RE TAI KAM CONSTRUCTION ENGINEERING CO LTD

HCCW 845/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 845 OF 2004

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D E C I S I O N

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1. This is an application by Tai Kam Construction Engineering Company Limited ("the Company") for the appointment of provisional liquidators in respect of itself.

2. The Company is a construction company which is involved in a number of Government construction contracts. It is an approved contractor under two of the lists of approved contractors maintained by the Works Bureau of the HKSAR Government, namely the List of Approved Contractors of Public Works under the Roads and Drainage category and the List of Approved Suppliers of Materials and Specialist Contractors for Public Works under the Landship Preventive/Remedial Works to Slopes/Retaining Walls category.

3. The Company has in recent months run into substantial financial difficulties. A Petition was presented against it on 4 August 2004 by one of its creditors, Tak Kee Petroleum Company Limited ("the Petitioner"), based on a debt of some HK$463,304.32 in respect of which a statutory demand has been served but has gone unanswered. It appears from the evidence filed by Mr Lee Hoi Nam ("Mr Lee"), a director of the Company, that the Company has substantial other debts totalling more than a further HK$7 million, but does not have the means to pay those debts. The Company admits that it is insolvent, so in the ordinary course of events one would expect that a winding-up order will be made when the petition eventually comes on to be heard on 8 September 2004.

4. However, the Company has made this application for the appointment of provisional liquidators in respect of itself because it believes that this is likely to lead ultimately to a better resolution of its affairs for the benefit of its creditors as a whole. This is said to be the position for a number of reasons.

5. The first is that, unless the Company has provisional liquidators appointed so as to be enabled to carry on its business, it will no longer be in a position to pay its sub-contractors in respect of the Government contracts that remain ongoing. The consequence is likely to be that those sub-contractors will stop work and that the Government will re-enter upon those contracts and terminate them vis-à-vis the Company. The result would be that future contract income from those contracts will be lost to the Company. The estimate of such losses is in the region of HK$1.2 million as there are two outstanding contracts still running which, it is anticipated, would produce income of that order to the Company over the next six to eight months. The basis on which that income is generated appears to be that the Company receives payment from the Government for works which are done pursuant to the contracts, but which are in fact done by a sub-contractor of the Company to whom the Company pays some 92% of the monies received from the Government, retaining 8% for itself. Clearly, if nothing is done to enable the Company to make payments to meet its obligations under these contracts the likelihood is that the income that would otherwise flow from these contracts will be lost to the Company, and therefore to its creditors.

6. The second matter that the Company relies upon as a reason for appointing provisional liquidators is that the appointment of provisional liquidators will, pursuant to section 186 of the Companies Ordinance (Cap. 32), bring about an automatic stay of all proceedings against the company, whereas if the Company did not have provisional liquidators appointed, but were left to seek validation orders to enable it to carry on its business, it would remain at risk of proceedings being brought against it by any of its creditors, of which there appear to be many, and it would be for the Company on each occasion to apply pursuant to section 181 of the Ordinance for a stay of such proceedings, or for a stay of execution on any order which might be made against the Company. It is therefore said that it is likely that the appointment of provisional liquidators will result in at least a marginal saving in costs in relation to such applications for validation orders as may be necessary.

7. The third reason why it is said that it is desirable to have provisional liquidators appointed in respect of the Company, is that it is intended that the provisional liquidators should explore the possibility of putting together a scheme of arrangement to enable the company to make a distribution to its creditors that will exceed the distribution that would be available on a winding-up. Apart from the contract income which will be generated from the ongoing contracts which the Company maintains with the Government, there is evidence to indicate that the Company's listing as an approved Government contractor is regarded as being of value by other businesses in the construction field. There is evidence of an offer of some HK$1 million for the shares in the Company by another construction company, Ease Geotechnical Engineering Company Limited, in order to enable it to acquire the benefit of the Company's listing as an approved contractor. This would, no doubt, be on the basis that the Company's existing debts are all dealt with in a manner that leaves no room for liability on the part of the investor. This would no doubt be the purpose of any scheme of arrangement that is proposed.

8. The Company has had advice from RSM Nelson Wheeler Corporate Advisory Services Limited ("Nelson Wheeler") as to the possibility of putting together a scheme of arrangement. For this purpose, Nelson Wheeler have produced a pro forma balance sheet for the Company with a liquidation analysis which indicates the likely distribution to creditors in the event of a compulsory liquidation and have compared this with the likely distribution to creditors under a scheme of arrangement. This shows that the unsecured creditors are likely to receive no distribution on a compulsory winding-up and that preferential creditors are likely to receive a very small dividend, of slightly in excess of 10% or 12% of the preferential portion of their claims, in that event. On the other hand, on the figures provided, the amount of the distribution likely in the event that a scheme of arrangement were successfully to be proposed would be such that the preferential creditors would, in essence, receive payment of the entire preferential amount of their claims in full and that, as to the balance of their claims, and for all other unsecured creditors, a dividend in the region of 20.5 cents would be paid. It should be said that those figures are based on estimated future contract income of HK$800,000, whereas the latest evidence on behalf of the Company suggests that the amount is likely to be rather higher, in the range of HK$1.2 million. If that is right, the likely distribution to unsecured creditors under a scheme of arrangement would, I am told, come to slightly in excess of 26 cents.

9. In these circumstances, it would appear, subject to one matter which I will mention in a moment, that a scheme of arrangement, if it is successfully proposed, is likely to produce a better return for the unsecured creditors and indeed for the preferential creditors than a compulsory winding-up would provide.

10. At the hearing before me, the Petitioner was represented by Mr Li, its solicitor. He informed me that the Petitioner's petition was that it, in principle, supported the idea of a scheme of arrangement and that it took a neutral stance in relation to this application.

11. The Official Receiver also appeared through Ms Karen Cheung. Ms Cheung very fairly told me that the Official Receiver's position was also essentially neutral, although there were a number of areas in which the Official Receiver felt that there might be some benefit in obtaining further information. These areas principally concerned what steps had been taken by the Company to bring the proposed scheme of arrangement to the creditors attention, and what details of the scheme of arrangement had been given to them. It was also said that there did not appear to be any precise details as to the debts of the creditors who had responded favourably to the proposed scheme, although it appears from Mr Lee's affirmation in support of this application that a total of five creditors responded favourably to the suggestion that there should be a scheme of arrangement and that they represent some 12% of the total debts of the company.

12. It is true that no specific breakdown of the amount of each of these debts has been provided although it is possible from the affidavit and the petition to identify perhaps one or two of such amounts, not least in relation to the Petitioner. However, I think that, at the end of the day, this is not a point that need cause particular concern, given that one knows the overall percentage of the debts in respect of which affirmative responses in favour of the scheme have been obtained.

13. As far as details of the scheme of arrangement are concerned, it seems to me that there is a reasonable amount of detail in the pro forma balance sheet and liquidation analysis prepared by Nelson Wheeler which makes it clear, quite fairly, that any distribution that is forecast is stated without taking into account the costs and expenses of the provisional liquidation and preparation of the scheme which will, in the absence of some other arrangement being made, fall to be deducted from the amount that will be available for distribution to unsecured creditors.

14. The one matter that concerned me was as to the question of the level of the costs and expenses that would be incurred in relation to the appointment of provisional liquidators. It seemed to me that if these were not either kept in check or closely monitored, there was a risk that a provisional liquidation, particularly one that was prolonged in any way, might result in substantial fees being incurred, which might mean that the distribution to creditors under the scheme of arrangement scenario would potentially be significantly reduced.

15. In response to inquiries that I made during the course of hearing, Miss Ismail helpfully informed me that the position was in fact that Nelson Wheeler had undertaken that their fees in respect of the entire exercise would be capped at the amount of HK$450,000.

16. On that basis, it seems to me that even if the fees reach that ceiling, the position will be that, if there is a scheme of arrangement put forward which proves acceptable to the necessary majorities of creditors, the likely distribution (in the light of the increase in the amount of the anticipated contract receivables) will be in the order of that indicated in the pro forma balance sheet and liquidation analysis, and will be only slightly below 20 cents in the dollar.

17. On the other hand, it is true that if the proposal for a scheme of arrangement does not come to fruition and the company goes into compulsory liquidation, the fees that have been expended by the provisional liquidator will eat into the company's assets which would otherwise have been available for distribution to (at least) the preferential creditors. However, on the basis of the material which I have seen, the amount of the assets likely to be available to the preferential creditors at this stage in the event of a compulsory liquidation are only some HK$76,000. The appointment of the provisional liquidators would at least have the effect of enabling the Company to carry on its business and to generate income from the two Government contracts that remain in place, so as to give rise to additional net income of somewhere in the region of HK$1 million to HK$1.2 million. Even allowing for the fees of Nelson Wheeler, if they were to reach in the interim the total of HK$450,000, there would still be net income generated of in excess of HK$500,000, which would substantially improve the position of the preferential creditors in the event of a compulsory winding-up.

18. In these circumstances it seems to me that, applying the well-established principles governing the appointment of provisional liquidators, it is clear that this case is one in which there is not just a prima facie likelihood of a winding-up order being made, but a certainty that one will be made if nothing is done to preserve the business and assets of the Company. The question therefore arises whether, in all the circumstances of the case and as a matter of the balance of convenience, it is appropriate to appoint provisional liquidators.

19. It seems to me that, in the light of the factors which I have mentioned, although the appointment of provisional liquidators will inevitably lead to some expense being incurred on behalf of the Company, it would appear that whatever the outcome at the end of the day, whether the Company is put into compulsory liquidation or a successful scheme of arrangement is proposed, the net position will be better for the preferential creditors in any event. The course proposed also provides a possibility, although by no means a certainty (given that only a limited number of creditors have so far responded to the proposed scheme of arrangement in the outline terms in which they have been informed of it), that there will be a considerably enhanced return for unsecured creditors in the event that a scheme of arrangement is successfully implemented.

20. In these circumstances, it seems to me that this is a case in which the court would be justified in appointing provisional liquidators with a view to exploring the possibility of a scheme of arrangement and restructuring of the Company's debts and a realization of the value of its listing at an approved Government contractor as part of that scheme, in accordance with the line of cases which have recently established what has been called the "rescue based" rationale for the appointment of provisional liquidators.

21. I might add that it also seems to me that in this case, given that the effect of being unable to pay its subcontractors is likely to result in the Company losing the benefit of the contracts which it still has with the Government, that there might well be said to be a "jeopardy based" rationale for the appointment of provisional liquidators, since the appointment of provisional liquidators will have the effect of enabling the company to carry on with its contracts and thereby generate income which would otherwise have been lost to it.

22. For all of those reasons, it seems to me that in the circumstances it would be right for me to appoint provisional liquidators in respect of the Company, and I therefore accede to this application.