YAO WEITANG v. CHINA CREATIVE GLOBAL HOLDINGS LTD

HCCW 427/2020

[2021] HKCFI 2814

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 427 OF 2020

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D E C I S I O N

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1.  I have before me a Petition issued on 11 December 2020 seeking the winding up of the Company on the grounds of insolvency. The present case has many of the characteristics of the winding up petitions that I have heard during the course of the last 12 months. They include:

(1)  The Company is listed on the Main Board of the Hong Kong Stock Exchange.

(2)  It is incorporated in the Cayman Islands.

(3)  It has intermediate subsidiary companies incorporated in the British Virgin Islands (“BVI”), which hold the Group’s interest in operating and asset owning subsidiaries, which are located in the Mainland where the Company carries on the large majority of its business.

(4)  The Petitioner holds what the Petition describes as a bond, which is in fact a loan to the Company made by the Petitioner who is an individual for HK$4 million. I have not been told why the Petitioner decided to make this loan in July 2016 to the Company.

(5)  There is no dispute that the Company is insolvent.

(6)  No major creditors, such as banks, have come forward to support or oppose the Petition.  From the evidence before me this is likely to be because most of the major creditors are in the Mainland and if they wish to take enforcement action they will be in a position to do so directly against assets located in the Mainland as the Mainland subsidiaries will either be the principal debtor or a guarantor.

(7)  The Board of the Company have taken no steps until very recently to respond to the Petition.

(8)  The Petitioner has not explained why he decided to issue the Petition in Hong Kong rather than in the Cayman Islands.

(9)  The Petitioner knows very little about the Company other than what is to be gleaned from publicly available information such as the Company’s annual reports, which go up until 2019.

(10)  There is a dispute about whether what is commonly referred to as the three core requirements[1] are satisfied.

2.  It was not until the Petition came on before me on 24 May 2021, some five months after the Petition was issued, that any evidence was adduced by the Company in response to the Petition.  This said nothing of significance other than that in early May 4 directors had been suspended because of concerns about their involvement in questionable transactions and that the Company planned to introduce a scheme of arrangement. I would have made an immediate winding up order if not for the fact that points were taken on behalf of the Company concerning the Court’s exercise of its discretionary jurisdiction to wind up the Company which as I have explained is incorporated in the Cayman Islands.  I adjourned the Petition for argument and produced reasons dated 24 May 2021.

3.  The Petitioner has filed further evidence exhibiting a proposed amended petition, which is primarily directed to adding to the facts and matters upon which it is contended the Court should exercise its jurisdiction.  The first and second of the core requirements are satisfied.  The controversy concerns the second core requirement.  I will explain the matters relied on by the Petitioner in due course.  A further affirmation has been filed on behalf of the Company.  This deals with two significant matters.  The first is the reason why a dispute has arisen at board level.  This is explained by the deponent Ching Wan Wah, Kitty, who is an executive director of the Company, in [15] of her affirmation:

“The inability to pay the Petitioner’s debt is due to the following transactions. On 20 November 2020, all of the Company’s relevant PRC subsidiaries, namely 福建亚伦电子电器科技有限公司, 亚伦（中国）有限公司 and 泉州亚伦轻工有限公司, which held the Company’s major assets, were sold to another company, 泉州大东敏盛健康发展有限公司, at an unknown consideration. 泉州大东敏盛健康发展有限公司 is a company associated with the major shareholder and the first director of the Company, Mr. Chen Fanglin (‘Unauthorized Transfers’). The transfers were made without the prior approval or notice to the Company’s Board of Directors and the Company’s Shareholders. The executive directors and independent non-executive directors concerned, namely Mr. Chen Fanglin, Mr. Shen Jianzhong, Mr. Zheng Hein, and Mr. Huang Songqing, have been suspended from their roles.”

4.  The affirmation then goes on to explain that two potential investors are considering investing in the Company with, if this comes to fruition, the result that it will be possible to pay the Petitioner.  The evidence, however, does not explain at all the nature or form of this proposed debt restructuring and clearly falls short of the requirement that a company seeking to adjourn a petition for this kind of reason needs to present to the creditors and the Court a proposal of sufficient detail that allows it to be assessed.  Ms Ching also makes reference to the impact of COVID-19 and various Government policies implemented in the Mainland, but these are not material to the determination of the Petition.  It is quite clear that the Company is insolvent, has not engaged in a responsible way with its creditors to address the repayment of its debts and appears to have been under the control of directors who have misappropriated nearly all its assets.  Subject to the jurisdiction issue the Company clearly should be wound up and if the Petitioner had issued a petition in the Cayman Islands I imagine it would have been so by now.

5.  The second core requirement requires that a petitioner demonstrates a real and discernible benefit of a winding up order being made in Hong Kong.  In assessing this the Court takes a pragmatic approach and does not require the Petitioner to identify with great precision what the benefit will be or quantify with exactness the value of the benefit[2].  I explain in Re Grand Peace Group Holdings Limited[3] what this means in practise in a case in which the company is the holding company of a group which consists of intermediate subsidiaries incorporated in the BVI, which in turn hold subsidiaries which own the group’s asset owning and operational businesses in the Mainland; which is the structure of the Group at which this Company is the apex.  In [3] and [4] I say this:

“3. Given the way that the matter has developed the issues the Court has to determine is limited to jurisdiction. The issues concern the utility of the Hong Kong Court making a winding up order. This is relevant to the second of the three core requirements that have to be satisfied before the Court will exercise its discretion to wind up a foreign incorporated company pursuant to section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32. The three core requirements are:

(1) There has to be a sufficient connection with Hong Kong, but this does not necessarily have to consist of the presence of assets within the jurisdiction;

(2) There must be a reasonable possibility that the winding up order would benefit those applying for it; and

(3) The court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets [4].

4.  There is no dispute that the first and the third requirements are met in the present case.  The Company argues that the second core requirement is not.  Until recently satisfying the second core requirement has given rise to limited controversy.  However, partly because of the structure and character of the businesses operated by companies that have been subject to winding up petitions in the last few years, and partly because of the decision of the Court of Appeal in Shandong Chenming Paper Holdings Ltd v Arjowiggins HKK 2 Limited [5], the second core requirement has become a more prominent consideration.  The vast majority of companies incorporated in foreign jurisdictions are holdings companies, and in the case of those coming before the Court in the last 18 months commonly listed, who hold operating and asset owning subsidiaries in the Mainland through intermediate subsidiaries incorporated in another offshore jurisdiction, of which the British Virgin Islands (‘BVI’) seems to be the most popular.  In order for a liquidator of the holding company to realise any value in the Mainland subsidiaries prior to the signing on 14 May 2021 by the Secretary for Justice and the Supreme People’s Court of a cooperation agreement for mutual recognition of insolvency processes (‘Cooperation Mechanism’), the impact of which I explain later, it was necessary for the intermediate subsidiary to be put into liquidation in its place of incorporation, because to the extent to which a Mainland court would have any regard to the status of a foreign liquidator, the foreign liquidator would have had to be appointed by the courts of its place of incorporation [6].  As I explain in Re China Huiyuan Juice Group Limited [7] the authorities in Bermuda, the Cayman Islands and the BVI would appear to establish that the courts of the BVI would not recognise liquidators appointed in Hong Kong over a company incorporated in Bermuda (as in the present case) or the Cayman Islands as having the authority to take control of a subsidiary of the company, which is incorporated in the BVI.  This would suggest that it is futile to appoint liquidators over a company incorporated in Bermuda in order to take control of its subsidiaries incorporated in the BVI with the ultimate aim of taking control of subsidiaries in the Mainland owned by the BVI companies.  The correct course is to seek to wind up of the holding company in its place of incorporation.”

6.  In the present case two matters are advanced by the Petitioner as constituting a real and discernible benefit.  The first is the amounts shown as current assets under bank and cash balances in the last publicly available interim report of the Company, which was for the period ending 30 June 2019.  This shows cash in bank as exceeding RMB 500 million. I accept that the evidence suggests that it is probable that in 2019 the Company had sufficient cash in bank in Hong Kong to satisfy the second core requirement.  The problem, however, is that the report is two years out of date.  Ms Ching in her affirmation acknowledges the amounts that are shown in the most recent interim reports, but states in [39] that the Company’s principal bankers were at all times in the Mainland and that currently in accounts in Hong Kong the Company has approximately HK$53,000.  It does not seem to me that I can overlook the fact that one of the Company’s directors has gone on oath to say that currently there is insufficient cash in the Company’s Hong Kong bank accounts to justify making a winding up order; or to put it more technically, satisfy the second core requirement.

7.  The second matter concerns obtaining control of the Mainland subsidiaries.  It is argued that the new cooperation arrangement signed on 14 May 2021 would allow liquidators of the BVI intermediate subsidiaries to seek recognition in Xiamen, presumably, as the Group carried on business in Fujian.  However the Group divides into two parts. One part has an intermediate holding subsidiary incorporated in Hong Kong, Allens, but that is already in liquidation in Hong Kong on the petition of a different creditor.  In the case of the other part of the Group there is no evidence which suggests that the Company would have a basis for seeking a winding up order of it in Hong Kong, because the Petitioner simply does not have access to the Company’s relevant financial records, or that the relevant BVI subsidiary’s centre of main interest is currently located in Hong Kong.  The information in the interim report and the 2018 annual report suggest that the intermediate subsidiaries were probably controlled by directors resident in the Mainland.  On the evidence before me the suggestion that there is a benefit to be obtained by putting the Company into liquidation because it would begin a process which would result in a BVI subsidiary being put into liquidation in Hong Kong and this would provide a springboard for recognition in the Mainland, is very largely speculative.  Unfortunately, sufficiently speculative that I do not think that the Court can properly treat it as being sufficient to satisfy the second core requirement.  I say unfortunately, because as I have already indicated it seems to me that if the Hong Kong Court could properly exercise jurisdiction it would be appropriate to make a winding up order.

8.  Unfortunately, although the Petition was issued at a time when there were plenty of authorities considering the relevant jurisdictional complications of issuing a petition in Hong Kong seeking to wind up a listed holding company incorporated in a foreign jurisdiction.  It is fairly clear that either insufficient thought was given to the obvious alternative to issuing a petition in Hong Kong, namely, issuing a petition in the Cayman Islands, or the Petitioner himself was put off by the prospect of commencing litigation in a distant jurisdiction.  Be that as it may it seems to me that in the circumstances the proper course is to dismiss the Petition.

9.  Having heard counsel on costs I will make no order as to costs to reflect what I consider to be the unsatisfactory way in which the Company responded to the Petition.