RE ALCO HOLDINGS LTD (the “Company”)

HCCW 384/2023

[2024] HKCFI 73

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 384 OF 2023

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D E C I S I O N

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1.  By a summons of 22nd December 2023 (“the Summons”), Alco Holdings Limited (“the Company”) has applied for a validation order in respect of:

1.1 all transfers of issued and fully paid up shares of the Company since the date of the Petition;

1.2 the proposed allotment and issue of new shares up to a maximum of 15,911,373 by the Company for cash consideration; and

1.3 the payment or other disposition of property made on or after 28th August 2023 in the ordinary course of business of the Company, including payments made into or out of bank accounts of the Company in respect of expenses or payments occurring in the ordinary course of business.

2.  The Official Receiver takes a neutral stance to the application. The Petitioner had originally indicated that it would take a neutral stance, but this morning indicated that it opposes that part of the application relating to payments or dispositions made in the ordinary course of business.

The share transfer

3.  The correct approach to determining whether or not to grant an application for validation of a share transfer is to ask whether the creditors would be better or worse off in the event of a winding-up order being made, and the transfer not having been sanctioned. The object of s.182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32) is to prevent a shareholder from evading his liability to contribute by transferring his shares to an impecunious party. A transfer of fully paid up shares will therefore generally be unobjectionable. See Re Belgravia Properties Ltd [2015] 1 HKLRD 509 at [6] to [9].

4.  In the case of a company whose shares are traded on the Hong Kong Stock Exchange, if the validation order is not granted, the Hong Kong Stock Exchange Limited may suspend the trading of the Company’s shares and ultimately cancel the Company’s listing status, which is an important asset of a listed company. See Re China Ocean Industry Group Ltd [2019] HKCFI 2363 at [4] to [6].

5.  In the present case, the evidence is that all the issued shares of the Company traded on the Hong Kong Stock Exchange are fully paid up. In the event that a winding up order is made, the creditors of the Company would not be worse off if the validation order is granted.

The proposed private placement

6.  The Company intends to conduct a fund-raising exercise by issuing up to 15,911,373 new shares.

7.  Ms Christy Chak, counsel for the Company, has rightly drawn my attention to Re China Ocean Industry Group Ltd [2021] 1 HKLRD 1030, in which Harris J held at [5] to [12] that the court’s jurisdiction to grant a validation order under s.182 is engaged only where the subject matter concerns a “disposition of the property of the company”, “transfer of shares”, or “alteration in the status of the members of the company”. An issue of new shares does not engage s.182.

8.  Ms Chak submitted that the circumstances of the present case are distinguishable as one of the conditions for completing the placement is the obtaining of a validation order from the court. In this regard, a document said to be the relevant placing agreement was exhibited to the 1st Affirmation of Liang Yanan. It states at clause 4.1 that completion of the placing is conditional upon “a validation order having been granted by the High Court of Hong Kong or the Petition having been withdrawn by the Petitioner or dismissed by the High Court of Hong Kong”. However, the document appears to be undated, unsigned and to be a draft, clause 4.1 itself being an inserted “tracked change”, and the precise nature of the “validation order” to be obtained is not defined. Ms Chak has confirmed today that it is indeed only a draft agreement. More fundamentally, whatever the status of this document or the nature of the “validation order” envisaged, the fact that it stipulates the obtaining of such a validation order as a condition precedent to the completion of the placing does not affect the construction of s.182.

9.  Accordingly, it would not be appropriate to make a validation order in respect of the proposed issue of shares and fund-raising exercise. However, the absence of a validation order does not prevent the Company from proceeding with the same (cf. Re China Ocean Industry Group Ltd [2021] 1 HKLRD 1030 at [13]).

Payments or dispositions in the ordinary course of business

10.  In the case of a solvent company with an active and ongoing business, a validation order would normally readily be made: Emagist Entertainment Ltd [2012] 5 HKLRD 703 at [4] to [5].

11.  In the case of an insolvent company which is trading, it may be beneficial for the company and its creditors that the company should be permitted to carry on its business in the ordinary course pending the making of a winding-up order against it. The court must consider where the interests of the unsecured creditors lie. In general, the court will be more disposed to the making of a validation order in respect of an insolvent company where it is satisfied that the carrying on of the business is likely to generate net cash or net assets for the benefit of the creditors, and thus to reduce any deficiency that might otherwise exist on the winding up of the company: Re Century Group Ltd, unreported, HCCW 59/2004, 18th March 2004 at [6] to [9].

12.  Where there are doubts as to the solvency of the company, the court will not sanction the proposed transactions unless it is satisfied by affirmative evidence that they would be beneficial and advantageous for the company: Re First Dragon Fashion (Hong Kong) Ltd [2010] 4 HKLRD 592 at [14].

13.  In the present case, the Company is insolvent on a balance sheet basis, but solvent on a cash flow basis. Ms Chak relies on the Company’s Interim Report 2023, and the 2nd Affirmation of Liang Yanan, which showed that:

13.1 the Company has demonstrated a modest improvement in its gross margin (5% in the six months ending 30th September 2023 compared to a loss of 3% in the same period in the previous year);

13.2 the Company’s revenue from self-branded notebook computers had increased by 65% to $86m for the period under review; and

13.3 the Company’s liabilities had decreased significantly from $795m in the previous year to approximately $145m, which was attributable to the deconsolidation of a heavily indebted subsidiary;

13.4 the Company was entitled to net trade receivables of about $48m after presentation of the Petition, nearly six times higher than the previous year’s net trade receivables of $8m.

14.  The Petitioner pointed out that the same materials showed that:

14.1 the significant decrease in the Company’s liabilities was attributed to the discontinued operations of a subsidiary which had been deconsolidated during the period;

14.2 the improvement in the Company’s gross profits was a modest 4.8 times compared to the improvement in the “other income and gain” received by the Company of 121.33 times; and

14.3 the trade and other payables of the Company had increased from about $11.3m to $16.7m.

15.  In considering whether the continuation of trading will generate net income or assets for the Company’s creditors, the increase in “other income and gain”, and significant decrease in the Company’s liabilities, should be left aside, as these were attributable largely to the one-off gain on deconsolidation of a subsidiary, and do not have any bearing on the profitability of the Company’s trading, as Ms Chak agrees.

16.  It seems that whilst the sales revenue and gross margin of the Company have appreciably improved, the operating expenses of the Company have also increased. If one leaves aside the one-off increase in “other income and gain” which was attributable largely to the gain on deconsolidation of a subsidiary, the Company still made a loss from its continuing operations for the six months ending 30th September 2023.

17.  Ms Chak has pointed out that the net trade receivables of the Company have increased. She nevertheless acknowledges that the Company continues to trade at a loss, and there are no projections or other evidence to show when this situation may change.

18.  In the circumstances, I do not consider that on the material currently before the court, the Company has shown that carrying on trading will generate net income or assets for its creditors.

19.  I therefore make an order in terms of paragraph 1(a) of the Summons. I dismiss the remainder of the Summons.