RE DAFA PROPERTIES GROUP LTD

HCCW 110, 111/2024

[2024] HKCFI 3034

HCCW 110/2024

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 110 OF 2024

_______________

_______________

AND

HCCW 111/2024

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 111 OF 2024

_______________

_______________

__________________________________

REASONS FOR JUDGMENT

__________________________________

1.  At the hearing of the petitions presented by China Construction Bank (Asia) Corporation Ltd (“Petitioner”) on 26 February 2024 against (1) DaFa Properties Group Limited (大發地產集團有限公司) (“Company”) in HCCW 110/2024 (“HCCW 110”) and (2) YinYi Holdings (Hong Kong) Limited (垠壹香港有限公司), an indirect wholly-owned subsidiary of the Company (“Guarantor”), in HCCW 111/2024 (“HCCW 111”), I made a usual winding-up order against each of the Company and the Guarantor (together “Companies”). These are the reasons for my judgment.

2.  The Petitioner is the trustee of the US$360 million 12.375% Senior Notes due 2022 issued by the Company (“Subject Notes”) and guaranteed by the Guarantor.  The outstanding principal under the Subject Notes accounts for 56% of the outstanding principal of the offshore debts in the amount of US$638 million which the Company intends to restructure and compromise by way of a scheme of arrangement[1].

3.  The Company was incorporated in the Cayman Islands on 18 December 2017.  Since 29 March 2018, the Company has been registered as a non-Hong Kong company under the Companies Ordinance (Cap. 622).  The Company maintains a principal place of business in Hong Kong and its shares have been listed on the Main Board of The Stock Exchange of Hong Kong Ltd (“SEHK”) (stock code: 6111). 

4.  The Company together with its subsidiaries engage in the development and sales of residential properties primarily in Mainland China.[2]

5.  The Guarantor was incorporated in Hong Kong on 17 January 2018.

6.  On 29 December 2023, the Petitioner served 2 statutory demands on each of the Companies requiring them to pay US$467,662,500 (“Debt”), being the outstanding principal and unpaid interest due and payable under the Subject Notes (together “SDs”).

7.  The Companies do not dispute the Debt or the fact that they are not able to pay their debts. Although the Company is a Cayman company, it does not dispute that the 3 core requirements for the court to exercise its discretionary jurisdiction to wind up the Company[3] are satisfied.

8.  As the Companies failed to comply with the SDs, they are deemed insolvent by virtue of s.178(1)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32).  The Petitioner is entitled ex debito justitiae to a winding-up order against each of the Companies.

9.  The only ground advanced by the Companies in opposition to the petitions is that they have been taking steps to negotiate with the creditors in respect of a restructuring proposal which, if implemented, would allow the Companies to compromise the offshore debts and restore to solvency.  

10.  The applicable principles for dealing with a winding-up petition presented on insolvency ground are well established.  As stated in Re Jiayuan International [2023] HKCFI 1254 §12:

“(1) A petitioner whose debt is not in dispute is entitled ex debito justitiae to a winding up order against the company. The burden lies on the company to demonstrate good grounds for the court not to make such an order against it;

(2) Where the company is insolvent and unable to pay its debts, it is the creditors who have a real interest in the company. They can decide whether it is in their interest to have the company wound up. It is not for the company to assert otherwise even if there are valid grounds in support of its assertion; and

(3) If the company opposes the petition on the ground that there is a reasonable prospect of being able to restructure and compromise the debts and restore its solvency, it has to demonstrate to the court that a concrete restructuring proposal or a scheme of arrangement has been prepared and put forward to the creditors for their consideration, and such proposal or scheme has the support of the requisite majorities of creditors. It is not enough for the company to point to certain commercial discussions with some creditors or make a general assertion that it has been actively pursuing a restructuring proposal. Nor is it enough for the company to say that it is only seeking a short adjournment of the petition. Unless the company is able to demonstrate that there is some useful purpose in adjourning the petition, there is no proper basis for the court to delay the creditor’s right in seeking an immediate winding up order against the company”.

11.  Further, the court would only adjourn a winding-up petition if it is satisfied that (1) there is funding for the proposed restructuring,(2) there is a restructuring plan, and (3) the plan has a timetable (Re China Evergrande Group [2024] 1 HKLRD 1128 §§41(3)-42)). 

12.  The Companies fail to show any good grounds to justify the court granting a further adjournment of the petitions for the reasons explained below.

13.  To-date, no restructuring proposal, let alone a concrete proposal has been put forward by the Companies to the creditors during the period of adjournment.  This was despite the fact that:

(1)  In as early as March 2022, the Company had already indicated its intention to put forward a restructuring[4], followed by the appointment of financial advisors to work on the debt restructuring and to “explore all feasible options” in January 2024[5].

(2)  At the first callover hearing of the petitions on 24 June 2024, the Companies sought an adjournment relying on the restructuring efforts set out in Gao 1^st and Gao 2^nd whereupon Ng J adjourned the petitions for substantive arguments before this Court.  More than 16 weeks have past but all that the Companies are able to say is that there have been “discussions” (商討) between the Company and some (unidentified) creditors,[6] and those creditors have raised certain “indicative” (示意性) restructuring terms[7].

(3)  In the letter dated 2 July 2024, solicitors for BFAM[8] complained that the Companies had failed to provide even the basic information on their so-called restructuring, including information on classification of creditors for voting purpose, financial analysis, comparison of restructuring and liquidation scenarios and timetable of the plan.[9]

(4)  It was only until 14 October 2024 that the Companies filed a draft Gao 3^rd to provide an “update” on the latest development of the restructuring proposal.  This was the first time when the Petitioner learnt of the development.

14.  The so-called development was nothing more than some preliminary steps belatedly taken by the Companies which include:

(1)  On 27 September 2024, the Company signed an agreement with an information agent, which set up an online platform for the creditors’ signing and returning of the restructuring support agreement (“RSA”). The Companies intends to dispatch the RSA to the creditors through the online platform.

(2)  The RSA, if agreed to and signed by the beneficial noteholders, require them to use all commercially reasonable endeavours to support, facilitate, implement the restructuring according to the “Term Sheet”.

(3)  On 27 September 2024, the Company made an announcement inviting the beneficial holders of the Subject Notes to sign the RSA and disclosed, for the first time, the “Term Sheet” which was appended to the announcement.  

15.  Mr Tony Ko, counsel for the Companies, submits that the terms under the “Term Sheet” provide more favourable terms than those outlined in Gao 1^st and Gao 2^nd in that:  

(1)  Option 1 remains the same.

(2)  Option 2 still involves a 40% haircut on all unpaid principal which will be converted into new short-term notes (5 years), but the interest rate will be increased to 2.5% p.a. for the first 2 years part of which is payable in cash, and 3.5% for the next 3 years all of which is payable in cash. 

(3)  The net sale consideration of the 9 specified projects will be set aside and be distributed to the short-term noteholders.

(4)  Option 3 will convert all unpaid principal into new long term notes of 7 years and waive all accrued interest.  The new long-term notes bear interests at 2% p.a. payable in cash or in kind at the option of the Company for the first 4 years, and thereafter, interest is payable in cash.

16.  The submission misses the point.  It is futile to focus on the terms proposed by the Companies without demonstrating that the Companies have the financial means to honour the payment obligations under the proposal and the creditors are prepared to consider or support such proposal.  Neither has been addressed by the Companies.

17.  So far as financial means is concerned:

 (1)  Although the Company claims that it has obtained new funding of US$119.8 million which it intends to use for the purpose of the restructuring, in fact, only 2 Letters of Intent (“意向书”) were entered into, both of which are subject to signing a further formal agreement by the relevant parties (“皆须由双方和其他有关当事人另行签署正式协议予以落实”)[10];

 (2)  While the Company asserts that it has put in place US$5 million for the “restructuring plan” to show its “good faith”[11], only a  Certificate of Credit issued by a bank showing the credit balance of an account in the name of “上海阙磊贸易有限公司” is produced[12].  In any event, US$5 million is hardly sufficient for the purpose of formulating and implementing any restructuring proposal[13].  

18.  Even if, contrary to my view, the “Term Sheet” can be regarded as a concrete restructuring proposal, there is no evidence to show that the proposal has the support of the requisite majorities of creditors:

(1)  No creditor appears to oppose the petitions or supports the adjournment sought by the Companies. Whilst the Companies had produced letters signed by 5 beneficial holders of the Subject Notes (who together hold 7.64% of the amount due under the Subject Notes) in support of the last adjournment, none of these holders have stated that they continue to oppose the petitions, let alone provide any reasons therefor.

(2)  In the letters, the holders merely referred to certain discussions and negotiations on an unspecified “debt restructuring plan”.  This is plainly insufficient as it is not clear what “plan” they referred to or whether such “plan” had been or would be made available to other creditors (cf. Re Dexin China Holdings [2024] HKCFI 1610, §22).

(3)  To the contrary, BFAM (a beneficial holder holding US$90,054,000 or 25%+ of the principal under the Subject Notes) [14] indicated that it opposes any alleged “restructuring” put forward by the Companies[15], and supports the immediate winding-up of the Companies.  This is unsurprising as the Companies have not even communicated with the Petitioner or BFAM during the 16 weeks’ adjournment[16].    

19.  Further, there is a complete lack of transparency on the part of the Companies as regards their current financial state and no meaningful information has been provided to the Petitioner or the court.  This made it difficult, if not impossible, for the creditors or the court to assess whether the proposal contained in the “Term Sheet” is viable or one which may be implemented by the Companies. This is exacerbated by the fact that: 

(1)  The Company has not disclosed their latest financial statements. The latest interim report of the Company was made up to 30 June 2022.[17]  There is no information on the Guarantor’s financial situation at all.

(2)  The cash flow forecast tables[18] provide no meaningful information as the basis or assumptions in arriving at the forecasts have not been disclosed by the Companies.  

20.  For all the above reasons, the Companies have failed to discharge the burden of showing that there is a proper basis for the court to grant a further adjournment of the petitions.  The Petitioner is entitled to the usual winding-up orders against the Companies.