RE GTI HOLDINGS LTD

HCCW 51/2020

[2021] HKCFI 3647

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 51 OF 2020

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R E A S O N S  F O R  J U D G M E N T

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1.  At the hearing of the petition dated 11 March 2020 (“Petition”), I made the usual winding up order against GTI Holdings Limited (“Company”). These are the reasons for my judgment.

2.  The Company was incorporated in the Cayman Islands in June 2004.  Its shares have since 5 October 2005 been listed on the Main Board of The Stock Exchange of Hong Kong Limited (“SEHK”) (stock code 3344).  The Company has more than 35 subsidiaries (together “Group”) incorporated in Cambodia, the Mainland, the BVI, Cayman Islands and Hong Kong some of which are operating subsidiaries engaging in production, sale and trading of textile products, trading of petroleum, provision of services for oil industry and provision of financial services.  

3.  In 2018, the Group started to shift its business focus from the overseas market to Hong Kong market.

Petition and appointment of PLs by Cayman Court

4.  The Petition was presented by Yu BaoHua (“Petitioner”) following the failure of the Company to satisfy a statutory demand served upon it on 21 January 2020 (“SD”). In the SD, the Petitioner demanded the Company to pay HK$7,815,600, being the principal and interest due and payable on 28 March 2019 (“Debt”) under a bond issued by the Company on 28 December 2018. 

5.  On 12 and 17 March 2020, 2 winding up petitions were presented against the Company in HCCW 57/2020 and HCCW 65/2020[1].

6.  There is no dispute that the Debt was due.  Nor is there any dispute that the Company is insolvent and unable to pay its debts.

7.  On 26 May 2020, the Company presented a winding up petition against itself and applied for appointment of provisional liquidators for restructuring purpose with the Grand Court of the Cayman Islands.  On 28 May 2020, the Cayman Court appointed Mr Osman Mohammed Arab and Mr Lai Wing Lun, both of RSM Corporate Advisory (Hong Kong) Ltd and Ms Claire Marie Loebell of R&H Restructuring (Cayman) Ltd as joint and several provisional liquidators of the Company (collectively “PLs”).

8.  On 17 September 2020, the PLs obtained sanction from the Cayman Court to issue new shares and to enter into a funding agreement.By order dated 14 December 2020 with the consent of the Company and Petitioner, Harris J sanctioned all the sale and purchase of shares of the Company and the corresponding alteration in the status of the members of the Company.

9.  On 24 September 2020, the PLs made an ex parte application in HCMP 1556/2020 to seek recognition of their appointment.  By order dated 9 November 2020, Harris J recognised the appointment and allowed the PLs to exercise certain powers in Hong Kong for (inter alia) the purposes of putting forward and implementing a restructuring proposal, investigating the affairs of the Company, protecting and securing the assets of the Company, retaining legal advisers as the PLs consider appropriate and bringing or defending legal proceedings in the name or on behalf of the Company.  These powers on their face are more extensive than what the Companies Court would normally confer on the provisional liquidators appointed by the Hong Kong Court as the PLs are not required to seek prior sanction of the Court before exercising such powers. 

10.  The Petition first came to be heard before Harris J on 13 July 2020, and was adjourned to 27 August 2020 for arguments with 3 hours reserved.  The Petition was further adjourned to 16 November 2020, 1 February 2021, 22 March 2021, 19 July 2021 and finally to 22 November 2021 pursuant to the consent summonses filed by the Company and Petitioner. 

11.  The adjournments were sought without the consent of the creditors who had given notices to appear in and support the Petition.  The details of the creditors who support the Petition (collectively “Supporting Creditors”) are as follows:

No.	Date(s) of filing	Name of creditor	Amount claimed
1	29/5/2020	王玉英	$911,627.40
2	29/5/2020	郭濟榜	$511,232.88
3	23/6/2020, 9/7/2020	Tong Kan Chuen Arthur	$550,000.00
4	23/6/2020, 9/7/2020	Fan Siu Hung	$542,109.18
5	23/6/2020, 9/7/2020	Mok Siu Mui Iris	$5,862,489.90
6	23/6/2020, 9/7/2020	Deng Zhenjie	$589,956.54
7	23/6/2020, 9/7/2020	Kong Chi Wang	$578,953.01
8	23/6/2020, 9/7/2020	Wei Qin	$10,284,355.94
9	23/6/2020, 9/7/2020	Wong Ho Yin	$1,153,425.88
10	23/6/2020, 9/7/2020	Wong Shin Kwun	$1,430,000.00
11	5/7/2021	Xu Kaimei	$16,153,000.00
	Appear at hearing on 22 November 2021
12	5/7/2021	古秀英	$7,400,000.00
13	5/7/2021	蔡素霞	$520,342.47
14	5/7/2021	Zhu Wei	$1,117,500.00
15	5/7/2021	潘漢洲	$2,000,000.00
16	5/7/2021	柯雪梅	$7,800,000.00
17	5/7/2021	Huang Wen Chih	$1,025,315.00
18	5/7/2021	Shen Pei Ying	$1,752,504.00
19	17/11/2021	Ng Chiu Ming	$274,929.32
20	17/11/2021	Kwong Wai Kee	$660,221.11
21	17/11/2021	蔡李原	RMB109,660.25
22	17/11/2021	Tsang Sin Ha	RMB936,279.45
23	19/11/2021	Wang Rujing	$1,737,480.00
		TOTAL	$62,855,442.63 & RMB1,045,939.7

12.  By another consent summons dated 11 November 2021, the Company and Petitioner proposed to further adjourn the Petition for another 5 months (to 11 April 2022) and to vacate the hearing on 22 November 2021.  No explanation has been provided to the Court as to why the Petition should be further adjourned.  Nor has the parties sought the consent of the Supporting Creditors, who have the right to be heard and seek an order to be substituted as petitioner if the Petitioner does not seek a winding up order against the Company.

Grounds in opposition to the Petition

13.  Mr Michael Lok (appearing with Ms Sharon Yuen), counsel for the Company, submits that the Petition should be further adjourned as the Company has already taken substantial steps in trying to implement a restructuring proposal in respect of all the debts owed to the creditors in that:

(1)  on 22 December 2020, Harris J heard the Company’s application for directions to convene a meeting for the creditors to consider a proposed scheme of arrangement (“Scheme”).  The learned Judge was not satisfied with the draft scheme document, and directed a further hearing to consider the revised draft scheme document on a date to be fixed from 23 February 2021 to 12 March 2021;

(2)  under the proposed Scheme, (a) new shares will be issued to the creditors as consideration for extinguishing their claims; (b) new shares will be issued to the “white knight” as consideration for discharging the loans which have been advanced to the Company to maintain its operation; (c) new shares will be issued to all the shareholders by way of a rights issue so as to raise funds to finance the future operations of the Company.  In short, the Scheme does not envisage any cash payment to the creditors and, to the contrary, the creditors will be asked to invest further money into the Company by subscribing for new shares in the rights issue;

(3)  the transactions contemplated by the Scheme are subject to the approval of SEHK and the SFC.  In particular, SEHK’s approval is required for listing of the new shares proposed to be issued by the Company under the Scheme;

(4)  as the Company had not been able to obtain the requisite approvals from the regulators, the directions hearing was subsequently postponed to the end of May 2021 and a sanction hearing was tentatively fixed for 30 June 2021;

(5)  in May 2021, the SFC indicated that it has no further comment on the relevant disclosure of the Scheme, but would only issue a formal clearance upon SEHK’s clearance;

(6)  since April 2021, SEHK raised queries on the highly dilutive effect of the Scheme, followed by its query on whether the Company has sufficient operations and assets to warrant its continued listing under rule 13.24 of the Listing Rule;

(7)  the Company then re-fixed the directions hearing to 23 November 2021;

(8)  on 19 August 2021, SEHK indicated that it would await the latest audited financial results of the Company for the 18 months ended 30 June 2021 so as to assess whether or not the Company is in compliance with rule 13.24;

(9)  however, the Company was unable to publish its audited results on 30 September 2021 and changed its auditors in October 2021 due to disagreement in fees and the audit time table.  The Company has been working with the new auditors to finalise the audit results which, it is said, will be published in November 2021;

(10)  the directions hearing was further re-fixed to no earlier than 30 January 2022, and the sanction hearing was re-fixed to 29 March 2022;

(11)  the Company had obtained “letters of support for the Company to progress with debt restructuring” from 76 creditors with aggregate claim of $484 million, representing 48% of the Company’s total liabilities;

(12)  on 31 July 2021, the Company offered to enter into a non-disclosure agreement with the Petitioner and the Supporting Creditors and, upon execution, Company would provide further details on the Scheme to them, and one creditor signed the agreement; and

(13)  the Company and the PLs are of the view that the implementation of the Scheme would be beneficial to the creditors and shareholders of the Company as the creditors would likely obtain “minimal recovery under the liquidation scenario based on previous analysis”.

14.  Mr Lok relies on Re China Huiyuan Juice Group Ltd [2021] 1 HKLRD 255 §§50-51; Re Lamtex Holdings Ltd [2021] 2 HKLRD 177 §§36-38 in particular Harris J’s observations that “the place of incorporation is not necessarily determinative” and that “the views of creditors are also a major consideration” and asks the Court to adjourn the Petition for the reasons summarised in §16 above. 

15.  In my judgment, there is no proper basis for the Company to seek a further adjournment of the Petition.

16.  The starting point is that an unpaid creditor whose debt is not in dispute is entitled ex debito justitiae to seek an immediate winding up order against the Company.  Although the Petitioner had signed a consent summons indicating its agreement to have the Petition be further adjourned, upon learning that the Court declined to vacate the hearing, the Petitioner changed his mind and decided to seek a winding up order against the Company.  Mr Lok does not dispute that the Petitioner is entitled to seek an immediate winding up order against the Company.

17.  In addition, amongst the Supporting Creditors:

(1)  7 of them to whom the Company admittedly owed $21,615,661.47 (listed under Nos. 12-18 at §11 above) appear at the hearing to support the Petition (collectively “7 Creditors”).  They are represented by Mr Andrew Lau; and

(2)  Another 4 creditors (listed under Nos. 19-22 at §11 above)  through Messrs. Rowland Chow, Chan & Co’s letter dated 19 November 2021 indicated that they “endorse” the stance of the Petitioner. 

18.  The burden is on the Company to satisfy the Court that there is a proper basis to further adjourn the Petition.  Where, as here, the only grounds in opposition to the Petition are that (1) the Company has been seeking to put forward a proposed restructuring, and (2) PLs have been appointed to assist the Company in implementing such restructuring, the Court will consider the feasibility of the proposed restructuring (Re Lamtex, §38).  In assessing the feasibility or otherwise of the proposed restructuring, the Court will have to take into account the views of the unsecured creditors as they have the right to decide whether the proposed restructuring is one which they are prepared to accept.  It is not for the Company or the PLs to decide whether it is in the interests of the creditors to accept the proposed restructuring. 

19.  I do not think that the proposed Scheme is feasible:

(1)  Putting the Company’s case at the highest, only creditors whose aggregate claims against the Company account for 48% of the total indebtedness are willing to consider the proposed Scheme.  These creditors did not say that they agree to the terms of the proposed Scheme. 

(2)  As Mr Lau points out, one of the creditors relied on by the Company is Champion Alliance Industries Limited, which is a secured creditor.  As the secured creditor is entitled to realise the security and applies the sale proceeds to repay the debt owed by the Company, it is wrong for the Company to include its claim as part of the 48% creditors who are willing to consider the proposed Scheme.

(3)  As there is no evidence to show that the proposed Scheme has the support of 75% in value of the claims of the unsecured creditors, there is no basis for the Company to contend that the proposed Scheme is one which can be implemented. 

(4)  It is clear from the evidence that SEHK has not indicated that it will approve the listing of the new shares proposed to be issued upon implementation of the Scheme, and requires to consider the latest audited financial statements of the Company.  The Company failed to publish its audited financial statements for the 18 months ended 30 June 2021 by the due date (30 September 2021). There is no evidence from the new auditors to say that the audited financial statements will be published in November 2021, as Mr Lok suggests. Without any audited financial statements, it is difficult to see how the Company can satisfy SEHK’s requirements.

20.  More importantly, it is clear from the evidence before the Court that despite the appointment of the PLs for about 18 months, the financial position of the Group has not improved and the Company remained unable to comply with the basic obligation of publishing its audited financial statements.

21.  The unaudited financial statements of the Group show that both the net current liabilities and net deficits had increased by more than 100% during the past 21 months, and the Group continued to suffer substantial loss as follows:

Period ended	Loss attributable to Company	Net current liabilities	Net liabilities
31/12/2019	$576,362,000	$522,887,000	$467,578,000
30/6/2021	$585,437,000	$1,717,508,000	$1,071,732,000
30/9/2021	$25,786,199	$1,179,580,404	$1,099,855,011

22.  It is highly undesirable for the Company with a substantial net deficit to remain in operation as a going concern.  The continued increase in net deficit is prejudicial to the interests of the unsecured creditors.  They are entitled to ask the Court to put the Company into liquidation without any further delay. 

23.  Finally, I am satisfied that the 3 core requirements are satisfied fortheCourttoexerciseits discretion tomake a winding uporder against the Company. The Petitioner has pleaded (at §§14-20 of the Petition) the matters it relies on in support of the contention that the 3 core requirements are satisfied. The Company does not take issue with the contention in the many affirmations filed in opposition to the Petition. I should add that at the hearing, Mr Lok suggests, for the first time, that the 3 core requirements are not satisfied and asks the Court to grant a short adjournment so that the Company can put in evidence to deal with the point. I do not see any basis for Mr Lok to take the point, when the Company has not in any of the affirmations raised such issue.

24.  In any event, it seems to me that the point which Mr Lok seeks to make is wholly without merit, given that:

(1) the Company is listed on SEHK and has officers resident in Hong Kong. This is sufficient to satisfy the1^st corerequirement;

(2)   the 2^nd core requirement is also satisfied. TheCompanyhassubstantialassetsintheformof operating subsidiaries in Hong Kong. Although the shares in these operating subsidiaries are held by an intermediate holding company incorporated in the BVI, the liquidators will be able to gain control of these operating subsidiaries by appointing themselves (or their nominees) as directors of the intermediate holding company and, thereafter, take control over the operating subsidiaries; and

(3)  the 3^rd core requirement is satisfied by the presence of the Supporting Creditors.