RE PING AN SECURITIES GROUP (HOLDINGS) LTD

HCCW 217/2020 & HCMP 1810/2020
(HEARD TOGETHER)

[2021] HKCFI 651

HCCW 217/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 217 OF 2020

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANOUS PROCEEDINGS NO 1810 OF 2020

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(HEARD TOGETHER)

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D E C I S I O N

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Introduction

1.  The Petitioner, Yang Xueli, has issued a petition to wind up Ping An Securities Group (Holdings) Limited (“Company”) on the grounds of insolvency.  The Company is incorporated in Bermuda.  Its shares are listed on the Main Board of the Stock Exchange of Hong Kong Limited (“HKEX”).  I also have before me an application issued by the Joint Provisional Liquidators (“JPLs”) appointed as soft-touch provisional liquidators in Bermuda on 2 October 2020 on an ex parte application made on 23 September 2020, which as will be seen from the next paragraph was after the Petition was presented in Hong Kong, for recognition and assistance (“Recognition Application”).  Trading in the Company’s shares was suspended on 5 October 2020.

2.  The debt relied on to prove insolvency arises as follows.  On 30 May 2014 the Company issued to Ms Yang a Bond for the principal sum of HK$10,000,000.  The Bond was interest bearing at the rate of 6% per annum.  The interest was payable in tranches.  The 6^th tranche in the sum of HK$600,000 was due on 30 May 2020.  It was not paid.  This was an event of default allowing Ms Yang to accelerate the obligation to pay the principal and interest.  This she did by a redemption notice served by her solicitors dated 17 June 2020. There is no dispute that this was lawful and effective and that Ms Yang is entitled to be paid by the Company HK$10,639,452.05 plus daily interest, which continues to accrue in the amount of HK$1,643.84 (“Debt”).

3.  On 23 June 2020 Ms Yang’s solicitors served a statutory demand.  This was unsatisfied.  On 15 July 2020 a Petition was issued, which was subsequently amended on 30 October 2020.  The amendments were necessary as the Petition failed to set-out the matters on which Ms Yang relied to demonstrate that her Petition satisfied what are commonly called the “3 core requirements”, which the Court requires to be met before the Court will exercise its discretion to wind up a company incorporated in a foreign jurisdiction.  Leave was granted by Linda Chan J to make the amendments to address this shortcoming.  Unfortunately, it appears in my view to have been overlooked that the amendments did not adequately address the 3^rd core requirement, namely, that there is a person subject to the jurisdiction of this Court who would benefit from a winding up order being made in Hong Kong other than the Petitioner.  The relevant paragraph of the Amended Petition is [32], which reads:

“In any event, the Company’s shares trade in the Hong Kong Stock Exchange. Any shareholders (or other creditors) in Hong Kong would have an interest in the distribution of the assets of the Company if the Company is wound up.”

4.  As the Company is alleged to be insolvent (which is not in dispute) the shareholders do not have an economic interest in a winding up and, therefore, cannot satisfy the 3^rd core requirement.  The Amended Petition does not identify any creditor who satisfied it and is, therefore, demurrable.  Ms Yang’s evidence does not address this issue at all.  I note that there are no other creditors either supporting or opposing the Petition.  Fortunately, the Company and the JPLs have accepted that the 3 core requirements are satisfied as it is clear from the JPLs’ own evidence that there are creditors other than Ms Yang resident in Hong Kong.

5.  The Recognition Application is supported by affirmations made by one of the JPLs, Lai Wing Lun.  In his 1^st affirmation made on 17 October 2020 Mr Lai after explaining what he understands to be the Company’s financial position, explains in [36]–[38] that to assist the Company’s restructuring the JPLs have worked closely with the Company since their appointment and are currently formulating a restructuring plan.  Mr Lai describes what the elements of that might be, although it is clear that as at 17 October 2020 no such plan existed.

6.  Mr Lai filed a 2^nd affirmation made on 8 December 2020.  Mr Lai details various High Court actions that have been commenced against the Company since May 2020 and statutory demands that have been issued against it in respect of various bonds that have been issued by the Company and not honoured.  Mr Lai explains that creditors of which the JPLs are aware have been told of the Recognition Application and none have objected.  In relation to the Company’s restructuring efforts Mr Lai says that the JPLs have not identified any third party investors, who are interested in investing in the Company.  The Company had, however, signed a memorandum of understanding, which is not exhibited to the affirmation with Cheung Kam Fai, who is the chief executive director of the Company, was a shareholder and is a creditor for HK$25,000,000, which provides that he will subscribe for new shares in the Company the proceeds of which will be used to pay the restructuring costs and settle the Company’s outstanding debt.

7.  Mr Lai’s 3^rd and final affirmation was made on 17 February 2021.  Mr Lai explains that the Company is now in the 1^st stage of delisting.  The subscription agreement with Mr Cheung is being negotiated.  It is contemplated that either debt is settled in exchange for equity or discounted.  No details are provided of either option.  The evidence is vague and amounts to little more than a description of the kind of structures that might be proposed by any investor thinking of acquiring an insolvent company.  What is clear is that other than Mr Cheung there is nobody interested in investing in the Company.

8.  Mr Lai explains that a meeting of eight creditors took place on 29 January 2021 at which they were told, it would appear they were not provided with any documents explaining the possible restructuring that I have described in the previous paragraph to which none apparently objected and three (including Mr Cheung) agreed.  I am told that the JPLs were reluctant to provide documents detailing the plan, which in its current form I describe later, because of concerns that it constitutes price sensitive information.

9.  I assume that the creditors accepted that a possible restructuring is preferable to a liquidation.  The rather vague state of the information is demonstrated by [32] of Mr Lai’s 3^rd affirmation, which ends the section on the proposed restructuring: “The PLs are now discussing with the Company and Mr. Cheung to formulate a more detailed restructuring plan.  The PLs will further liaise with the Creditors in respect of their opinions on the restructuring of the Company and to seek their support with regard to the same.”

10.  Until I requested it shortly before the hearing I had not been provided with the evidence from the Company filed with the Bermuda Court in support of the application to appoint JPLs. Having had the opportunity to read it I note that in [10] of Walkers skeleton argument dated 25 September 2020 it is submitted that the appointment of Provisional Liquidators “…. would lead to a moratorium on adverse creditor action…”.  This maybe the case in Bermuda, but it is not necessarily the case in Hong Kong, but I think it reasonable to infer that this was a principle purpose of seeking to commence a soft-touch provisional liquidation.  There is, of course, no provision for a moratorium in Hong Kong and one can only be obtained indirectly (and partially as it would not automatically prevent other enforcement procedures) by persuading the Court to adjourn a petition to allow a restructuring to proceed.

Principles governing recognition and assistance

11.  The Court will recognise and assist foreign soft-touch provisional liquidators appointed for the purposes of restructuring as this is permissible for the reasons explained in Re China Solar Energy Holdings Limited (No 2)[1] and The Joint and Provisional Liquidators of Moody Technology Holdings Limited [2].  As I explain in The Joint Administrators of African Minerals Ltd v Madison Pacific Trust Ltd [3] Hong Kong does not have a statutory mechanism, which provides for a moratorium on the enforcement of a secured debt.  The same is true of an unsecured debt.  The only means in Hong Kong of achieving a similar result is by issuing a winding up petition and relying on the restrictions on transfers of assets imposed by section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 and persuading the court to grant adjournments of the petition in order to give a company time to settle its debts or restructure them.  I discuss the subject of granting soft-touch provisional liquidators a stay of a winding up petition in Re FDG Electric Vehicles Limited [4].  There has as yet been no application by a soft-touch provisional liquidator for an order staying winding up proceedings in Hong Kong in respect of a company over which they have been appointed.  In the present case the JPLs do not seek a stay.  They seek an adjournment of two months to progress the restructuring.

12.  Although the current position in Hong Kong as explained in Hsin Chong[5] and Moody Technology[6] is that a soft-touch provisional liquidation will be recognised and assisted in Hong Kong, Mr Felix Ng sough to persuade me that these decisions are wrong.  He argued that these decisions are inconsistent with the Privy Council’s decision in Singularis Holdings Ltd v PricewaterhouseCoopers[7], which he submitted demonstrated that it was an impermissible use of the court’s common law power of recognition and assistance, because to do so was to confer on the foreign soft-touch provisional liquidators powers that the court could not as a consequence of the Court of Appeal’s decision in Legend International Resorts Limited [8] grant to local insolvency practitioners, which Singularis expressly rejects.  This submission fails to understand what the court is doing when it recognises the appointment of foreign liquidators appointed in the place of incorporation of the company.

13.  As I explain in Lamtex Holdings Limited [9] recognition of a liquidator appointed in the place of incorporation is a consequence of the principles of private international law referred to in [7] of Lamtex.  Essentially what the court is doing when making an order for recognition is confirming for the benefit of parties in Hong Kong with whom the foreign liquidator may have to deal that the foreign liquidator is the duly authorised agent of a company properly appointed under the laws of the company’s place of incorporation, which laws determine matters concerning the constitution and internal management of a company.  Mr Ng accepted in argument that there was nothing objectionable in the court making an order for recognition.  The powers of assistance, which the court normally grants foreign soft-touch provisional liquidators is simply a consequence of recognition.  If as a matter of a company’s place of incorporation a liquidator is entitled to represent the Company and negotiate agreements with third parties all the Hong Kong court is doing when it makes an order of assistance stating that the foreign liquidator has such powers is to confirm the rights that the foreign liquidator has as a matter of the relevant private international law principles.  The foreign liquidator is not, for example, being granted a power to take a step in an insolvency process such as calling for production of documents from third parties that is a power peculiar to liquidators and commonly arising under insolvency legislation.  The limitations on the common law powers of recognition and assistance discussed in Singularis are not relevant unless the powers the court is asked to grant go beyond recognition and assistance by way of confirming the consequence of the provisional liquidators’ status in the place of the Company’s incorporation, in particular their right to represent the Company in the various stages of a restructuring process.

14.  The Petitioner further argues that the soft-touch provisional liquidation should not be recognised because it is not a collective insolvency process which is necessary before the court’s powers of recognition and assistance can be deployed [10].  Mr Ng gave the following reasons:

(1)  The JPLs do not have the extensive powers, in particular powers of investigation normally given to provisional liquidators and cannot pursue claims.  This means, as I understood the argument, that full value cannot be obtained for creditors and consequently a soft-touch provisional liquidation cannot achieve a pari passu distribution of the Company’s assets.

(2)  A scheme introduced in Hong Kong would not compromise debts governed by the laws of other jurisdictions.  I note that there is no evidence of there being any debts that are not governed by the law of the jurisdictions in which schemes would be introduced or which would be likely to recognise them, held by creditors who object to the soft-touch provisional liquidation.

(3)  A collective insolvency process involves the realisation of a company’s assets and distribution of the proceeds to creditors on a pari passu basis.

15.  The first point would seem to be much the same as the third one, namely, a collective insolvency process is a liquidation of a company’s assets and a distribution to its creditors and the fact that the soft-touch provisional liquidators do not have the powers to commence that process (being provisional appointments they could not complete it) demonstrates that soft-touch provisional liquidation is not a collective insolvency process.  Mr Ng has not identified any authority or text, which supported this characterisation of what constitutes a “collective insolvency process”.  I am confident that the suggestion that it can only be a winding up would generally be considered controversial.  I do not need to determine what are the necessary characteristics of a collective insolvency process and whether or not they are present in the case before me.  What would, however, seem to me clear is that a central feature will be a process intended to regulate the rights of creditors or a class of creditors of a company, which is insolvent or seriously financially distressed.  It is not limited to a conventional liquidation.  With respect to Mr Ng his arguments do not adequately address the issue and in the circumstances I consider it would be unhelpful to attempt to fully explore what as I observe in FDG [11] is undoubtedly a potentially important and complicated issue.  I am satisfied that for the reasons explained in Moody Technology[12] and [13] above that there is nothing objectionable in principle to the court recognising and assisting a foreign soft-touch provisional liquidator.

16.  As I have already mentioned in [11] of FDG [13] I suggest that granting a stay of winding up proceedings in Hong Kong on the application of foreign soft-touch provisional liquidators may only be justified if in accordance with Hong Kong principles the provisional liquidation is to be viewed as a collective insolvency process.  As I have already explained I am not dealing with an application for a stay.  I am dealing with an application for recognition by the JPLs and an application for an adjournment by the Company. 

17.  The second issue seems to me to be irrelevant to whether or not soft-touch provisional liquidation is a collective insolvency process.  It concerns the utility of a scheme or arrangement and it is clear from Legend [14] that there is nothing objectionable in a company in provisional liquidation or liquidation introducing a scheme of arrangement.  The significance of Legend[15] is the narrow reasoning that provisional liquidators can only appointed for conventional asset protection reasons, although if the circumstances justify it, they can also be given powers to restructure.

18.  The Petitioner also argues that to adjourn the Petition to allow the Company the opportunity to progress a restructuring is inconsistent with the Rule in Gibbs [16], which provides that a debt can only compromised in accordance with the law that governs it.  The submission is that the Company’s attempts to have the JPLs appointment in Bermuda recognised and the Petition adjourned is inconsistent with that rule. It is not.  What the Company and the JPLs are proposing is a process that would lead to all unsecured debts being compromised by a Hong Kong scheme of arrangement.  That is no different from what is commonly proposed by companies seeking time to restructure.  As Ms Yang’s debt is governed by Hong Kong law a Hong Kong scheme would be effective to compromise it.

19.  Mr Ng also argued that the soft-touch provisional liquidation is an improper attempt to stifle enforcement of the Debt.  This is to misunderstand both the character of a winding up petition and a scheme of arrangement.  Ms Yang is seeking to invoke a class remedy.  The issue is: what order should the court make in order to best achieve a result, which is likely to be beneficial to the class?  If the court is satisfied that the best course at present is to adjourn the petition to allow a scheme to be introduced, which would compromise all unsecured debt it is entirely consistent with the character and purpose of the insolvency process to do so.

20.  Mr Ng’s final submission was that if the Court takes the view that the proceedings in Bermuda should be recognised, as I do, they should be treated as an ancillary process rather than the main one.  This is an issue that I have considered in a decision to which I have already referred, which had not been handed down at the time the present matter came on before me, namely, Re Lamtex Holdings Limited [17].  I conclude that faced with a Hong Kong petition to wind up a foreign incorporated company (also incorporated in Bermuda) whose COMI is located in Hong Kong and an attempt by the company, which is in soft-touch provisional liquidation in its place of incorporation, to adjourn the petition in order to have time to formulate a restructuring and introduce a scheme of arrangement, primacy is not automatically to be given to soft-touch provisional liquidation in the place of incorporation.  If a petition has already been issued in Hong Kong and the Petitioner and such other creditors as support it, do not agree to an adjournment the Company is still required to satisfy the criteria by reference to which the Hong Kong court assesses applications on similar grounds by companies incorporated in Hong Kong.  If the Company cannot do so it will be wound up and an application for recognition of the soft-touch provisional liquidation will not be granted.

The application to adjourn the Petition

21.  This brings me to what I consider to be the determinative issue in this case, namely, has the Company satisfied the relevant criteria, which are explained in [50]–[51] of Re China Huiyuan Juice Group Limited [18]for having the Petition adjourned for approximately two months rather than the Company immediately wound up.  I can take this question shortly.  The restructuring is straightforward and will involve the subscription by Mr Cheung for new shares and, if the subscription agreement is approved by the HKEX and executed, he will also become obliged to make a loan to provide working capital for the Company.  At the moment the Company is in the three-month black-out period following the end of its financial year on 31 December 2020 and the subscription agreement cannot be executed until the black-out period ends on 31 March 2021, because Mr Cheung is a shareholder of the Company.  The HKEX is unlikely to approve the subscription agreement until the end of the black-out period.  I note that the audit of the Company’s financial statement is also expected to be complete by the end of March.

22.  The JPLs expect it to be possible to sign the subscription agreement in April.  Once this is done they can take steps to introduce a scheme of arrangement at the end of April or beginning of May.  This explains why the Company and the JPLs are content with a short adjournment of two months by which time they hope to be able to have commenced the formal restructuring process.

23.  It seems to me that in these circumstances the Petition should be adjourned until 10 May 2021.  I will make an order for recognition and assistance, but not in the terms sought in the summons.  The following amendments need to be made:

(1)   Paragraph 2(j): remove reference to investigations and taking a forensic image of documents;

(2)   Paragraph 4 needs to be replaced with the wording set out in [7] of the decision in FDG; and

(3)   Paragraph 5 of the order amended to add reference to the Petitioner and creditors.

24.  In respect of the costs of the Petition these I will reserve.

25.  Finally, Mr Ng asked me to grant leave to appeal any decision to adjourn the Petition to avoid a further application.  I decline to do so.  If the Petitioner wishes to appeal she will need to apply for leave.