Re BG Lighting Co. Ltd.

HCCW3/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.3 OF 2000

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R E A S O N S

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1. These are creditors' petitions. The first is a petition presented on 4 January 2000 against BG Lighting Company Limited ("Lighting"). The underlying debt is based on a Labour Tribunal award for arrears of wages in the sum of approximately $270,000. The other petition was presented on 12 January 2000 against BG International Limited ("International"). The underlying debt is also based on a Labour Tribunal award. The amount of the award was approximately $32,000. Lighting and International (collectively "the Group") are related companies and were represented by its common director Mr Wong Pak Sum. The two petitions were heard together and winding-up orders were made at the hearing on 22 May 2000. The reasons appear below.

2. The petition relating to Lighting first came before me on 20 March 2000. At that hearing, Mr Wong informed the court that it had appointed Horwath Corporate Solutions Limited ("Horwath") to formulate a restructuring proposal and to look for new investors. A letter dated 10 January 2000 from Horwath was exhibited in which Horwath confirmed their appointment as the independent financial adviser of Lighting and stated that their advisory role included the formulation of a restructuring plan which would be presented to the board for consideration as soon as possible. That letter was by then some nine weeks old. Yet, there was no evidence of any progress having been made. At that hearing, Lighting sought and was granted an adjournment of four weeks to present its restructuring proposal and the in-principle support of the majority of its creditors. The need for legal representation should it proceed with a restructuring was brought to Lighting's attention. Given the technicalities that a restructuring would involve, it was simply not realistic for Lighting to believe that a restructuring could be accomplished without legal assistance.

3. Lighting did not engage solicitors, probably due to a lack of financial resources. On 14 April 2000, Mr Wong filed written submissions on behalf of Lighting seeking a dismissal of the petition. Similar submissions were filed for International which also came before me on 17 April 2000. Attached to those submissions was a draft letter from Horwath to one of the bank creditors of Lighting dated 10 April 2000 stating that there had been a delay but that the Group's management accounts for the years ended 31 March 1999 and 2000 were expected to be available before 30 April 2000 and 22 May 2000 respectively. On this basis, Horwath stated that they anticipated being able to present the restructuring plan for the Group by mid-June 2000. There was also a list of creditors showing the Group's indebtedness to be of the order of $46.4 million. Mr Wong did not attend the adjourned hearing which took place on 17 April 2000. He was apparently in Italy seeking investors and was not due to return to Hong Kong until 19 April.

4. At the adjourned hearing on 17 April, the Group was represented by another director, namely Madam Fu Yuk Sum, who sought a further adjournment. The Group was told in no uncertain terms that unless a viable restructuring plan which had the necessary in-principle support was before the court at the further adjourned hearing on 15 May 2000, it faced the prospect of winding-up orders. Moreover, it was made plain to the Group that it was not in a position to insist that a restructuring plan would not be submitted until mid-June given the petitions.

5. At the hearing on 15 May, the position had not changed : no restructuring plan was before the court although a letter was produced from the Bank of China, allegedly the largest creditor of the Group, that it agreed to an adjournment until mid-June for Horwath's report. On 15 May, the Group was given one last opportunity to place the requisite evidence before the court.

6. At the hearing on 22 May, the Group produced letters from a number of its creditors whose debts in the aggregate amounted to some $31.6 million. In the case with the Bank of China, it did not object to an adjournment till mid-June. The other creditors simply stated their agreement to the dismissal of the petitions. There was also before the court a letter dated 20 May 2000 from Horwath who had not been able to proceed with the formulation of the restructuring plan as that was dependant on the availability of financial statements for the years ended 31 March 1999 and 2000. It was clear from that letter that whilst the 1999 draft financial statements were expected to be available in early June 2000 (an unexplained delay of over a month), the financial statements for the year ended 31 March 2000 could not even be prepared until those were available. When those would be available was clearly problematic. Further, it was obvious from that letter that no restructuring would be viable without an immediate injection of capital of at least $2 million. There was no evidence of there being any potential investor willing to consider a capital injection.

7. The Group's letter to its creditors which was sent following the hearing on 15 May was couched in terms of support for the dismissal of the petitions. No doubt being a layman, Mr Wong was unable to appreciate that the dismissal of the petitions was plainly not an option unless the debts which are not disputed were settled and that a creditor is prima facie entitled as of right to a winding-up order. The support for the dismissal of the petitions was thus meaningless. Even if it were to be considered as support for a further adjournment, $31.6 million whilst representing some 68% of the overall indebtedness, it was short of 75%, assuming the list exhibited correctly listed the creditors and the amount owing. In that connection, it was not entirely clear whether any of the debts were secured. From the evidence filed, it would appear that 10 properties of the Group have been sold in the past year by the mortgagees. The state of the evidence was somewhat unsatisfactory given that the Group had no legal representation.

8. The question was whether a further adjournment was warranted given that Lighting had already had nine weeks to come forward with something viable and Horwath had been retained since 10 January.

9. It was clear that a further adjournment until mid-June was unlikely to take matters any further : it is highly doubtful whether Horwath would be in a position to come forward with any proposal since the mid-June date was predicated on the financial statements for 1999 and 2000 being available by 30 April and 22 May. There were too many uncertainties : there was no assurance that the necessary financial statements would be available (and it is to be noted that there is nothing from the auditors as to when those would be forthcoming); there was no evidence of there being any potential investor willing to inject $2 million into the Group in the immediate future; and it would appear that no proposal could be put forward in the absence of such an investor. In those circumstances, the case for a further adjournment of four weeks had not been made out and the application for an adjournment was accordingly refused. I would add that had the petitioners been willing to grant the Group breathing space as was the stance of creditors holding $31.6 million of indebtedness, I would not have had any difficulty in granting the adjournment. But the petitioners were implacable in their opposition.

10. Given the refusal of a further adjournment, there was little alternative but to make winding-up orders and I did so with reluctance for reasons which I will elaborate. It is perhaps timely to draw attention to what would appear to be a wholly unsatisfactory state of affairs concerning winding-up petitions presented by former employees based on unsatisfied Labour Tribunal awards.

11. In the present case, creditors holding some 68% of the overall indebtedness were willing to hold their hand and give the Group some breathing space. That is clearly significant : it is some indication that the business was considered to be fundamentally sound. I say this because the decisions of financial and trade creditors are largely dictated by commercial considerations. There is no advantage in winding-up a company if the dividend is likely to be nil or nominal. If the business is basically sound, given improved economic conditions, it would more likely than not turn round and produce a higher return for creditors than on a liquidation. The Group, like so many other companies, has had the misfortune of being caught up in the recent economic turmoil. What it needed was time and this was dependant on the indulgence of its creditors.

12. The approach of ex-employee creditors (usually legally-aided) in such cases is quite different : invariably, a winding-up order seems to be the be-all and end-all of the proceedings even when the expected dividend in a liquidation is nil. As noted in In re UDL Holdings Limited HCMP 436 of 1999 (at pp.26-27), this mindset has been brought about by the apparent 'policy' of the Protection of Wages on Insolvency Fund Board ("the Board") with regard to the exercise of its discretion in relation to ex-gratia payments. Effectively, it forces ex-employee creditors to obtain winding-up orders indiscriminately, regardless of the fundamentals of the business and the possibility of a turnround. There is a world of difference between a company that has fallen on hard times because of factors beyond the control of its management and those that are not salvageable because the fundamentals for a profitable business are simply not there. This difference is lost with ex-employee creditors since the only objective is to obtain a winding-up order, armed with which they could expect to receive ex-gratia payments from the Board.

13. I would respectfully suggest that the correctness of the 'policy' of refusing to make ex-gratia payments to former employees in the absence of a winding-up order needs to be revisited. The Board's discretion is triggered, not by a winding-up order but by the presentation of a winding-up petition : see section 16(1)(b) of the Protection of Wages on Insolvency Ordinance. To refuse to exercise the discretion without a winding-up order appears to be not only improper but also contrary to legislative intent. The Board should take note that its 'policy' has far-reaching ramifications : it may not ultimately be in the interest of the ex-employee creditors and in the longer term may prove to be damaging to the public interest and the prosperity of Hong Kong.