Re Grand Empire Holdings Ltd.

HCCW 883/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP ACTION NO.883 OF 1999

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R E A S O N S

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1. This is a creditor's petition presented by The Hongkong and Shanghai Banking Corporation Ltd to wind up Grand Empire Holdings Limited ("the Company"). The petitioner had extended banking facilities to the Company in the sums of approximately HK$9.5 million and US$8.5 million in respect of which a formal demand for repayment was made but had not been complied with. The petition was supported by Prudential-Bache International Ltd and Rudolf Wolff & Co. Ltd.

2. At the first hearing on 20 December 1999, the Company opposed the petition on the ground that a restructuring proposal had been put to its creditors on 10 December. The petitioner and the supporting creditors together hold just under 15% of the total indebtedness. They did not support the restructuring proposal put forward which provides for repayment of 100% of the indebtedness but over a period of 25 years. The Company's major creditors are two PRC banks, namely, China State Bank and Kwangtung Provincial Bank ("the major creditors") who together hold more than 75% of the total indebtedness. At the first hearing, their stance vis-á-vis the proposed restructuring was not known. The petition was accordingly adjourned for two weeks to enable the Company to file additional evidence regarding any in-principle support it has for the proposed restructuring.

3. At the adjourned hearing on 3 January 2000, the Company sought a further two-week adjournment which was refused and a compulsory winding up order was made. The reasons appear below.

4. The Company is insolvent. As at 30 September 1999, its bank liabilities stood at approximately HK$448 million. It is currently estimated that on a liquidation basis, an unsecured creditor might expect to recover not more than 8% of its debt before taking into account liquidation costs.

5. The objective of the restructuring proposal is to reconstitute the core trading business of the Company which consists of copper and aluminium trading. The Company with another entity are apparently negotiating a new contract with the world's largest copper supplier. Further, under a contract signed on 12 August 1999 between the Kongli Group and the Huatong Nonferrous Metal Wholesale Market Limited, it is anticipated that the Company will be the Hong Kong channel for importing and exporting copper, aluminium and silver for the current year since it is likely to become a shareholder in Kongli. It is to be noted that no details of the copper contract are available and the document exhibited as "LSY4" to the 2nd affirmation of Lam Siu Yuk, assuming it to be the August contract makes no reference to copper and aluminium trading.

6. In order to reconstitute its core business, the Company requires new credit lines from the major creditors to the tune of HK$960 million, which it hopes to raise against what is known as the "My Home" Project ("the Project") consisting of service apartments. The Company does not yet own the Project but intends to enter into an agreement to swap receivables for the issued share capital of Fu Yu Long Real Estate Development Company Limited which owns the Project. It is envisaged that the major creditors would provide credit facilities of HK$960 million being 80% of the value of the Project which would be pledged to them.

7. The purpose of the two-week adjournment granted on 20 December 1999 was to enable the Company to obtain in-principle support from the major creditors.

8. A 2nd affirmation of Lam Siu Yuk was filed on behalf of the Company prior to the adjourned hearing. Paragraph 5 reads :

"The response from Kwangtung Provincial Bank and China State Bank (collectively 'PRC Banks', which together represent more than 75% in value of the total indebtedness of the Respondent Company) has been rather positive and reassuring. Subsequent to the submission of the Proposed Scheme, we have been actively involved in our negotiations with the PRC Banks about the Proposed Scheme. We also met with their senior management for this purpose. We have already made it clear that they should review and confirm their position as a matter of urgency. However, they have indicated that because of the magnitude of the debts involved and the intervening holidays, they would need some time to review the Proposed Scheme. Further, they would have to obtain the approval of Head Office of the BOC Group in Beijing and therefore, they would hardly in a position to endorse the Proposed Scheme and confirm their stance to the Court and other creditors before then. ..."

Since there was no evidence as to what the major creditors' response was, it is unclear on what basis their response could have been described as "positive and reassuring". Be that as it may, it is not at all evident if BOC approval would be forthcoming.

9. At the adjourned hearing, counsel for the Company informed the court that a meeting with the BOC Group would be taking place later the same week although he was unable to specify the date. On that basis, a further two-week adjournment was sought. The petitioner and the supporting creditors opposed any further adjournment.

10. The first ground of opposition is the absence of any evidence demonstrating support for the restructuring proposal. It is to be noted that the stance of the major creditors vis-á-vis the restructuring proposal remains unknown. Not only is there no in-principle support from them, there is no support in any shape or form, qualified or unqualified. It is not therefore a question of provisional support, subject to obtaining the approval of the head office of the BOC Group in Beijing. There is simply no indication one way or another although information relating to the restructuring proposal had been provided over three weeks ago, on 10 December 1999.

11. As the restructuring proposal involves the provision of substantial credit lines by the major creditors, their support is particularly vital. What is transparently clear is that the major creditors have not shown any willingness to endorse the proposal. Whilst a meeting with the BOC Group was expected to take place in the next few days, it is not suggested that anything definitive will emerge from that meeting. It is most unlikely that the Company did not realise that approval at that level would be necessary : yet no steps appear to have been taken to obtain such approval at least until relatively recently.

12. The major creditors also expressed scepticism as to the viability of the restructuring proposal which depends on future trading on the part of the Company. They pointed to the lack of evidence to substantiate the contracts and negotiations underlying the reconstitution of the core business. It is unnecessary to go into more detail regarding these criticisms save to say that they appear legitimate.

13. Leaving aside the criticisms made of the proposal, the question is whether my discretion ought to be exercised to give the Company yet more time to endeavour to obtain support from its major creditors. On the evidence, the proposal plainly did not enjoy the in-principle support of any creditor despite an adjournment to enable the Company to adduce evidence of support. In my judgment, there is nothing but wishful thinking on the part of the Company that support would be forthcoming from the major creditors. In those circumstances, a further adjournment is plainly not warranted. The Company's application was accordingly refused and a winding-up order made.