after the winding-up order was made. It seems that the delay of over 3 years since the winding-up order has been accounted for.
44. It was accepted by the applicants, as stated in Re Telescriptor Syndicate Limited [1903] 2 Ch 174 at 180 and adopted in Hong Kong decisions, among them Re Sharp Brave Company Limited (in liquidation) [1999] 4 HKC 79, even though the entire body of creditors would favour a stay because they can obtain positive benefits out of this, on consideration of the conduct of directors if the court is of the view that it is not in the public interest to grant a stay, it will not do so, regardless of the wishes of creditors. I note that in Re Sharp Brave Company Limited , a stay was granted on terms that it would take effect upon the resignation of the 2 directors involved in the questionable transactions.
45. The creditors here support the application for a stay as the restructuring, if successful, would mean that they will get better and more timely return than if the liquidation were to continue.
46. A balance is to be struck between the interests and wishes of the creditors and the public policy issues.
47. The Official Receiver has reached a careful decision on the available evidence as to whether disqualification proceedings are justified against any of the 3 directors or the de facto director and in respect of which of the matters raised in the liquidators’ report.
48. It seems to me that with the Carecraft settlement reached and the disqualification order made against Mr Vaswani, the issues of public morality should have been properly addressed.
49. I therefore granted the relief sought and made an order in terms of the draft submitted. Provision is made for the release of the liquidators in the order.
(S Kwan)
Miss Linda Chan, instructed by Messrs Stephenson, Harwood & Lo, for the Applicants
Mr Jonathan Harris, instructed by Messrs Johnson, Stokes & Master, for the Joint & Several Liquidators
Ms P. Mckenna, for the Official Receiver