RE LERTHAI GROUP LTD

HCCW 233/2020

[2021] HKCFI 207

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 233 OF 2020

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D E C I S I O N

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The Petition

1.  On 29 September 2017 the Industrial and Commercial Bank of China (Asia) Limited (“ICBC”) entered into a facility agreement with LT Commercial Limited (“LT”).  The facility was for HK$1,500,000,000 and was made available to reduce the debt of six members of LT Commercial Real Estate Limited, which is listed on the Main Board of the Stock Exchange of Hong Kong Limited.  The terms of the facility were varied by a consent and variation letter dated 10 May 2019 pursuant to which Lerthai Group Limited (“Company”), which is incorporated in Hong Kong and also listed on the Stock Exchange of Hong Kong Limited became jointly and severally liable.  LT and the Company defaulted on their repayment obligations.  On 19 May 2020, ICBC obtained judgment against LT for in excess of HK$1,700,000,000 (“Debt”).  On 2 July 2020, ICBC issued a statutory demand against the Company in respect of the Debt.  There is no dispute that the Company is indebted to ICBC for the sum claimed, although ICBC has substantial security for the Debt, which at present it has chosen not to enforce.  The Company wishes the Petition to be adjourned in order that it can progress a restructuring of its debt.  ICBC considers this to be futile and seeks an immediate winding-up order.  Including the Debt it would appear from the evidence that the Company’s total debt is approaching HK$4 billion.

2.  A number of other creditors have given notice to appear on the Petition although none appeared at the hearing before me.

(1)  China Railway Urban Construction Group Co Ltd is owed approximately RMB400,000,000.  Initially it opposed the Petition, but has withdrawn its opposition.

(2)  Sun Guiying and Zhao Qiang, who are owed HK$21,600,000.

(3)  Shenzhen Angel Excellence Fund Company Ltd, which by a letter dated 29 December 2020 from its solicitors to the Company asserted it was owed over HK$1 billion and intended to oppose the Petition.  However, it has not filed a notice to appear and on 15 January 2021 its solicitors wrote to the Court saying that they no longer had instructions to act or file a notice to appear.  Shenzhen Angel did not appear on the hearing of the Petition and have provided no other information about their alleged debt or the position in respect of the Petition.  ICBC understand that Shenzhen Angel’s basis for asserting that it is a creditor is an assignment of a debt, but that the assignment has not been executed and, therefore, it is not a creditor.  Be that as it may, or may not be, given Shenzhen Angel’s failure to file a notice to appear little weight can be given to its initial indication that it intended to oppose the Petition.

3.  Given the position of the Company’s creditors unless the Company is able to point to compelling evidence that it would be better for the creditors of the Company and possibly creditors of its subsidiaries in the Mainland for the Petition to be adjourned in order to allow time for it to progress a restructuring, in my view, the Court should accede to ICBC’s wish to obtain an immediate winding-up order to which on the face of the matter it can legitimately submit it is entitled ex debito justitae.

Principles relevant to an application for time to restructure debt

4.  I have explained in a number of recent decisions how in broad terms the Court should approach applications to adjourn petitions.  I say this in [6] of SMI Corporation Limited [1]:

“6. It seems to me that, in the circumstances, there is no sensible reason for the Court not to wind up the Company. As I explain in my recent decision in Re Chase on Development Limited [2], an important consideration when the court is faced with an application by an insolvent company to adjourn a petition based on an undisputed debt is the views of the creditors, their reasons for supporting or opposing the petition and the feasibility of the proposed restructuring. Necessarily this will require evidence to be put before the court that allows the court to make an informed decision whether or not to agree an adjournment of a petition to allow a company to restructure debt. The evidence will need to be all the more compelling if a company is unable to find a creditor to oppose an immediate winding-up.”

5.  I develop this further in Re China Huiyuan Juice Group Ltd [3]:

“50. As the New Zealand Court of Appeal has recently observed ‘Insolvency law is a mix of principle and pragmatism. The [insolvency legislation] is to be used in a practical way. It does not require liquidation when that will not serve any useful purpose’[4]. The way in which the courts assess applications by financially distressed companies that seek adjournments of petitions reflects this.

‘When the court considers the possibility of benefit resulting from an order, the normal starting point is to consider any possible benefit to the petitioner, whether it be a debtor or a creditor. In many cases, showing benefit to the petitioner will be sufficient to persuade the court to make the order… I do not see why a consideration of benefit should be restricted to the possibility of benefit to the petitioner; benefit to others should also be relevant. Conversely, disadvantages or unfairness to others may also be relevant. After all, the court is exercising a discretion and is surely required to consider the effect of the proposed order on all relevant persons. In such a case, as is normal, the court will consider the effect of making the order and the effect of not making the order and will then consider what to do, having regard to all relevant considerations, including the legitimate aspirations of all potentially affected persons.’[5] (emphasis added)

‘I accept that as a general proposition, in the absence of good discretionary grounds to the contrary, an applicant for winding up who has proved its debt and has proved insolvency ought to achieve a winding up order. However, … the discretion can be exercised in favour of granting a stay where the refusal of a stay would be likely to work a substantial injustice.’[6] (emphasis added)

51. I summarise how this balancing exercise is to be approached when, as in the present case, creditors take differing views about what is in their best interests in Re Chase On Development Ltd [7]:

‘In cases in which a company is clearly insolvent and a petitioner’s debt is not in dispute an important consideration, when a court it being asked to adjourn a petition by a Company in order to allow it to attempt to restructure its debt, are the views of its unsecured creditors.

If the creditors are taking different views the Court will normally take into account all the circumstances including the following considerations:

(a) A qualitative assessment of the number of creditors for and against a winding-up order. It is not just a matter of counting the number of creditors in favour and those against or the proportion of the value of the debt they hold.

(b) The reasons proferred by the supporting and opposing creditors.

(c) The feasibility of the proposed restructuring.’

In practice the court is making a decision which commonly will be more commercial than legal. In most situations the court takes the view that a party is best placed to assess what is in its best financial interests, but the nature of the insolvency process involving, as it frequently does, multiple creditors inevitably throws up situations where there are genuine differing views. This may be explained by varying degrees of knowledge amongst the body of creditors about a company, its commercial prospects or the insolvency process. In these circumstances the court has to decide, which view it considers preferable at the time the decision has to be made. Snowden J provides an example in his judgment in Re Maud (No 2) [8] of how the court approaches this task in the analogous situation of personal bankruptcy:

‘Taking all these factors into account, I am not currently satisfied that the interests of Mr. Maud’s creditors would be served by making him bankrupt immediately. Whilst there is no certainty, there does now seem to be some prospect of an imminent end-game to the Spanish insolvency which might bring a benefit to Mr. Maud and his creditors if he continues to be able to play a role in Spain. In contrast, there seems to be no real likelihood of any obvious, still less immediate, benefit to his creditors if a bankruptcy order is made now, and I have not been given any specific reason why a formal investigation of Mr. Maud’s past dealings needs to be undertaken immediately.

The majority in number and value of Mr. Maud’s creditors are also in favour of a further adjournment, and whilst I recognise that the creditors who have advocated or supported an adjournment may have other interests to serve, I cannot say that I find their approach unreasonable or irrational.  I also have in mind that the only voice that I actually heard in favour of the making of such an order, that of Edgeworth, also comes from a party that is vigorously pursuing its own commercial agenda outside the bankruptcy proceedings’ (emphasis added).”

The evidence required to satisfy the Court an adjournment is justified

6.  When dealing with substantial listed companies with very significant debt the Court will expect the evidence that it is put before it to support an application to give time to allow a company to progress a restructuring to be consistent with the character of the business and the debt.  In the present case the evidence suggests that the Company owns property in the Mainland worth approaching HK$19 billion and has net assets of HK$5 billion.  There is no explanation of what its business model has been, why it guaranteed the Debt and how it finds itself unable to pay its debts.  The Court is presented with a list of its principal property assets and its principal onshore and offshore creditors and a brief statement as to which obligations, for example under bonds, are in default.

7.  So far as the restructuring is concerned what is proposed is very simple.  The Company will sell some of its most attractive property to another developer and pay its debtors with the proceeds.  It is suggested that the Company is more likely to maximise the value of the properties than a liquidator would.  What I have not been told is how the Company after paying off, I assume, those creditors pressing for immediate payment anticipates that it will continue to operate a profitable business or at least pay its debts as they fall due.  It seems to have been assumed that it is not necessary to satisfy the court that any proposed “restructuring” will ensure that the Company is viable in at least the medium term.  This is wrong.

8.  The Company is insolvent at least in the sense that it cannot pay its debts as they fall due.  In order to satisfy the Court that a petition should be adjourned in order to give a company the opportunity to address its financial problems it is necessary to adduce evidence explaining how the financial difficulties arose and how they will be addressed not just in the immediate term, but also by explaining how the company will be returned to financial viability in the short to medium term.  No evidence of this sort has been adduced.  Mr Maurellet suggested that the underlying problem was probably that the Company’s business model involved developing property for sale as the yield on its property portfolio was likely to be less than the interest it was paying on its borrowing and the market was and remains poor. This may be the case, although there is no evidence of it.  Assuming, however, that it is correct it illustrates the problem with the Company’s approach to justifying an adjournment.  The explanation leaves open the possibility that even after the Company pays off its current creditors it will remain insolvent because it will not going forward be able to pay its debts as they fall due and payable to new creditors.  The Court needs to be satisfied that this is not the case otherwise the appropriate course it to make an immediate winding-up order.

The Evidence in the present case

9.  Other than the evidence of Zhang Yan, an executive director of the Company, and the Company’s secretary in their affirmations in opposition I have no evidence of the sort I have described above.  Mr Zhang simply recites a summary of the Company’s group property portfolio, provides a list of its principal creditors and their debts and a liquidation analysis prepared by Lazards.  The Company secretary provides a list of what in October 2020 it was hoped certain properties would be sold for.  Apart from this all I have is a three-page memorandum of understanding dated 14 October 2020 between the Company and Hebei Longhu Jingbai Real Estate Development Co Limited (“HLJ”) which envisages HLJ carrying out due diligence with a view to buying five of the Company’s subsidiaries’ properties at, I assume, something around the prices that are stated in the Company secretary’s affirmation of 23 October 2020.  However, I have no other documents and HLJ have not made any firm commitment to purchase any of the properties and, as I understand the position, it will not do so until April 2021.

Conclusion

10.  It seems to me that the Company has failed to demonstrate a good reason for the Court to adjourn the Petition rather than accede to ICBC’s wish that it be put into immediate liquidation.  ICBC is rather better placed to assess what it is in the creditors best interests than the Court.  Generally unless there is a substantial body of creditors opposing a petition for sensible reasons the Court will defer to a petitioner’s wishes. I would add that ICBC is a Mainland bank and I think I can reasonably assume well placed to assess the prospects of the Company reaching a satisfactory resolution to its present financial problems.  I will, therefore, make the normal winding-up order.

11.  I would add that the lack of necessary information that I have described earlier in this Decision is, as I have observed in other decisions, far too common.  I am frequently faced with Mainland business groups, normally listed, who either do not receive appropriate advice or lack the wherewithal to provide the type of information that I have described.  If they fail to provide the necessary evidence to the Court to justify an adjournment they should assume that they will be wound-up. They should also proceed on the basis that the evidence should be contained in evidence filed before a petition first comes on before a judge.  There is no excuse for substantial businesses who must be alive to their financial difficulties and the demands of creditors for repayment long before a petition is presented not filing evidence in order that creditors and the Court can consider the appropriate course to take early in winding-up proceedings.