BANK OF INDIA v. BERGNER (HK) LTD (In Liquidation)

HCCW 45/2019

[2019] HKCFI 1171

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 45 OF 2019

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J U D G M E N T

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1.  This is an application by summons dated 2 April for a validation order made in the context of winding-up proceedings commenced by petition dated 12 February 2019.

2.  The first hearing of the petition is listed before the Master tomorrow, 10 April 2019.

3.  The petitioning creditor is a bank which extended credit facilities to the company which are said to remain outstanding despite demand.  The outstanding principal is a little over HK$28.3 million with accrued interest up to 31 December 2018 of almost HK$3 million.

4.  A statutory demand was served on 8 January 2019 and the petition was presented after the 21-day period had elapsed without satisfaction of any part of the sum demanded.  The application is opposed.

5.  The Official Receiver has adopted a neutral stance and is absent with my consent, but has drawn my attention to the principle that where a company is insolvent to obtain a validation order it should satisfy me that continuation of trading is likely to generate net income.  As I understand it, this principle is not in dispute.

6.  Mr Dicky Cheung, counsel for the petitioner, also asserts that before the court makes a validation order there must be credible evidence that either:

(a)   the company is solvent and able to pay its debts as they fall due or

(b)   the order, whether it relates to a particular transaction or a series of transactions, would be for the benefit of the company’s creditors as a class.

7.  He also submits that where a company seeks to carry on trade, the court must be satisfied that the transactions are likely to be profitable and, therefore, would increase the company’s assets so as to benefit its creditors.

8.  For his part, Mr Mo for the company has referred me to various other authorities, but agrees that if the solvency of the company is open to question, the court will generally only validate dispositions which are in the interests of the general body of the creditors of the company.

9.  The insolvency position is not in issue as a matter of fact, but Mr Mo refers in particular to paragraph 17 of the case Siu Ping v Chan Wai Chi Louis and Others, cited by Mr Justice Toh on 1 March 2010 in HCCW 82/2010, which he says has some factual similarity in relation to the problems which occur if the company is not allowed to continue to trade and, therefore, gets into one might call it deeper trouble to no greater benefit of the creditors or contributors.

10.  He also says that the views of the majority of the creditors should be respected.  This morning, I am afraid rather unacceptably late, he has provided a supplemental list of authorities going in part to this point.  He refers me to section 287 of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance, which provides that as to all matters relating to the winding-up of the company, the court may have regard to the wishes to the creditors or contributors of the company, regard being given to the value of each creditor’s debt.

11.  It is not entirely clear to me, and Mr Mo was not able to assist in this regard, as to whether that section applies only after a winding-up order has been made, but it reflects, perhaps, a general principle relating to looking at the wishes of creditors or contributors of a company subject to a winding-up order or an application for such an order.

12.  Other authorities identify that the exercise of the court’s discretion is not simply a mathematical exercise and account can also be given to the quality of the creditors and their wishes.

13.  For his part, Mr Cheung says that in this application I need not and indeed should not look at the wishes of the creditors, but what I should be concerned about is what is truly in the interests of the creditors as a whole.  I think that that is correct.

14.  The application is led by the affidavit of Janek Davitashvili, confirmed by an affirmation of Umesh Ramchandra Gupta, copies of which are exhibited to the affirmation of Mr Mo dated 2 April 2019.

15.  No evidence has been filed by the petitioner, though, its skeleton argument which was filed almost on time puts on record that it was only provided with 11 bundles of supporting evidence on 29 March 2019 and states a reservation of rights to make full submissions on the evidence filed by the company and to file further evidence if necessary.

16.  This morning, Mr Cheung has orally made the same point, but I am not sure that it can really help matters for evidence to be filed by the petitioning bank in response to the materials provided by the company which are essentially internal materials relating to what it says is its trading position.

17.  In fact, Mr Cheung may do himself a disservice by suggesting that he has not been able to make the most helpful of submissions.  I think he has.

18.  As an aside, I would also note that I was provided with the documents in the court file comprising the petition summons and affidavits together with 11 volumes of exhibits in wide lever arch files. Whilst I do not mind that this material was not simply duplicated in a court bundle, it was, however, unsatisfactory that no skeleton argument was provided for the company timelessly in accordance with the relevant practice direction. In fact, no such skeleton argument was received at all until after my clerk chased for one and I received it only at about 4.45 pm yesterday.  It came with a small bundle of authorities and a core bundle. 

19.  Providing such documents so late is unhelpful to say the least.  It does not help that the core bundle contained not only the summons and the affidavit and affirmation previously filed, but a new affirmation dated and filed on 8 April 2019, that is just yesterday, from Panda Raval Lapil George Anto.  He is the financial controller of the company and the main purpose of the affirmation is to explain the rather late timing of the application for the validation order.

20.  Mr Anto sets out what he says is the history of settlement negotiations between the company and the petitioning bank over the period since the statutory demand was served on the company on 8 January 2019. I do not need to rehearse what he says is the history for it suffices to say that he says negotiations continued until the settlement proposal from the company was finally accepted by the petitioning bank through its office in Hong Kong on 19 March 2019.

21.  The thrust of the suggested settlement is payment of 70 per cent of the outstanding debt over a period of 12 months attracting no further interest.  Mr Anto also says that he was constantly assured by an officer of the petitioning bank that the head office would approve the settlement terms.  However, it is clear from the solicitors’ correspondence after 19 March 2019 that there is a real issue as to whether any settlement was actually achieved between the parties.  In fact, it is firmly asserted on behalf of the petitioning bank that no settlement has been reached.  For the purposes of this hearing, I proceed on that basis.

22.  Amongst the exhibits to Mr Davitashvili’s affidavit are the company’s report and financial statements for the year ended 31 March 2018.  The auditors have given a qualified audit opinion on the basis that there is a material uncertainty that may cast significant doubt on the company’s ability to continue as a going concern.  This is the result of incurring a HK$192 million impairment loss on unrecoverable trade receivables giving rise to a capital deficiency amounting to HK$52 million sustained at the end of the reporting period. 

23.  Nevertheless, I note from the consolidated comprehensive income statement that the revenue increased from about HK$493 million in the year to 31 March 2017 to about HK$695 million in 2018 and that but for the impairment recognised in the accounts, there would have been a profit from operating activities in 2018 larger than in 2017.  In other words, the impairment loss occurred as a result of an extraordinary event and the company remained profitable on its ordinary trading.

24.  The management accounts from April 2018 to January 2019 show revenue of approximately US$66 million or HK$515 million. There is also shown a profit of U$160,000 over the period.  Ordinary trading profit continues, though, this is undoubtedly a very low margin business.

25.  Mr Cheung this morning warns me of the significant risk of loss from the nature of the market involving import into Ukraine where there are difficulties, geopolitical difficulties, perhaps, between Ukraine and Russia which are capable of affecting and, indeed, have affected that market giving rise to the impairment problem.

26.  The company has been operating a homeware business for over 15 years and has more than 100 full-time employees in Hong Kong and Guangzhou.  The company’s creditors comprise several banks as well as its suppliers.  The banks provide several lines of working capital facilities and appear to have done so over many years.  The petitioning bank is but one of those lenders and appears to account for approximately 11 per cent of the total liabilities.

27.  The petitioning bank previously issued a writ action against the company but it seems that the writ has not been served. Instead, there were negotiations as to settlement on the termination of the credit facilities, but those negotiations did not reach closure before the service of the statutory demand and then the petition.  As I have said, there is an issue as to whether any settlement has been reached since, but I proceed for present purposes on the basis that settlement discussions have been in earnest, but no settlement has been reached.

28.  Despite the presentation of the petition, all the other banks providing credit or trading facilities to the company have continued to support the company and have indicated that they have a positive outlook on the present and future business prospects of the company.  Letters of support from those banks were exhibited by Mr Davitashvili and although all are marked “without prejudice”, they evidence those banks continued support at least for the present and also their support for the application for the validation order.

29.  The facilities provided by those banks together comprise approximately 65 per cent of the total liabilities of the company.  On the assumption that those banks are taking an appropriate and commercial view of matters, there is, therefore, a significant body of creditors who appear to take the view that continuation of trading is likely to generate net income so as to improve their prospects of recovery of moneys lent under the facilities. In other words, for the benefit of the creditors as a whole.

30.  As it happens, Mr Anto also exhibited up dated letters from the supporting banks reiterating their support from the company and the validation order sought.  Indeed, those supporting banks were event represented at the hearing this morning by Mr Terry Liu, albeit that his firm has not yet come on the record who, I think, would reiterate their stance in support of the grant of the validation order.

31.  The scope of the validation order sought relates to making payments for various matters in the ordinary course of business including payment from its bank accounts.  This is in part to pay suppliers so as to fulfil the purchase orders from customers, to pay operating expenses such as staff costs, rent and utilities, as well as to effect repayment to the banks under the various types of facility provided.

32.  As acknowledged by the company, the draft validation order is cast widely to permit the company generally to continue to trade despite its deemed insolvency.  In fact, the order is sought in two parts.  The first relates to payment already made by the company from 12 February to 4 March 2019 when its bank accounts were generally frozen. Those payments are said to have been made during that period in the ordinary course of business.  The second part of the order relates to intended future general trading.  From the schedule attached to the summons, the nature of the payments do seem to me to relate to such general future trading.

33.  I also note that the majority of the company’s assets consist of trade receivables and delayed trade receivables which are likely to have a better recovery if the company remains in business.  Though, the level of profitability does not seem to be very high, a net profit margin of well under 1 per cent, including, historically, the company does appear to achieve an operating profit, albeit at the cost of significant finance costs.

34.  Despite Mr Cheung’s criticism of the absence of evidence relating to the costs to be charged against revenue so as to be able properly to identify anticipated profit, I do not think there is any particular reason to think that the company would not continue to make operating profit and some net profit.

35.  Perhaps, as importantly, if the company effectively just ceases trading, it is likely to face significant claims from its trading partners on unperformed contractual arrangements already in place. Those claims are unlikely to be done to the benefit of creditors generally.

36.  I have considered whether or not to accede in essence to Mr Cheung’s application that I treat this as some sort of callover hearing and come back for more substantive argument on another occasion, but it seems to me that I have sufficient materials to be able to decide this and Mr Cheung has been able to deploy the relevant legal argument and to make his factual comments which are sufficient for me to decide this matter now.

37.  Taking all of the above matters into consideration in the exercise of my discretion, it does seem to me that the company has satisfied the relevant test that the transactions from general trading are likely to be profitable and, therefore, would increase its assets so as to benefit all creditors. 

38.  As already noted, it seems that this view is shared by a significant body of the banking creditors, even if not by the petitioner bank itself.  I look not to their wishes, but to what they think is in their interests and it seems to me, and I agree, that general trading is likely to be in the general interests of the creditors as a class.

39.  I, therefore, grant the validation order in the terms of the draft provided.