RE LUEN CHEONG TAI INTERNATIONAL HOLDINGS LTD

CACV 378/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 378 OF 2002

(ON APPEAL FROM HCCW NO. 584 OF 2002)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1. By notice of appeal dated 4 October 2002 the Company appealed from the order of Madam Justice Kwan dated 5 September 2002 whereby provisional liquidators had been appointed. The application before this court was that the notice of appeal should be struck out. At the conclusion of the hearing of the application this court granted the order on the basis that the grounds of appeal were frivolous and plainly unarguable and not competent. When doing so we said that reasons would be given in writing later which we now do.

Background

2. The background history of the matter has been set out in the reasons for decision of the judge below dated 13 September 2002. No issue has been taken in respect of that, hence it is sufficient only to highlight some of the points.

3. The petition to wind up the Company was presented on 3 June 2002 by Showa Leasing Company Limited. On the first hearing, on 21 August 2002, when the petition came before the Master it was adjourned to be heard by the judge 5 days later, in the normal way. On the same day that the petition had been before the Master, the Bank of China (Hong Kong) Limited, ("BOC"), applied ex parte on notice before Madam Justice Kwan for the appointment of provisional liquidators. The Company appeared on that application and requested an adjournment, which was granted, for them to file evidence in opposition. The application for the appointment of provisional liquidators was then heard on 5 September. In the meantime the winding up petition had come before the same judge on 26 August and had been adjourned for two weeks on the Company's application because a restructuring proposal had been put forward which it was hoped to put to the creditors. It is noteworthy, however, that counsel who appeared for the Company on the winding up petition, who was the same counsel who appeared on the application for the appointment of provisional liquidators, informed the court that, if the Company's proposals did not have the support of the creditors, the Company would not be able to resist the petition.

4. In the Reasons for Decision the judge first considered the question of the known assets of the Company. It appeared that there were substantial assets, but that they had been depleted. It was also apparent that the claims made against the Company were very substantial in relation to the total assets. Faced with the assertion by counsel on behalf of the Company as to the inability to resist the petition on the grounds of insolvency, it was a foregone conclusion that a winding up order would inevitably be made unless there were some accommodation with the creditors.

5. The judge then went on to consider the dealings in the Company's assets which had been revealed in the evidence. This included the leasing of machinery and equipment of a value exceeding HK$50 million. That had been leased to another company, Jilin Jitai Industrial Company Limited ("Jilin"), in which two directors of the Company had a 45.9% interest. The evidence before the judge was that Jilin was in very substantial arrears in the payment of the rental monies. The judge also considered other aspects including the assignment of accounts receivable on the basis of which some other unidentified debtor and Jilin were released from their obligations to settle the amounts which they owed the Company. Furthermore, it appeared that the Company had made very substantial investments at a time when its cash position would not have warranted it. For example, in April 2001, the Company, or at least other companies which it owned and controlled, had acquired three internet companies at a cost of HK$64,070,000 although the companies which were acquired had a net asset value of only HK$3.35 million. Again, payment had been made in part by assignment of trade receivables to the extent of HK$59.7 million.

6. The judge posed the question as to "whether it is justifiable for BOC and the supporting financial creditors to infer suspicious circumstances and questionable conduct of the management." The judge rejected the submission on behalf of the Company that the matters which had been examined by her showed merely bad business decisions by the management. In doing so she took into account both the magnitude of the transactions and their cumulative effect.

7. In those circumstances, it would be surprising if an application for the appointment of provisional liquidators were not successful. The Company was clearly and admittedly insolvent and therefore liable to be wound up. The judge had found that there were suspicious circumstances and questionable conduct of a sufficiently grave nature to warrant the appointment of provisional liquidators. Before this court Mr Chu, who appeared on behalf of the Company on the instructions of two of its directors, did not seek to suggest the court below was in error in approaching the application on that basis.

8. The notice of appeal contained three paragraphs in the grounds of appeal. The first stated that the judge had been wrong in law in concluding that it would be appropriate to appoint provisional liquidators to protect the assets of the Company. The second alleged that the judge had been wrong in law in concluding that the provisional liquidators could be appointed for the purpose of facilitating a restructuring proposal. The third averred that the judge should not have appointed the particular provisional liquidators because of a possible conflict of interest. Despite an almost immediate request by the respondents for particularisation of those grounds, that has never been provided.

9. Before this court Mr Chu, who appeared on behalf of the Company, sought to argue that no provisional liquidators should have been appointed on the application of BOC because they were not the petitioners. That point is clearly unsound. The petitioner in this case still remains the petitioner, it has requested the court's leave to delay bringing on the full hearing of the petition seeking a winding up order pending the result of a search for an acceptable rescue package. The court acceded to that request. There is no indication that the petitioner would not pursue the petition should a rescue package not be forthcoming. In any event, Mr Harris, on behalf of BOC, has indicated that it is his client's view that should a rescue package not be put in place in respect of the Company then the Company should be wound up. Hence, the necessity, still less the time for replacement of the petitioner by BOC has not yet arrived. Furthermore, there is no basis for saying that the circumstances for the appointment of provisional liquidators do not exist.

10. The second ground of appeal is likewise fallacious. As already indicated, the grounds for the appointment of provisional liquidators are clearly sound. The provisional liquidators have been given authority to facilitate a restructuring proposal.

11. Those are powers which it is well within the jurisdiction of the court to grant to provisional liquidators provided the particular circumstances of the case warrant it. Indeed, if they had not been granted and should a proposal have materialized for the restructuring of the Company in order to save it, application could have been made to the Court and the appropriate orders made.

12. The judge below referred to decisions in which similar orders had been made in circumstances where administration orders were not available. In particular, the judge referred to the decision in Re Keview Technology (BVI) Limited [2002] 2 HKLRD 290 where the application had the support of 100% of the company's outside creditors. In that case Yuen J (as she then was) held (at paragraph 19) that there was no jurisprudential objection to extending the powers of provisional liquidators in order to enable a corporate rescue to take place provided that a winding up order would be sought should the rescue attempt fail. Once it has been established that the grounds for the appointment of provisional liquidators exist on the basis that it is likely that a winding up order would be made and that circumstances exist which justify the making of the appointment on the basis of the protection of assets, the fact that the applicant for the appointment wishes that the provisional liquidators be granted powers to facilitate a restructuring of the company can be no bar to the appointment and is not intrinsically objectionable. Whether such powers should be granted and the scope of those powers including any restrictions would depend on the particular circumstances such as the support of the creditors. In the present case, the objection was directed at the grant of the additional powers rather than their scope. But the grounds for impugning the exercise of the court's discretion nowhere appear. The notice was therefore deficient and failed to comply with Order 59 r 3(2). See Leung Kin-hung v Cheng Mui [1982] HKLR 383. In those circumstances the second ground in the notice of appeal is also clearly unarguable.

13. There remained the final ground which related to the possibility of conflict of interest. At the hearing in the court below this ground was put on the basis that the firm of which the provisional liquidators were partners had acted for the Company in formulating a draft restructuring proposal in September 2001 and had carried out a limited scope financial review, which had been issued in October 2001. That ground was rightly dismissed by the judge. It had not been alleged or shown that the information which had been available to the firm was such that it would make it improper for the provisional liquidators to act. This argument was not pursued before us.

14. Before this court Mr Chu sought to argue that the provisional liquidators had a conflict of interest because they were also provisional liquidators of a subsidiary of the Company, which subsidiary owed the Company a substantial debt. Again, Mr Chu was unable to show that this would either be wrong in principle or that some conflict of interest would arise because of this. Indeed, to the contrary, as was pointed out in argument, unless other circumstances exist, for example, where there is some dispute concerning the existence and/or amount of an intercompany loan, it would normally be desirable to have the same provisional liquidators acting where there is a group structure. Quite apart from that, this court was informed that the appointment as provisional liquidators of the subsidiary took place after the appointment in respect of the Company.

15. In those circumstances it appeared to this court that there was no arguable ground for this appeal and it was clear and obvious that the appeal should be dismissed on this application.

Hon Le Pichon JA:

16. I agree.

Hon Ma JA:

17. I agree.