RE GUOAN INTERNATIONAL LTD (in liquidation)

HCCW 453/2022

[2023] HKCFI 666

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 453 OF 2022

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J U D G M E N T

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1.  There is before the court a petition presented by Road Shine Developments Limited (“Petitioner”) on 2 December 2022 seeking an ancillary winding up order against Guoan International Ltd (“Company”).

2.  The Petitioner is a creditor of the Company, having advanced HK$15,796,639.54 pursuant to 13 loan agreements made between 22 May 2021 and 21 February 2022. The debt is not in dispute.

3.  The Company was wound up by the Grand Court of the Cayman Islands on 28 February 2022 and Mr Yuen Tsz Chun and Mr Martin Trott were appointed as its liquidators on the same day (“JLs”).

4.  Mr Jose Maurellet SC (leading Ms Sharon Yuen), counsel for Mr Chong Chin and Ms Yao Sze Ling, the opposing creditors (together “OCs”), oppose the petition on 2 main grounds:

(1)  the benefit pleaded in the petition[1] does not amount to a legitimate benefit which makes it appropriate to wind up the Company in Hong Kong; and

(2)  substantial costs, time, and resources may be incurred (or even wasted) if the insolvency regime in Hong Kong is triggered, and the Petitioner has not explained why that is justified or desirable to do so. The potential incurrence / wastage of substantial costs will be prejudicial to the creditors in particular the OCs.

5.  The JLs, represented by Mr Martin Ho, say that they are “neutral”. However, instead of leaving the matter to the Petitioner and the OCs who are persons having real interests in the Company, the JLs saw fit to incur much time and costs in preparing and filing an affirmation of Yuen Tsz Chun on 6 February 2023 (“Yuen 1^st”) and instructing counsel to appear at the hearing.

6.  It is no coincidence that Yuen 1^st and the affirmation filed on behalf of the OCs[2] were both filed out of time[3] (on 6 February 2023) and the matters stated in Yuen 1^st are all supportive of the stance taken by the OCs. When being asked to justify the JLs’ involvement in these proceedings, Mr Ho says that they want to “assist the court”. I am unable to accept the assertion. No assistance has been sought by the court. In any event, the JLs have not articulated any reason as to why it is in the interests of the creditors as a whole to incur costs in preparing Yuen 1^st and appearing at the hearing.

7.  I do not think there is any justification for the OCs and the JLs to file their affirmations out of time and I refuse to give leave to the OCs and the JLs to file Yuen 1^st and Chong 1^st for the following reasons: Neither the OCs nor the JLs have issued any summons for leave to file their affirmations out of time. Nor have they provided any explanations on the delay in filing their affirmations. The delay is substantial and inexcusable as the OCs have since 2020 been embroiled in litigation against the Company, while the JLs have since September 2022 taken steps to put an end to all the litigations between the OCs and the Company.

8.  The aforesaid notwithstanding, I have considered Yuen 1^st and Chong 1^st de bene esse to see if the facts and matters stated therein constitute valid grounds in opposition to the petition.

Background

9.  The Company was incorporated in the Cayman Islands. From April 1999 onwards the shares of the Company were listed on The Stock Exchange of Hong Kong Limited (“HKEx”) as its primary listing. The Company also maintained a secondary listing on the Singapore Stock Exchange.

10.  The Company is an investment holding company with operating subsidiaries carrying on business in Hong Kong (together “Group”). The Group through the subsidiaries engages in trading and provision of telecommunications products and services, investments in financial assets, money lending business and provision of securities brokerage services.

11.  By an Acquisition Agreement dated 13 February 2018 (“Agreement”), the OCs (through their corporate vehicle, Elitemind Investments Ltd) sold 100% shareholding in Yicko Securities Ltd (“Yicko”), a Hong Kong company with license to carry on securities brokerage business, to Exquisite Honour Holdings Ltd (“Exquisite Honour”), a wholly owned subsidiary of the Company, at the consideration of HK$420 million. The consideration was paid in part by the Company issuing 3 Convertible Bonds of HK$100 million each (“CBs”) to the OCs which bear interest at 3.8% p.a. and matured after 12, 24 and 36 months of issue[4].

12.  The Company defaulted in paying the amount due on the first CB on 28 February 2020 (as subsequently extended to 28 November 2020). This led to the OCs commencing HCCL 9/2020 against the Company, followed by application for summary judgment on 21 January 2021[5]. On 1 March 2021, Anthony Chan J gave final judgment against the Company for HK$100 million together with interest (“Judgment”)[6].

13.  Trading of the shares on HKEx was suspended on 30 March 2021.

14.  The Company appealed against the Judgment in CACV 136/2021 and did not pay any part of the amount due.

15.  On 7 June 2021, the OCs presented a winding up petition in the Cayman Islands court, relying on the Company’s failure to pay the Judgment debt[7]. The Company applied for adjournment of the petition on the ground that there was a pending appeal against the Judgment. On 15 October 2021, the Cayman court decided to adjourn the petition to “avoid accidentally undermining the integrity of parallel or related proceedings before the Hong Kong courts” on the condition that the Company file evidence by 29 October 2021 showing that it has applied for a stay of execution of the Judgment.

16.  Meanwhile, on 12 November 2021, the Court of Appeal ordered the Company to pay HK$700,000 into court as security for the costs of the appeal within 21 days thereof[8]. The security was provided by the Company.

17.  After a contested hearing, on 28 February 2022, the Cayman court made a winding up order against the Company and appointed the JLs.

18.  On 30 March 2022, the JLs obtained an order (made ex parte in HCMP 304/2022) from Harris J recognising the liquidation of the Company and the appointment of the JLs with powers (1) to request and receive documents and information concerning the Company; (2) to take control of the books and records of the Company and to investigate the assets and affairs of the Company; (3) to take all necessary steps to prevent any disposal of the Company’s assets and, in particular, to secure any bank balances in any bank accounts in the name or under the control of the Company in Hong Kong; (4) to operate, open or close any bank accounts in the name of the Company for the purpose of collecting the assets and paying the costs and expenses of the liquidation; (5) to employ legal representatives and other agents to assist them; (6) to bring and defend legal proceedings whether in their names or in the name of the Company in Hong Kong including any application for order for disclosure of documents or private examination of any third parties to facilitate their investigations, and/or ancillary relief such as freezing orders, search and seizure orders in any legal proceedings commenced (“Recognition Order”).

19.  It is notable to see that the Recognition Order only empowers the JLs to secure and prevent disposal of the Company’s assets. It does not confer any power on the JLs to deal with or dispose any assets of the Company.

20.  Upon the application made by the JLs in the name of the Company, the appeal against the Judgment was dismissed on 15 September 2022.

21.  It is not in dispute that the Company has very substantial connections with Hong Kong in that:

(1)  It maintained a principal place of business in Hong Kong;

(2)  It gave an undertaking to HKEx to comply with the Listing Rules;

(3)  The business and affairs of the Company and of the Group were directed and managed by the directors who were (and still are) based in Hong Kong;

(4)  It raised funds through borrowing 13 loans from the Petitioner in Hong Kong;

(5)  It used Exquisite Honour to acquire Yicko and issued the CBs to the OCs as partial payment of the consideration for the acquisition, all of which were carried out in Hong Kong; and

(6)  The Company has very substantial assets in Hong Kong including (a) 100% indirect interest in Yicko, which is supposed to worth HK$420 million; and (b) an office premises in Admiralty (“Property”), held through its wholly‑owned subsidiary, Eagle Faith Investments Limited (“Eagle Faith”). The net value of the Property, after repayment of the mortgage loan, was stated at HK$110 million[9].

Applicable principles

22.  The principles governing the exercise of the discretionary jurisdiction to wind up a foreign company have been stated by the Court of Final Appeal in Shandong Chenming Paper Holdings Ltd v Arjowiggins HKK 2 Ltd (2022) 25 HKCFAR 98, §3 as follows:

“As explained in Kam Leung Sui Kwan v Kam Kwan Lai[10] (which we shall refer to as “Yung Kee”), the statutory jurisdiction to wind up a foreign-incorporated company in Hong Kong is subject to self-imposed restraints that have been articulated as three threshold, or so-called core, requirements which must be satisfied before the court will exercise that jurisdiction.[11] These are that:

(1)  There must be a sufficient connection with Hong Kong, but this did not necessarily have to consist in 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.”

23.  So far as the second core requirement is concerned:

(1)  The test is whether “there is a reasonable prospect that the petitioner will derive a sufficient benefit from the making of a winding-up order, whether by the distribution of its assets or otherwise, will always be necessary and will often be sufficient.” (Yung Kee, §24);

(2)  The court adopts a pragmatic approach in assessing whether it would be useful to make a winding up order against the foreign company. As stated in Shandong Chenming, §54:

“(1) There is no doctrinal justification for confining the relevant benefit narrowly to the distribution of assets by the liquidator in the winding up of the company;

(2) It is sufficient that the benefit would be enjoyed solely by the petitioners;

(3) There is also no doctrinal justification requiring the relevant benefit to come from the assets of the company;

(4) There are cases where even though there was nothing for the liquidator to administer the courts did not find any difficulty in holding that the second requirement was satisfied so long as some useful purpose serving the legitimate interest of the petitioner can be identified;

(5) The benefit need not be monetary or tangible in nature; and

(6) The fact that a similar result could be achieved by other means does not preclude a particular benefit from being relied upon for the purposes of fulfilling the second requirement.”

(3)  The leverage or benefit derived from the presentation of the winding up petition over a foreign company may constitute a benefit so long as the benefit can be said to be a real possibility (Shandong Chenming, §§62-67, 80-83).

24.  In respect of a foreign company which has already been wound up at the place of incorporation and is carrying on business “only for the purpose of winding up its affairs”, the court may make a winding up order against it under s.327(3)(a) of the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUO”). The winding up order made by the domestic jurisdiction is regarded as ancillary to the winding up order made by the court of the place of incorporation. Such order is very common in this jurisdiction as majority of the listed companies in Hong Kong are foreign incorporated companies (See for e.g. Re Up Energy Development Group Ltd [2022] 2 HKLRD 993, §46; Re NewOcean Energy Holdings Ltd [2022] HKCFI 2501; Re Silver Base Group Holdings Ltd [2022] HKCFI 2386).

Discussion

25.  In the present case, there is no dispute that the first and third core requirements are satisfied.

26.  In view of the substantial connections between the Company and Hong Kong, it is difficult to see why any creditor acting in the interest of the class would object to the court making an ancillary winding up order against the Company.

27.  Nevertheless, the OCs contend that the benefit pleaded in the petition does not satisfy the second core requirement.

28.  In §25 of the petition, the Petitioner pleaded that there is a reasonable possibility of benefit that a winding up order would benefit the Petitioner and other creditors of the Company in that:

(1)  The Property owned by Eagle Faith has a market value of HK$203.2 million and would realise net proceeds of HK$135.3 million after payment of the mortgage loan; and

(2)  The liquidators appointed under the CWUO would have the statutory powers to investigate and apply to set aside the Company’s antecedent transactions. In particular, the liquidators would be able to determine if there is merit in setting aside the CBs in view of (a) the value of Yicko was substantially less than the consideration under the Agreement; and (b) the day before completion of the Agreement, the OCs procured Yicko to pay HK$15.5 million by way of dividend to the OCs qua shareholders.

29.  Mr Maurellet submits that neither matter relied upon by the Petitioner is sufficient for triggering the insolvency regime in Hong Kong because:

(1)  The JLs already procured execution of an agreement for sale of the Property for HK$188 million which will be completed in March 2023, and such sale had been sanctioned by the Cayman court.

(2)  The issue whether the Agreement is liable to be set aside has already been determined in HCCL 9/2020, as can be seen from §§14, 25, 33-36 of the Decision. The Petitioner has not demonstrated why liquidators should be appointed in Hong Kong to re-open the challenges to the Agreement.

30.  Further, Mr Maurellet contends that the Petitioner has not explained why it is justified or desirable for invoking the insolvency regime in Hong Kong which may result in “substantial costs, time and resources” being incurred or even wasted in circumstances where:

(1)  the JLs have already undertaken significant work in the Company’s liquidation including obtaining the Recognition Order, taking steps to secure assets within the jurisdiction, conducting various investigations and arranging for sale of the Property;

(2)  if the Company were to be wound up in Hong Kong, the JLs estimate that ad valorem fee in the amount of HK$2.035 million would have to be paid on the basis that the realisable assets within the jurisdiction worth about HK$120 million (assuming Yicko would be realised at HK$156 million); and

(3)  the JLs have been investigating into whether the former directors had unnecessarily incurred professional expenses of around HK$26 million to pursue investigation and legal proceedings which the JLs considered to be without merit.

31.  In my view, the second core requirement is plainly satisfied for the following reasons.

32.  First, as explained in Re Up Energy, §§59-68, the making of a winding up order against the Company is the only way to bring into operation the statutory scheme of winding up under the CWUO. Mr Maurellet does not contend that the reasoning in Re Up Energy is in any way incorrect. I am unable to see how the Company or the JLs would be able to rely on or benefit from the use of any of the provisions under the CWUO in the absence of a winding up order made by the Hong Kong court.

33.  Second, the OCs (and the JLs) seems to proceed on the assumption that the Recognition Order confers power on the JLs to deal with and dispose the assets of the Company within the jurisdiction. The assumption cannot be right.

(1)  As explained by Lord Sumption in Singularis Holdings Ltd v PricewaterhouseCoopers [2015] AC 1675, §18, the domestic court (i.e. Hong Kong court) does not have a common law power to assist the foreign court by doing whatever it could have done in a domestic insolvency. It is by no means clear that the Recognition Order is one which the court has the power to make or that it will not be challenged by any party in future[12].

(2)  In any event, the Recognition Order does not in fact confer any power on the JLs to deal with or dispose any assets of the Company. The fact that the JLs have been taking steps to deal with and sell the assets of the Company as if they had the power to do so does not alter the fact that they have not in fact been given such power.

34.  As the JLs do not have power to deal with or dispose any assets of the Company within the jurisdiction, it is plainly necessary and certainly in the interest of the creditors for the Company to be wound up so that provisional liquidator / liquidator can take steps to deal with and, if necessary, dispose the assets of the Company. The benefits far outweigh the ad valorem fees required to be paid by the Company. According to the JLs, the Company has very valuable assets within the jurisdiction which include:

(1)  The indirect 100% interest in Yicko (which has bank balances of HK$133 million), and the receivable owed by Exquisite Honour to the Company in the amount of HK$439.2 million;

(2)  The receivable from Wise Crown Enterprises Limited in the amount of HK$337 million as at 31 January 2022;

(3)  The indirect 100% equity interest in Eagle Faith which holds the Property; and

(4)  The investment in Foreign Synergy Associates Ltd which has a book value of HK$10 million as at 28 February 2022. Foreign Synergy in turn has a principal subsidiary, Linktech Hong Kong Limited, which engaged in provision of services in telecommunication sector.

35.  Third, in view of the fact that almost all the business and affairs of the Company were conducted by the former directors and management in Hong Kong, it must be in the interest of the creditors that liquidators are appointed in Hong Kong so that they can conduct the liquidation under the supervision of the court. It is indisputable that the Hong Kong court is best placed to consider and if necessary, decide what steps should be taken by the liquidators when dealing with the affairs and assets of the Company within the jurisdiction. Moreover, once appointed, the liquidators would be able to exercise all the powers under the CWUO to carry out their functions including investigating the affairs of the Company, summoning persons to provide information and documents relating to the Company and taking steps to deal with and realise the assets of the Company, all of which can be done expeditiously and in a costs effective manner.

36.  For the above reasons, the court is satisfied that there are substantial benefits to the Petitioner (and, indeed, the creditors as a whole) if a winding up order is made against the Company in Hong Kong.

37.  Having reached the above conclusion, it is unnecessary to decide whether there is any valid ground to set aside the Agreement or the CBs. Suffice to say that I am inclined to agree with Mr Maurellet that in view of the Decision, it does not appear that the Company is entitled to re-open the issue as to whether the Agreement or the CBs should be rescinded or set aside.

38.  I make a winding up order against the Company.

39.  As for costs, there be a cost order nisi that:

(1)  The costs of the petition including the costs of the hearing before Master be paid out of the assets of the Company;

(2)  The costs of and occasioned by the filing of Yuen 1^st and Chong 1^st, if any, be paid by the OCs to the Petitioner and the Official Receiver, to be taxed if not agreed;

(3)  The costs of the hearing be paid by the OCs to the Petitioner and the Official Receiver, to be taxed if not agreed; and

(4)  The JLs are not entitled to receive their remuneration or to recover the costs incurred in preparing and filing Yuen 1^st and appearing at the hearing out of the assets of the Company.

40.  The above costs order reflects the fact that had it not been for the OCs’ opposition, the Company would have been wound up at the hearing before Master. The OCs should be required to pay the costs occasioned by their opposition to the petition. As for the JLs, it is appropriate to deprive them of their remuneration and costs incurred in preparing Yuen 1^st and appearing at the hearing, which I consider to be wholly unnecessary and unjustified.