RE CW ADVANCED TECHNOLOGIES LTD

HCCW 174/2018

[2018] HKCFI 1705

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 174 OF 2018

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REASONS FOR DECISION

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Introduction

1.  On 26 June 2018 CW Advanced Technologies Limited (“Company”) presented a petition seeking an order that it be wound up.  The following day I heard an application ex parte by the Company to appoint provisional liquidators over it.  I adjourned the application to 11 July 2018 in order that various issues addressed later in these reasons could be addressed by the Company, creditors and the Official Receiver.  The Company subsequently withdrew its application.  Instead an application to appoint provisional liquidators was made by the Company’s largest creditor, Bank of China (Hong Kong) Limited (“BOC”). On 11 July 2018, I granted an order appointing provisional liquidators to the Company.

2.  BOC applied for the appointment of provisional liquidators on conventional grounds, as opposed to for the sole purpose of restructuring.  But this matter involves significant cross-border elements and engages the much discussed new Singapore restructuring regime.  I thus asked to be addressed on the cross-border implications, including the possibility of recognising and assisting the Singapore proceedings.  I also requested the Official Receiver to provide amicus assistance. 

3.  In the end, both the Company and BOC largely eschewed the cross-border issues.  Because of the parties’ position, the court does not need to make a determination on the cross-border issues, such as whether the Singapore moratorium is eligible for recognition in Hong Kong.  Nevertheless BOC’s application for provisional liquidation here calls for a better understanding of the practice of cross-border restructuring and the importance of advance cross-border planning, which I will discuss briefly below for the benefit of future applicants.

Corporate Structure

4.  The Company is a Hong Kong incorporated private company and is part of a corporate group (“CW Group”) which is a precision engineering solutions provider.  The CW Group is headquartered and has its principal place of business in Singapore. 

5.  The holding company of the CW Group is CW Group Holdings Limited (“CWG”).  CWG is incorporated in the Cayman Islands, managed from Singapore, listed on the Hong Kong Stock Exchange, and a registered non-Hong Kong company.

6.  CWG wholly owns SG (BVI) Limited, a company incorporated in the British Virgin Islands, which in turn wholly owns the Company. 

7.  The Company’s principal activities include entering into:

(a)   supply contracts in respect of industrial machinery and equipment; and

(b)   trade finance facilities with Hong Kong-based banks to fund the performance of its obligations under the supply contracts.

8.  The Company’s customers are primarily based in South East Asia, with the supply contracts generating approximately 40% of the CW Group’s revenue.  The Company’s assets primarily consist of its receivables under the supply contracts.

The CW Group’s Financial Condition

9.  The CW Group (including the Company) has encountered financial difficulties.  In particular, the CW Group could not issue new notes under its Multicurrency Debt Issuance Programme (“Programme”) to re‑finance the outstanding notes which fell due on 25 June 2018 and to re‑finance the CW Group’s outstanding bank loans.

10.  The failure to issue new notes under the Programme led to, among others:

(a)   some bank lenders terminating the CW Group’s banking facilities; and

(b)   some bank lenders (including BOC) serving letters of demand on the CW Group.

11.  In particular, on 7 June 2018, CWG and the Company received statutory demands from BOC dated 3 June 2018 (“Statutory Demands”), demanding the immediate repayment of:

(a)   approximately HK$157.5 million (plus interest) outstanding in respect of a term loan extended to CWG, guaranteed by the Company; and

(b)   approximately US$14.5 million outstanding in respect of a general banking facility granted to the Company, guaranteed by CWG.

12.  Notes issued under the Programme are governed by Singapore law, whereas all of the Company’s bank debt is governed by Hong Kong law.

13.  The Company accepts that the CW Group (thus including the Company) is unable to pay its debts and is cashflow insolvent.

Background to BOC’s Application for Provisional Liquidation

14.  In light of their financial difficulties, the CW Group’s management took the following steps with a view to achieving a debt restructuring:

(a)   RSM Corporate Advisory Pte Ltd (“RSM Singapore”) was engaged as a restructuring advisor.

(b)   On 22 June 2018, four companies in the CW Group (including CWG and the Company) made an application to the Singapore court under section 211B of the Singapore Companies Act for a six-month moratorium in order to facilitate a restructuring (“Singapore Moratorium”).

(c)   On 26 June 2018, the Company presented its own winding-up petition and made an application for the appointment of provisional liquidators in Hong Kong.  The candidates put forward were Osman Mohammed Arab and Wong Kwok Keung of RSM Corporate Advisory (Hong Kong) Limited (“RSM HK”).  BOC did not object to the Company’s provisional liquidation application, but wanted the provisional liquidators to be So Man Chun and Jong Yat Kit of PricewaterhouseCoopers.

15.  To achieve a group-wide restructuring, the CW Group sought the Singapore Moratorium for these reasons:

(a)   The CW Group is headquartered in Singapore, with most of its directors based in Singapore.

(b)   A large proportion of the holders of the outstanding notes are probably Singapore-based investors.

(c)   More than 50% of the CW Group’s bank debt is Singaporean bank debt.

(d)   The Singapore insolvency regime could facilitate a group‑wide restructuring, including in respect of companies incorporated outside Singapore.

16.  The effect of the Company’s application for the Singapore Moratorium was that an automatic moratorium came into effect for 30 days after the date of filing or until the application is decided by the Singapore court, whichever is earlier.

17.  The Company’s application for provisional liquidation in Hong Kong was to:

(a)   avoid a potential open-ended winding-up petition being presented by BOC (ie without provisional liquidators) which would create substantial commercial uncertainty, detrimental to the Company’s ability to recover its trade receivables; and

(b)   allow the provisional liquidators to preserve the Company’s assets and business, especially given that RSM Singapore and RSM HK are part of the RSM network and therefore the RSM professionals could pursue a coordinated approach to creditor engagement.

18.  When the matter came before me on 27 June 2018, I raised some questions about the relevance and impact of the Singapore Moratorium.  I then adjourned the matter to 11 July 2018 for substantive hearing.

19.  In the meantime, the bank creditors of the Company took the following steps:

(a)   On 22 June 2018, Fubon Bank (Hong Kong) Limited presented a petition to the Grand Court of the Cayman Islands (“Cayman Court”) for the winding-up of CWG.

(b)   On 28 June 2018, BOC filed a summons in the Cayman Court seeking the appointment of Simon Conway of PwC Corporate Finance and Recovery (Cayman) Limited, and Christopher So Man Chun of PricewaterhouseCoopers Ltd as provisional liquidators of CWG.

20.  Separately, the Board of CWG liaised with a creditor of CWG, Brownstone Ventures Limited (“Brownstone”), resulting in the following:

(a)   On 29 June 2018, Brownstone presented a petition to the Cayman Court for an order that CWG be wound up on the grounds of CWG’s inability to pay its debts.

(b)   Immediately following Brownstone’s presentation of the winding-up petition, on 29 June 2018, CWG filed a summons in the Cayman Court seeking the appointment of Eleanor Fisher and Gordon MacRae of Kalo (Cayman) Limited and Osman Mohammed Arab of RSM HK as “soft touch” provisional liquidators of CWG on the grounds that, inter alia, CWG would like to present a compromise or arrangement to its creditors.

21.  On 5 July 2018, the Company’s Hong Kong solicitors wrote to inform the court that, in light of the developments since 27 June 2018 and the Company’s limited resources, the Company would withdraw its application for provisional liquidation in Hong Kong.

22.  On 6 July 2018, BOC issued a summons for the appointment of So Man Chun and Jong Yat Kit of PricewaterhouseCoopers as provisional liquidators of the Company in Hong Kong. BOC argued that provisional liquidators were urgently needed to investigate into the Company’s affairs, prevent the dissipation of the Company’s assets, and preserve the Company’s books and records.

23.  Specifically, in addition to the grounds put forward by the Company for its original application for provisional liquidation, BOC’s application relied on these grounds:

(a)   The accounting records relating to the Company’s trade receivables appeared to show serious irregularities.

(b)   There was a highly suspicious sale and purchase transaction between the Company’s immediate parent (SG (BVI) Limited) and Brownstone, casting doubt on the integrity of the Company’s management.

(c)   The potential appointment of provisional liquidators at the CWG level would not remove the need for an immediate appointment of provisional liquidators to the Company.

24.  While having withdrawn its own application for provisional liquidation, the Company does not oppose BOC’s application.

Appointment of Provisional Liquidators

25.  The criteria for the appointment of provisional liquidators are not in dispute.  The court applies the long-established twofold approach when asked to appoint a provisional liquidator to a trading company.  Before the court would be willing to make the appointment, the court would need to be satisfied that (i) it is likely that, on the hearing of the petition, a winding-up order will be made (threshold requirement), and (ii) in the circumstances of the case it would be right that a provisional liquidator be appointed (discretionary requirement).  The discretionary requirement can be satisfied only if there is a need to safeguard against the risk of dissipation of the company’s assets or if there is a need for independent investigation.[1]

26.  In the present case, I am satisfied that provisional liquidators should be appointed to the Company:

(a)   The threshold requirement is satisfied because the Company admits that it is insolvent and the debt owed to BOC is undisputed.

(b)   The discretionary requirement is satisfied because BOC has produced evidence showing the need for independent investigation into the Company’s affairs and the need to preserve assets.  The Company does not dispute BOC’s evidence.

27.  The terms of the order of appointment here does not confer on the provisional liquidators any powers to pursue debt restructuring.  This is not to say that they may not apply for an extension of their powers in future.  It is well established that where the circumstances warrant the appointment of provisional liquidators, the provisional liquidators may be granted powers to explore and facilitate a debt restructuring.  Of course whether such powers should be granted and the scope of the powers would depend on the particular circumstances such as the existence of creditor support.[2]

Cross-Border Issues

28.  As I mentioned, BOC’s application for provisional liquidation in Hong Kong has a much larger cross-border context:

(a)   When the four CW Group entities (including the Company) applied for the Singapore Moratorium, the purpose was to propose Singapore schemes of arrangement to their creditors. 

(b)   Accordingly, the Company’s original application for provisional liquidation in Hong Kong was in the context of on-going plans for coordinated schemes of arrangement in the various jurisdictions where the CW Group members are located.  In other words, the Company’s provisional liquidation application in Hong Kong was to assist and implement the CW Group’s restructuring efforts in Singapore.

(c)   When the Company withdrew its provisional liquidation application in Hong Kong, its intention was to rely on CWG’s application for provisional liquidation in the Cayman Islands to achieve the CW Group’s restructuring objectives.  In relation to the Company, it was envisaged that the Cayman provisional liquidators would be able to take practical control of the Company as an indirect subsidiary of CWG and to formulate a collective restructuring plan.

29.  I think it reasonable to assume that the CW Group’s advisers in Singapore assumed that the CW Group’s restructuring objectives could be managed effectively through the Singapore Moratorium and Singapore schemes of arrangement, with recognition and assistance given by other jurisdictions in which the CW Group members are located.

30.  However, the CW Group’s Singapore-based restructuring efforts have not progressed as planned, for reasons which may serve as lessons for practitioners in future:

(a)   Despite being the largest creditor of the CW Group, BOC was not consulted before the four CW Group entities (including the Company) applied for the Singapore Moratorium.  This was surprising because the contemplated schemes of arrangement would need BOC’s approval.  Springing the Singapore Moratorium on the largest creditor may raise suspicion and, in this case, it apparently led to BOC opposing the CW Group’s attempts to introduce provisional liquidators in Hong Kong to advance a Singapore-based restructuring.

(b)   The court was never asked to recognise and assist the Singapore Moratorium in Hong Kong. No Singapore letter of request was produced.  The Company’s provisional liquidation application merely commented that “the provisional liquidation regime will … harmonise the position of Hong Kong and Singapore, by ensuring that an overall moratorium exists over the Company’s debts in both jurisdictions”.  On the other hand, BOC argued that the Singapore Moratorium could not be recognised in Hong Kong.  Mr William Wong SC, as amicus curiae, argued that the Singapore Moratorium should not be given effect.

31.  In future, where the Singapore Moratorium is involved in a cross-border context, practitioners should perhaps consider these issues:

(a)   whether the Singapore Moratorium is eligible for recognition in Hong Kong;

(b)   if the Singapore Moratorium is eligible for recognition, whether the court may grant assistance by way of appointing provisional liquidators. 

32.  This is not to pre-judge the question of recognition of the Singapore Moratorium.  Not least because Hong Kong does not have a statutory cross-border insolvency regime, there are many unresolved questions:

(a)   It is unclear if the Singapore Moratorium is a collective insolvency proceeding for common-law recognition purposes.  Because the Singapore Moratorium is meant to facilitate a scheme of arrangement, the characterisation of the Singapore Moratorium for recognition purposes may well depend on whether a scheme of arrangement should be treated as a collective insolvency proceeding, which is a question subject to seemingly conflicting comparative authorities:

(i)   In Re Contel Corporation Limited,[3]the Bermuda court recognised a Singapore scheme of arrangement promoted by a Bermuda company.  But the Bermuda court’s reasoning relied on the Privy Council decision in Cambridge Gas Transportation Corpn v Official Committee of Unsecured Creditors of Navigator Holdings[4]which has been largely overruled by the UK Supreme Court in Rubin v Eurofinance.[5]

(ii)   In the context of Chapter 15 of the US Bankruptcy Code, it is well established that a scheme of arrangement falls within the definition of “foreign proceeding”, namely “a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation”.[6]

(iii)   In the context of section 426 of the UK Insolvency Act 1986, the English court gave assistance to the Irish High Court in respect of an Irish scheme of composition of debts such that it became binding on United Kingdom creditors.[7]

(iv)   In the context of Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, a series of English authorities hold that a scheme of arrangement as such (ie not coupled with a formal insolvency proceeding such as administration) is not to be regarded as “bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings”.[8]

(b)   Assuming the Singapore Moratorium is a collective insolvency proceeding, there is no Hong Kong authority on whether the court may recognise a foreign collective insolvency proceeding where the foreign jurisdiction is not the country of incorporation.[9] But a number of comparative authorities suggest that the doctrine of modified universalism which underpins the recognition of foreign insolvency proceedings is not dependent on the foreign proceedings being opened in the country of incorporation.[10]

(c)   Assuming the Singapore Moratorium is eligible for recognition, one has to consider if the court may grant assistance by way of appointing provisional liquidators.  Again there is no Hong Kong authority, though the court may conceivably consider analogous authorities under section 426 of the UK Insolvency Act 1986, such as Re Tambrook Jersey Ltd.[11]

33.  Solving the cross-border challenges above is for another day.  In the meantime, the Company’s restructuring needs may conceivably be achieved in the following way:

(a)   Through either CWG’s control over the Company or an extension of the powers of the Company’s provisional liquidators, the Company may seek to do a restructuring.

(b)   Assuming CWG and the Company promote schemes of arrangement in Hong Kong, the schemes would presumably be recognised in Singapore under Singapore’s implementation of the UNCITRAL Model Law on Cross‑Border Insolvency.

(c)   Although the Hong Kong schemes may compromise debts governed by both Hong Kong and Singapore law, this would be no bar to recognition in Singapore.[12]

(d)   If necessary, CWG and the Company might also promote parallel schemes of arrangement in the Cayman Islands to mirror the Hong Kong schemes.

Conclusion

34.  From the perspective of practitioners, this case highlights the need for careful cross-border planning before insolvency proceedings are commenced.

35.  From the perspective of Hong Kong policy-makers, this case underscores again the urgent need to enact a statutory cross-border insolvency regime.