RE KB (ASIA) LTD

HCMP 307/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 307 OF 2013

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D E C I S I O N

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1.  I have before me an originating summons issued on 8 February 2013 by a shareholder of the company. The shareholder seeks a direction that the company may convene a meeting of creditors of the company to consider a scheme of arrangement. This is necessary because on 18 December 2012, a petition was presented for the winding up of the company. The winding up petition has been adjourned pending the determination of the originating summons application.

2.  The originating summons first came on before me on 26 March 2013.  I was not happy on that occasion with the state of the scheme document and adjourned the originating summons in order that further consideration could be given to its terms.  In very general terms, my concern about the scheme is as follows.

3.  The company is a private company. It was involved in trading, principally, electronic products.  The company is family owned and the family business has a long history.  The company’s audited financial statements show that in the financial year ending 31 March 2009, it had a turnover of $252,940,994.  The turnover increased by approximately another $50 million in 2010.  Then the financial fortunes of the company changed dramatically.

4.  The financial statement for the year ending 31 March 2013, which has recently been audited, shows that by the end of 2012 the company had a turnover of $16,269,195.  In practice, the company had ceased taking new orders by February of 2012 and for the remainder of that financial year was involved in dealing with outstanding orders.  In 2012, the company made an operating loss of $98,489,497.

5.  The balance sheet for the year ending 31 March 2012 records that the company has very limited assets.  Plant and equipment are valued at $63,139 and trade and other receivables have diminished to $760,270.  This is a very significant reduction in the trade receivables shown in the financial statement for earlier years.  Change has come about largely, I understand, as a result of a significant proportion of receivables having been written off.

6.  The introductory pages to the scheme of arrangement explain to creditors that the scheme, which involves an injection of US$1 million from the shareholder, will result in an estimated recovery for unsecured creditors of 8 per cent.  The scheme suggests that in the event of a liquidation, there will be no recovery, taking into account the very limited assets that the company has and the costs of liquidation.

7.  The difficulty, it seems to me, that any creditor assessing this proposed scheme in any detail faces, and the court will face, if a meeting of creditors takes place and a statutory majority is obtained and a petition for the approval of the scheme presented to it, is in assessing whether or not it is appropriate to accept at first hand what is suggested in the scheme document or whether, given the massive insolvency of the company and the writing off of such a significant proportion of its receivables, it is more appropriate that the affairs of the company are investigated by a liquidator.

8.  The kind of matter that might encourage a creditor, and possibly the court, to conclude that the latter is the better course is illustrated by the information contained in note 2 on page 17 (internal numbering) of the explanatory statement.  There it is explained, if I understand the note correctly, that there may, in fact, be available to the company a claim for approximately HK$28 million against HSBC in respect of letters of credit.  There is no explanation in the scheme document as to why that particular claim could not be profitably pursued by a liquidator.

9.  A creditor or the court might also note that the company’s banking creditors were paid off in full by the shareholder in 2012 or 2013.  The amounts due to banks were HK$52,026,799 (see page 19 of the explanatory statement). 

10.  Questions therefore may arise, certainly in the minds of anybody of a cynical disposition, as to whether or not the reality might be that those behind the company know full well that if they are allowed to recommence its business, they will be able to, for example, obtain payment of some of the accounts receivables which at present have been written off.  The cynically minded might ask, for example, “Why else would the shareholders be prepared to inject fresh money into this now defunct, massively insolvent company?”

11.  The way I have dealt with the matter today is as follows.  There were a number of matters that remained to be dealt with before I could make a formal order in any event for convening a scheme meeting.  In particular, I was concerned that the scheme document has only been produced in English.  20 per cent of the unsecured creditors are based in the Mainland and, indeed, they represent 40 per cent of the independent debt of the company.  It seems to me that for the circulation of the scheme document and a meeting to serve any purpose at all, it is necessary that they are provided with a substantial amount of information about the proposed scheme in a language they are capable of reading and fully understanding. 

12.  What has been proposed is that a summary will be produced in both simplified and traditional Chinese for mainland and Hong Kong creditors.  I have directed that an English version of this be provided to me for my consideration.  If I am happy with that, I will consider a formal order which is to be submitted to me for my further consideration.

13.  I have at present, been provided with draft notices convening the meeting and proxies.  The notice is to be translated into Chinese for the purpose of appearing in a Chinese language newspaper.  It also seems to me that it is desirable that the form of proxy be translated into Chinese as should be, at this stage, the notice of claim for voting purposes in order that Chinese readers in Hong Kong and in the Mainland are capable of understanding and completing them properly in order that they are able to take part effectively in any scheme meeting that takes place.

14.  As I explained to Mr Kwok, who appeared for the shareholder today, I want it to be understood that if this matter proceeds to a scheme meeting, and in principle I am prepared to make an order that such a meeting is convened, I will review very carefully a petition, assuming that a statutory majority is obtained, before the court sanctions the scheme. Any such petition should be presented and prepared on the basis that even if a statutory majority is obtained, the court will review the scheme and the views of creditors carefully, with a view to deciding whether it is appropriate to sanction the scheme or whether it is desirable that the company be put into liquidation in order that an independent liquidator can thoroughly review its affairs.