PANG WAI HONG v. CHINA TAIFENG BEDDINGS HOLDINGS LTD

HCCW 205/2018

[2018] HKCFI 1828

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANISE (WINDING‑UP) PROCEEDINGS NO 205 OF 2018

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DECISION

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1.  I have before me a petition issued by the company, the subject of the petition, China Taifeng Beddings Holdings Limited, (“China Taifeng”), for the company to be wound up, and an ex parte application for the appointment of provisional liquidators.

2.  A virtually identical petition came before Mr Justice Harris on 24 July 2018—that is three days ago—and for reasons set out in an oral decision which he delivered at the time, Mr Justice Harris declined to make the order.  He adjourned the petition and noted that it may be that a further application has to be heard by another judge.

3.  Mr Hui comes to me now with different grounds upon which to justify the winding up order. 

4.  Now, he says that a winding-up petition has been presented by a creditor of China Taifeng, following the making of a statutory demand, which has not been met.  There is evidence in the bundle, to which Mr Hui points me, to show that China Taifeng is unable to pay that debt and that in due course, when that petition comes on for hearing, there will be no basis upon which the company will be able to resist the application for winding-up.

5.  The reason the company comes back to me now is that it is not in the position of a company in the usual way, which is merely unable to pay its debts. 

6.  The company is a Hong Kong company, although it was formed in the BVI.  It maintains bank accounts in Hong Kong, and employs staff in Hong Kong.  Its shares are listed on the HKSE and it is regulated by both the Hong Kong Stock Exchange (“HKSE”) and the Securities and Futures Commission (“SFC”).

7.  There is substantial evidence before me that the company’s affairs are in a chaotic state.  The difficulties began in June 2015, when the then auditors of the company, Baker Tilly, resigned their position citing, amongst other things, a specific set of auditing issues arising in the calendar year (which is the company’s financial year), 2014.  Given the audit issues and Baker Tilly’s resignations, the company could not publish its accounts and annual reports for the financial year 2014, and financial years thereafter.

8.  At the time of Baker Tilly’s resignation, with trading in the company shares voluntarily suspended, the company was hoping to announce a very substantial acquisition.  But in the light of the announcement of the audit issues, the HKSE, by a letter dated 6 August 2015, imposed resumption conditions on the company that required the engagement of an independent forensic specialist to undertake an investigation into the audit issues and to publish all outstanding financial results and make all necessary public disclosures.

9.  Independent professionals were appointed, but they have been unable to bring the company’s affairs into a state where they can be properly reported on to the satisfaction of the HKSE.  This is primarily due to the lack of access of those independent professionals to supporting documents, the unreliability of documents that had been provided and the poor co-operation from the management of the group of companies.

10.  Investigations in Shandong where much of the company’s affairstake place, have been deliberately, it appears, frustrated, with the investigators being denied information and refused entry to premises. 

11.  Between December 2017 and March 2018, seven of the company’s directors have resigned leaving the current board comprised of only two directors, one appointed in April 2017, the other appointed in May 2018.  The current board has made attempts to contact the former directors but all recent attempts to contact them have been unfruitful. 

12.  The company’s proposals for restructuring have made significant progress and on 5 February 2018, the company entered into a legally binding agreement for the purposes of the proposed restructuring. Essentially, the restructuring involves a reverse takeover and a deemed new listing under the listing rules.  That would result in the company’s existing liabilities being discharged under a scheme of arrangement to be entered into with its creditors. Significant steps have been taken in respect of the timelines for the restructuring agreement.

13.  However, the matter has now reached a stage where there is an imminent need to appoint provisional liquidators.  On 26 January 2018, the Listing Committee of the HKSE informed the company that it had decided to proceed to cancel its listing. 

14.  On 5 February 2018, the company requested that the decision be referred to the Listing Review Committee (“LRC”).  The hearing before the LRC was heard on 31 May 2018 with the submissions of the company being mainly based on restructuring efforts. 

15.  On 4 January 2018, the LRC announced that they had decided to uphold the decision to cancel the listing and the LRC decision has now been referred to the Listing Appeals Committee, (“LAC”).  Written submissions were due to be referred to that committee by 24 July but that date has been extended to 21 August.

16.  The submissions made by Mr Hui to me, supported by evidence, show that there is a real likelihood that provisional liquidators will be able to take the matter to the stage where the LAC will be able to be convinced that the restructuring agreement will be able to be fulfilled and that consequently, it would be premature to delist the company.

17.  Mr Hui puts before me as well traditional grounds justifying the appointment of provisional liquidators such as the need to preserve books and records and a need for independent investigation.  These are certainly grounds which may be taken into account.

18.  Mr Hui properly reminds me that it is not the court’s usual practice to grant provisional liquidators extensive restructuring powers at the first instance on their initial appointment.  The practice seems to be that such powers will usually only be granted on a subsequent separate application by the provisional liquidators themselves.

19.  I am satisfied from Mr Hui’s submissions that this is a case in which the restructuring process has begun long before the application and is ongoing.  It would not be commercially sensible to impose a de facto stay on restructuring works upon the appointment of provisional liquidators by declining to give them restructuring powers.

20.  Further, unlike the provisional liquidation of private companies, this case concerns efforts to save the listing status of a Hong Kong listed company.  The status of being a “listed” company has been accepted to be capable of constituting an asset in jeopardy, justifying the appointment of provisional liquidators: see Re China Solar Energy Holdings Ltd (No 2) [2018] 2 HKLRD 338.  In those circumstances, the grant of restructuring powers is even more desirable if these powers are to be applied by the provisional liquidators to preserve this valuable asset of the company.

21.  For the foregoing reasons, I am satisfied that this is a proper case to make the orders sought.  Draft orders have been put before me and agreement has been reached between Miss Chan for the Official Receiver and Mr Hui on the terms of the order.

22.  Miss Chan raises one particular matter with me to which I must refer.  The proposed liquidators have put before the court a certificate pursuantto s 262C of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32, which requires a disclosure statement to be made by a person before that person may be appointed as a provisional liquidator.  The liquidators are able to certify properly in terms of that provision, however, they have raised two matters, for completeness.

23.  In April 2018, the target group, that is the group of companies proposed to be injected into China Taifeng to achieve the reverse listing, engaged Deloitte (the accounting firm of which the provisional liquidators are members) to audit the consolidated financial statements of the target group for three years ended 31 December 2017, and for three months, tentatively ended 31 March 2018. In my view, that does not create such a conflict of interest as might concern the court.

24.  The second matter is that Deloitte was the reporting accountant for the initial public offering of China Taifeng in 2010, and was the auditor of the company until its resignation on December 2013. Having resigned in December 2013, and not having completed the audit for that year, the last yearin which Deloitte would have audited the company would have been the year 31 March 2012.

25.  Miss Chan prudently raises the spectre of a potential negligence action against Deloitte in respect of the audit ending 31 March 2012, the limitation period for which will not expire until 31 December 2018.  I would also raise the spectre of negligence concealed by fraud ,in which case the limitation period would not even yet have started to run until any fraud is revealed. 

26.  However, there is no suggestion—and I am sure that if there had been the slightest hint of it, Mr Hui would have put it before me—that there might be any risk there.  Deloitte are a respectable firm, and are already deeply engaged in the restructuring exercise. To require other accountants to take over at this stagewould be, in effect, requiring them to restart the whole procedure which would not be in the best interests of the company, would not be in the best interests of its shareholders and would not be in the best interests of its creditors.

27.  I am satisfied that, balancing the remote risk of a negligence action against Deloitte arising from an audit undertaken nearly six years ago, against the best interests of the company, the proper course is to accept that in reality there is no conflict of interest in that respect which might be such as to prevent the order being made.

28.  For those reasons, the order will be made appointing provisional liquidators with the restructuring powers set out in the draft order.

29.  The costs of the application in accordance with the draft are reserved.  The Official Receiver’s costs are agreed at $12,000.