RE CARNIVAL GROUP INTERNATIONAL HOLDINGS LTD

HCCW 48/2020

[2022] HKCFI 2668

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP)  PROCEEDINGS NO 48 OF 2020

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REASONS FOR JUDGMENT

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1.  At the hearing of the petition presented by the petitioner, Ms Zhang Jingchu (“Petitioner”), against Carnival Group International Holdings Ltd (“Company”)  on 10 March 2020 (as amended on 21 May 2020)  (“Petition”)pursuant to s.327(3)(b)  of the Companies (Winding Up and Miscellaneous Provisions)  Ordinance (Cap. 32)  (“CWUO”), I made a winding up order against the Company. These are the reasons for my judgment.

Background

2.  The following facts and matters are not in dispute.

3.  The Company is incorporated in Bermuda and has since February 1994 been registered as an oversea company under Part XI the former Companies Ordinance (Cap. 32).  The Company’s shares are listed on The Stock Exchange of Hong Kong Ltd (“SEHK”)  (stock code: 996).  The Company has a principal place of business in Hong Kong where it carried on substantial financing activities including issuing new shares and bonds and raising funds through borrowing loans from banks. 

4.  The Company is an investment holding company and holds a number of subsidiaries incorporated in Hong Kong, the Mainland and the BVI (together “Group”).  The Group principally engaged in theme-based leisure and consumption business, with a focus on design, development and operation of large-scale tourist complex projects in the Mainland. 

5.  Since 2018, the Company and the Group have been in financial difficulty in that the income generated from the business has not been sufficient to meet its debts. 

6.  According to the Company’s audited financial statements for the year ended 31 December 2019 (“2019 AFS”), as at 31 December 2019:

(1)  The total outstanding interest-bearing debts of the Group was RMB 7.6 billion.  Amongst them:

(a)  RMB 3.2 billion was owed by subsidiaries in the Mainland to onshore banks and financial institutions (collectively “Onshore Debts”).  The Onshore Debts are secured by mortgages and pledges over various development projects as well as the guarantees provided by the Company (to the extent of RMB 2.78 billion).

(b)  HK$4.87 billion was the loans obtained by the Company outside of the Mainland (collectively “Offshore Debts”)  from institutional creditors (which account for HK$3.77 billion)  and holders of unsecured and non-guaranteed bonds issued by the Company (which account for HK$1.155 billion)  with maturity dates between 2020 to 2026.  The Company describes the latter bondholders as “immigration bondholders”, presumably because they invested in the bonds in order to fulfil the requirement to emigrate to Hong Kong. 

(2)  The Company’s total assets were HK$4.6 billion while its total liabilities were HK$5.6 billion and hence its net liabilities were HK$1 billion. 

7.  The Petitioner is an immigration bondholder who holds a number of senior unsecured bonds all of which matured by 2 June 2019.  The Company defaulted on the bonds.  As at the date of the Petition, the outstanding principal on the bonds was HK$30,186,620.

8.  In addition, 99 creditors to whom an aggregate amount of HK$878,266,113 is owed by the Company have indicated their support to the Petition (collectively “Supporting Creditors”).  Most of them are immigration bondholders or unsecured creditors of the Company.  Amongst the Supporting Creditors, 97 of them have filed notices of intention to appear in and support the Petition while 2 have indicated their support through solicitors or letters to the Petitioner’s solicitors. 

9.  As pointed out by Mr Laurence Li SC (leading Mr Jonathan Fung), counsel for the Petitioner, no creditor has filed any notice to oppose the Petition.  Although the Company has in the past procured 12 institutional creditors (comprising both onshore and offshore creditors)  to sign letters in support of an adjournment of the Petition to enable the Company to explore and implement restructuring proposals, one of them (China Tonghai Finance Ltd)  has on 18 August 2022 indicated its support to the Petition.  The other 11 creditors have not indicated their stance.  Unlike the Supporting Creditors, these 11 creditors hold security in respect of their debts. 

10.  In all the affirmations filed by the Company in opposition to the Petition, the Company does not dispute the averments in the Petition that the 3 core requirements for the Court to exercise its discretionary jurisdiction to wind up the Company are satisfied.  The only ground advanced by the Company in opposition to the Petition is that there has been ongoing restructuring effort in respect of the Company’s indebtedness which, if implemented, would result in a higher return to the unsecured creditors in particular the immigration bondholders. 

11.  The restructuring effort has come to nothing.  As Mr Li submits, the history of the matter shows that the Company used the so-called restructuring effort to obtain multiple adjournments of the Petition and failed to comply with the orders requiring the Company to file affidavit evidence to deal with the progress of such restructuring:

(1)  The Petition was heard before Harris J on 15 June 2020 and was adjourned to 21 July 2020 for substantive arguments with 3 hours reserved.  The Company filed Luo 3^rd on 29 June 2020 describing the restructuring proposals in respect of (a)  the Onshore Debts incurred by the 3 subsidiaries in the Mainland; and (b)  the Offshore Debts, which require the creditors to exchange their bonds for newly issued bonds with extended maturity dates, to be implemented through a scheme of arrangement in Hong Kong.   

(2)  The hearing was adjourned due to COVID-19 and was listed to be heard before Harris J on 29 September 2020.  On 25 September 2020, the Company filed Luo 5^th which gave a high level description of a proposed capital reorganisation and subscription of new shares by an un-named “strategic investor” which, if completed, would generate net proceeds of HK$123.2 million, and the amount raised would be applied to repay the debts owed to the immigration bondholders.  The Company’s target was to complete the proposed subscription in the beginning of December 2020. After hearing arguments from the parties, Harris J reserved judgment.

(3)  Before judgment was handed down, the Petitioner and the Company filed a consent summons to adjourn the Petition to 1 March 2021 before a Companies Judge. By Order dated 4 February 2021, the Company was ordered to file affidavit to deal with the progress of restructuring by 8 February 2021. 

(4)  The Company did not file the affidavit.  At the hearing on 1 March 2021, Harris J adjourned the Petition to 25 May 2021 for substantive arguments with one day reserved, and the Company was ordered to file evidence to deal with the progress of restructuring by 30 April 2021.

(5)  The Company again failed to file any affidavit, despite express reminders by the Petitioner’s solicitors.  By letter dated 12 May 2021, the Petitioner requested the Court to restore the Petition.  In response, the Company issued a summons for extension of time to file its evidence.  The time summons was listed before this Court on 17 May 2021 and was adjourned to 25 May 2021, the date of the substantive hearing of the Petition before Harris J. 

(6)  Shortly before the hearing, the Petition was further adjourned by order of Harris J dated 21 May 2021 to a date not earlier than 31 August 2021 for substantive argument, and the Company was ordered to file affidavit to deal with the progress of restructuring “24 clear calendar days before the adjourned hearing”.  The Company again failed to file any such evidence.

12.  There is no evidence before the Court to show that the Company has in the past 2 ½ years made any real effort in pursuing the restructuring proposals described in Luo 3^rd or Luo 5^th. To the contrary, it is the unchallenged evidence of the Petitioner that the Company never involved the immigration bondholders in any discussions about any restructuring proposals.

Discussion

13.  Where as here a company is insolvent, the directors are under a duty to consider whether there is any reasonable prospect of the company avoiding going into insolvent liquidation.  In the absence of a viable restructuring proposal which has the support of the requisite majorities of creditors, it would be incumbent upon the directors to take step to put the company into liquidation so as to bring into operation the statutory scheme of winding up its affairs and assets.  This duty is enshrined in the avoidance provisions under the CWUO such as s.266, which renders unfair preferences made at the time the company is unable to pay its debts voidable, and s.275 which imposes liability on directors for fraudulent trading.  It also accords with the principle that where a company is insolvent or of doubtful solvency, the interests of the company are in reality the interests of the creditors as it is the creditors’ money which is at risk.  The directors, when carrying out their duty to the company, must consider the interests of the creditors as paramount and take those into account when exercising their discretion (Colin Gwyer & Associates Ltd v London Wharf (Limehouse)  Ltd [2003] BCC 885, §74, per Deputy Judge Leslie Kosmin QC; Bilta (UK)  Ltd v Nazir (No. 2) [2016] AC 1, §§123, 130, per Lord Toulson & Lord Hodge JJSC). 

14.  In the present case, it must be clear to the directors, who it is said have been discussing restructuring proposals with the institutional creditors, that there is no reasonable prospect of the Company being able to implement any proposals to compromise its debts such that its liquidation is inevitable.  However, the directors saw fit to cause the Company to continue to oppose the Petition and even instructed senior counsel to appear alongside with junior counsel who has been acting for the Company at the outset. When asked by this Court as to how in the face of the insolvent state of the Company, the directors’ duty to protect the interests of the creditors and the lack of any viable restructuring proposals, the directors could come to the view that it is in the interests of the Company and the creditors to oppose the Petition, Mr Clifford Smith SC (leading Mr Look Chan Ho), counsel for the Company, is unable to identify any reason other than contending that the second core requirement is not satisfied.  As stated above, this is not even a ground raised by the Company in any of the affirmations filed in opposition to the Petition. 

15.  Mr Smith submits that the question of jurisdiction is a question of law and does not need to be stated in affirmation. In any event, it cannot be said that the Petitioner is taken by surprise as the argument was mentioned in some of the skeleton arguments of Mr Ho lodged in the past. 

16.  I do not think that it is open to the Company to contend that second core requirement is not satisfied, having decided not to take issue with the averments in the Petition that the Company has substantial connections with Hong Kong and there is a reasonable possibility that a winding up order to be made by the Court would benefit the Petitioner by reason of the facts and matters stated in §§23-26 of the Petition.  Indeed, the arguments advanced by Mr Smith are premised on his contention that on the evidence before the Court, the Company has no meaningful assets in Hong Kong and there is no possibility of benefits to the Petitioner and the Supporting Creditors for a winding up order to be made against the Company.  It seems to me that it would be unfair to allow the Company to point to the so-called lack of evidence in support of the second core requirement when the Company has decided not to take issue with the averments in the Petition in any of its affirmations filed in opposition to the Petition.  This is particularly so when the Company’s consistent stance is that the Court should adjourn the Petition so as to give more time to the directors to pursue the restructuring proposals.  Had the Company (and its legal advisers)  genuinely believed that the second core requirement would not be satisfied, one would expect the Company to ask the Court to dismiss the Petition on jurisdictional ground at a much earlier stage. This has never been done and it lies ill in the Company’s mouth to raise the argument as a last ditch effort to defeat the Petition. 

17.  Even if, contrary to my view, it is open to the Company to raise the jurisdictional challenge 2 ½ years after the Petition was presented, I do not think that there is any merit in the argument. 

18.  The test of the second core requirement, as recently stated by the Court of Final Appeal in Shandong Chenming Paper Holdings Ltd v Arjowiggins HKK2 Ltd [2022] HKCFA 11, is as follows:

(1)  The nature of the inquiry is “to ascertain whether it would be appropriate to put into motion the winding-up machinery in respect of a particular overseas company” (§83);

(2)  The requirement is set at “low threshold” and is met “as long as the benefit can be said to be a real possibility, rather than a merely theoretical one” (§§56, 83); and

(3)  Even in cases where there are no assets for a liquidator to administer, the requirement is satisfied so long as there is “some useful purpose serving the legitimate interest of the petitioner” (§54(4)).

19.  In the present case, the Company’s primary listing is on SEHK.  It maintained a principal office in Hong Kong where the directors managed the affairs of the Group and carried on substantial fund raising activities including issuing the immigration bonds of over HK$1.1 billion.  There is a need to investigate the reasons for the Company’s failure and what has happened to the substantial funds raised and the assets owned and, if necessary, take steps to obtain and recover those funds and assets for the benefit of the creditors as a whole.  These steps have to be carried out in Hong Kong as the majority of the directors (4 out of 5)  are Hong Kong residents with residential addresses here and are subject to the jurisdiction of the Hong Kong court.  The observations in Re Up Energy Development Group Ltd[2022] 2 HKLRD 993, §§47-48, apply to the Company with equal force. 

20.  As Mr Li submits, the Company’s suggestion that billions of dollars’ worth of assets have been lost, all operating subsidiaries are “valueless”, and no assets will be available for distribution to the unsecured creditors cannot be correct in light of the evidence described in §23 below.  If this were correct, this would be a case which cries out for investigation by liquidators.  As Buckley J pointed out in Re Crigglestone Coal Co Ltd[1906] 2 Ch 327 at 332 (cited with approval by Le Pichon J in Re Comtowell [1998] 2 HKLRD 463, 471J-472F):

“The company will often put forward, as if it were matter of defence, that there are no assets to wind up. It is not matter of defence at all … If the order will be useful (not necessarily fruitful)  there is jurisdiction to make it. This view is illustrated by the fact that in many cases …, the Court will make an order, not because there are assets, but in order to provide the machinery for ascertaining whether there cannot be shewn to be assets.”

21.  Mr Li points to the following matters which require investigation by liquidator with a view to recover assets for the benefit of the unsecured creditors:

(1)  In KPMG’s report, it assumed a recovery of 10% to 20% of the Group’s receivables from external parties totalling HK$1.14 billion on the basis that “Management considers that the recovery to be low and thus, the realization rate of that part is assumed to be 10% [HK$117 million] to 20% [HK$234 million]”.  There is no explanation as to why the recovery rate is as low as the Management suggested. 

(2)  The Company claims that most, if not all, of its substantial assets would go to the secured creditors.  The same contention was made by the respondents in Re Crigglestone.  Buckley J’s observations (at 335-336)  that the unsecured creditors are entitled to the statutory remedy of a winding-up order – which gives the right to seize and administer the company’s affairs, including to investigate the circumstances under which the loans were obtained and the security granted, by the hand of a liquidator for their benefit, apply with equal force to the present case.  

22.  Mr Smith is not able to refute the above points but contends that neither case assists the Petitioner in that:

(1)  In Re Crigglestone Coal, at 337-338, the Court of Appeal said that the burden is on the petitioners to negate the respondents’ assertion that “in no possible case could the petitioners gain any benefit from a winding-up order”.  I do not think this is right.  In fact, Collins MR said (at 337-338)  that the onus is on the debenture-holders (who are respondents alongside with the company and oppose the petition on the ground that all its assets were subject to a floating charge created by the company in their favour)  “to negative that possibility”.  He went on to say that “If there is a reasonable probability, or even a reasonable possibility … that the unsecured creditors will derive any advantage from a winding-up, the order ought to be made”. 

(2)  Re Comtowell is a petition presented by the company and it is the company’s own case that its affairs need to be investigated.  I am unable to see why this is a point which renders the principle expounded in Re Comtowell inapplicable to the Company. 

23.  Further, Mr Li points to the following evidence which shows that the Company has substantial assets which can be realised for the benefit of the unsecured creditors:

(1)  According to the 2019 AFS, the Company had total assets of HK$4.6 billion as at 31 December 2019.

(2)  On Mr Smith’s argument, “96%” or “most” of the Group’s assets are in the Mainland and are “subject to security or judicial attachment in favour of Mainland creditors”[1]. If correct, this means that there are 4% of assets outside of the Mainland, which worth HK$184 million.  The argument does not sit well with the Company’s evidence that “72.4% of [investment in subsidiaries and amount due from subsidiaries in the Mainland] … are pledged or seized” (Luo 2^nd §8).  This suggests that 27.6% of the assets in the Mainland are unencumbered, which are of very substantial value. 

(3)  The 2019 AFS shows that the Company had HK$338,000 in cash and cash equivalents, notes receivables of HK$82,792,000 and prepayments and other receivables of HK$15,304,000.  Even if one takes KPMG’s very conservative estimates[2], the amount which may be recovered from “other assets” of the Company is HK$10 million to HK$20 million. 

(4)  According to KPMG’s liquidation analysis (based on the directors’ instructions and very conservative assumptions), the return to immigration bondholders is in the range of 3.6% to 10.5%.  This represents a return of HK$205 million to HK$632 million to these bondholders.

(5)  The Company must have made substantial payments to its legal advisers, KPMG and financial advisers retained to advise on the restructuring proposals during the past 2 ½ years.  Upon a winding up order made against the Company, these payments unless sanctioned by the Court would be void and liable to be returned to the Company (cf. Re Up Energy§54(2)). 

24.  Mr Smith submits that there is no reasonable possibility of benefit to the Petitioner if the Company is wound up by the Court given that:

(1)  the Company has no realisable assets in Hong Kong;

(2)  the Company’s shareholding in its direct BVI subsidiaries is “valueless” because the indirect operating subsidiaries in the Mainland are insolvent;

(3)  A Hong Kong liquidator is unable to obtain recognition in the Mainland; and

(4)  The Petition carries no commercial leverage for the Petitioner. 

25.  The 1^st and 2^nd points must be rejected.  The evidence before the Court shows that the Company has substantial assets which may be realised by liquidators appointed in Hong Kong. The suggestion that the liquidators appointed by the Court “is unlikely to have access to realisable assets” is wholly without basis. 

(1)  There is no evidence to suggest that the directors, in particular those who are subject to the jurisdiction of the Court, would not cooperate with the liquidators in passing control of the direct and indirect subsidiaries of the Company to the liquidators (cf. Re NewOcean Energy Holdings Ltd [2022] HKCFI 2501, §16(1)). 

(2)  The reliance on Re Grand Peace Group Holdings Ltd [2021] HKCFI 2361 is misplaced.  If and to the extent that the directors or persons in control of the subsidiaries refuse to pass control to the liquidators, the liquidators can apply to the Court for orders to compel them to do so (Kam Leung Sui Kwan v Kam Kwan Lai (2015)  18 HKCFAR 501, §39). I should add that Mr Smith points to §39 where Ma CJ and Lord Millett NPJ said that they do not share the confidence for a change in composition of the board of Long Yau (a BVI subsidiary).  As events subsequently transpire, the entire liquidation of Yung Kee Holdings Ltd (a BVI company)  has been carried out by liquidators appointed in Hong Kong and supervised by the Hong Kong court without any difficulty. 

(3)  The liquidators can apply for a winding up order against the Company from the Bermuda court and ask that court to appoint them (and a practitioner from that jurisdiction)  to be liquidators, should it become necessary to do so.  This has been how the liquidation of foreign companies listed on SEHK conducted.  There is no basis to suggest that the liquidators appointed by the Court would not be able to take control over the subsidiaries.

26.  As for Mr Smith’s suggestion that there would be “cross-border insolvency hurdles” such that a “Hong Kong liquidator’s attempt to access Mainland assets … would be fruitless”[3], it is equally without merit.  There is no evidence as to the nature of the alleged “hurdles” or how such hurdles would negate the possibility of benefit of a winding-up order to the unsecured creditors. 

27.  Lastly, Mr Smith contends that the Hong Kong liquidators would not be able to access Mainland assets or take control over the Mainland subsidiaries given that the key subsidiaries are not located in Shenzhen, Shanghai or Xiamen, which are the 3 pilot areas to which the Cooperation Mechanism[4] apply.  As these Mainland subsidiaries are insolvent, the Company’s shareholdings are “valueless”.  I am unable to agree with the contention for the following reasons:

(1)  There is no evidence to suggest that the directors of the Mainland subsidiaries would refuse to cooperate with liquidators appointed under the CWUO.

(2)  According to the Group structure chart adduced by the Company, each development project is held under a subsidiary established in the Mainland which, in turn, is wholly owned by an intermediate holding company incorporated in Hong Kong.  Once the liquidators take control over the Hong Kong subsidiaries, they can have access to the Mainland subsidiaries and the development projects.

(3)  As Mr Li submits, at least 2 of the development-holding subsidiaries in the Mainland are held by subsidiaries established in a relevant pilot area to which the Cooperation Mechanism apply. They are (a)  the residential development “Shilaoren Project” held by Qingdao Jiayaohua Real Estate Co. Ltd which is wholly-owned by a company in Shenzhen named 嘉寶年華投資諮詢（深圳）有限公司 which, in turn, is 100% held by a Hong Kong company, Million Famous International Investment Ltd; and (b)  the residential development “Beijing Yanglin Project” held by Beijing Konggangfushi Real Estate Investment Co. Ltd which is 99.4% owned by a company in Shenzhen named 深圳偉采科技有限公司 which, in turn, is wholly owned by a Hong Kong company, Loyal Well Investments Limited.

(4)  The Hong Kong intermediate holding companies, by virtue of their place of incorporation and their function as holding companies, have their centres of main interests in Hong Kong (Cooperation Mechanisms, Article 4).  Their principal assets are their 100% interests in the Shenzhen companies, a pilot area (Article 5).

28.  The “commercial leverage” point (see §24(4)  above)  is irrelevant.  There is no suggestion that the Petitioner or the Supporting Creditors are using the Petition as a leverage to obtain payment.  Nor is there any suggestion that the Company has the means to repay the debts owed to them.

Conclusion and Costs

29.  For the above reasons, this is a clear case where the Court should exercise its discretionary jurisdiction under s.327(3)  of the CWUO to make a winding up order against the Company.  The Company’s contention goes against the evidence before the Court and is wholly devoid of merit. 

30.  As for costs, at the hearing, I ordered the directors of the Company to be joined as respondents for costs purpose only.  It seems to me that as soon as the directors became aware that the restructuring proposals would not come to fruition, it was incumbent upon them to cause the Company to be wound up so as to protect and safeguard the interests of the unsecured creditors.  The directors failed to take such step and, instead, saw fit to cause the Company to oppose the Petition by raising the jurisdictional challenge which has absolutely no merit.  It seems to me that this may be a case where the Court should depart from the usual costs order (i.e. the costs of the Petitioner and one set of costs for the Supporting Creditors be paid out of the assets of the Company)  and consider ordering the directors to pay the costs of and occasioned by the Company’s opposition to the Petition from the time when they became aware that the restructuring proposals would not be implemented. 

31.  Accordingly, I gave directions requiring the directors involved in causing the Company to oppose the Petition to file and serve their evidence and/or submissions by 13 September 2022 as to why they should not be liable to pay the costs of and occasioned by the Company’s continued opposition to the Petition.  I will make a determination on costs on papers or at a further hearing, should any party request for such hearing.