RE STX PAN OCEAN (HONG KONG) CO., LIMITED (In Liquidation)

HCCW 324/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 324 OF 2013

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D E C I S I O N

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INTRODUCTION

1.  STX Pan Ocean (Hong Kong) Co, Limited (“the company”), a company incorporated in Hong Kong, has been in creditors’ voluntary liquidation since 26 August 2013.  By the petition herein presented on 14 November 2013 and amended on 3 July 2014, the substituted petitioner, Rostrum Trade SA (“Rostrum”), seeks an order that the company be compulsorily wound up by the court pursuant to s. 177(1)(d) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“the Ordinance”).

2.  By a summons dated 20 November 2013, Rostrum also seeks an order for the appointment of two nominated insolvency practitioners as provisional liquidators of the company pursuant to s. 193 of the Ordinance.

THE BACKGROUND

The company and the STX group

3.  The company was incorporated on 7 September 2005.  Its principal activities were providing bulk cargo carrying service and acting as ship owner and ship management agent.  Its directors were, at all material times up to 21 November 2012, Mr Seo Chong Il, Mr Lee Sung Chui and Mr Kim Jung Min.  On that date, Mr Kim resigned and was replaced by Mr Kang Kun Hee.  Mr Seo and Mr Lee both later resigned on 5 August 2013, leaving Mr Kang as the sole director of the company.

4.  The sole shareholder of the company was at all material times a company incorporated in the Republic of Korea in 1966 previously known as Pan Ocean Bulk Carriers, Limited and, later, STX Pan Ocean Co., Limited and now Pan Ocean Co., Limited (“PO Korea”).  The primary field of its business was providing dry bulk cargo marine transportation service.  The shares of PO Korea are listed for public trading in Korea and Singapore.  It ranked third among all marine transportation companies in Korea, and ranked first in terms of size of capital.

5.  PO Korea and the company formed part of a group of companies of which the ultimate holding company was STX Corporation.  I shall refer to this group as the STX group.  Prior to the rehabilitation proceedings referred to below, STX Corporation and its affiliates held 36.06% of the issued share capital of PO Korea.

6.  The company’s business was heavily dependent on PO Korea.  Hong Kong was a hub port of the Southeast Asian business of PO Korea.  Under an agency agreement dated 15 November 2006, the company was a general agent of PO Korea for providing container liner service business in Hong Kong.  The company acted as PO Korea’s cargo booking agent in Shenzhen and various provinces of the People’s Republic of China.  PO Korea had also acted as guarantor for the bank loans obtained by the company from KDB Asia Limited (“KDB Asia”) (the Hong Kong subsidiary of Korea Development Bank (“KDB”)) and Korea Exchange Bank, Hong Kong Branch (“KEB HK”).

7.  Since the latter half of 2008, commercial freight rates have dropped drastically.  The Baltic Dry Index – the relevant index for freight rates in the dry bulk cargo marine transportation industry – plummeted from its height of 9,143 in 2007 to 774 (2008), 3,005 (2009), 1,773 (2010), 1,738 (2011) and 699 (2012).  PO Korea, who had entered into various long-term charters of vessels under better market conditions, faced financial difficulties and significant daily losses from the long-term charters.  A number of companies in the STX group, including STX Pan Ocean (UK) Co Ltd (“STX UK”), also went into financial difficulties.  The STX group’s major creditor, and PO Korea’s largest creditor, was KDB.  KDB also held 14.99% of the issued shares of PO Korea as at 31 December 2012. 

8.  On 7 June 2013, PO Korea applied to the Seoul Central District Court (“the Seoul court”) for the commencement of rehabilitation proceedings, being a statutory form of insolvency proceedings in Korea the purpose of which is to maintain and rehabilitate a company under court supervision.  The Seoul court granted the application and appointed two receivers (also sometimes called “administrators” or “custodians”) over PO Korea on 17 June 2013.  One of the receivers later resigned in November 2013 and Mr You Sik Kim has since been the sole receiver.

9.  On 11 July 2013, PO Korea petitioned for its own winding-up by the Hong Kong court as an ancillary proceeding to the rehabilitation proceedings in Korea with a view to protecting its assets from enforcement of claims, levy of execution or seizure during the course of the rehabilitation proceedings.  By that petition, PO Korea also sought the appointment of Ms Lauren Lau and Mr Kennic Lui, both of the firm of KLC Kennic Lui & Co, as its own liquidators.

10.  The rehabilitation plan for PO Korea was approved by the Seoul court on 22 November 2013, following which PO Korea’s petition for its own winding-up in Hong Kong was dismissed by consent on 16 January 2014.

Rostrum

11.  Rostrum, the present petitioner, is a Panamanian company who chartered a vessel to the company by a time charterparty dated 11 September 2008 for a minimum period of 178 months at the rate of US$35,700 per day.  The company’s obligations under the charterparty were guaranteed by PO Korea.  In January 2012, with Rostrum’s agreement, the charterparty was novated so that PO Korea became the charterer instead and the company the guarantor.  The novated charterparty was governed by English law.  The vessel was delivered shortly after the novation.  The minimum period of the charterparty would run to January 2026.

12.  On 7 and 22 June 2013, PO Korea failed to pay two hire instalments that fell due in the sum of US$536,250 each.  On 5 July 2013, PO Korea failed to pay a further hire instalment of US$536,250.

13.  On 18 July 2013, Rostrum submitted a claim for US$163,257,904.27 under the novated charterparty in the rehabilitation proceedings in Korea, being the total amount Rostrum would have earned under the charterparty from that date to January 2026 if it had been performed, plus legal costs.  Rostrum subsequently made clear that it accepted PO Korea’s repudiation of the charterparty.

14.  On 8 August 2013, Rostrum was informed that the whole of its claim was rejected by the receivers in Korea.  It then commenced proceedings in Korea seeking recognition of its claims against PO Korea by the Seoul court.  These proceedings were eventually settled in February 2014 on terms which admitted Rostrum’s claim in the sum of US$86,815,414.32.  The settlement has since been approved by the receiver and by the Seoul court.

15.  Rostrum contends that the company, as guarantor, is liable for (i) a liquidated sum of US$364,978.09 being the balance of the unpaid hire up to the termination of the charterparty after giving credit for sums paid by PO Korea in July 2013, (ii) unliquidated damages estimated in the sum of US$90,362,861.59, (iii) interest at 4.25% p.a. compounded quarterly based on the practice of London arbitration tribunals, and (iv) unspecified costs of aborted London arbitration proceedings commenced against PO Korea.

Lauritzen

16.  The petition in these proceedings was originally presented by Lauritzen Bulkers A/S (“Lauritzen”), a Danish company, who is another ship owner who had entered into a time charter of a vessel with the company. The charterparty was dated November 2007, with delivery to take place between late 2009 and early 2010, and was to last, at the minimum, to September 2019. PO Korea guaranteed the company’s performance of this charterparty.

17.  As in the case with Rostrum, in January 2012, at the request of the company and PO Korea, the charterparty with Lauritzen was novated to PO Korea as charterer, with the company becoming the guarantor instead.

18.  Starting from 22 May 2013, PO Korea had failed to pay Lauritzen the hire instalments.  On 17 June 2013, Lauritzen served a statutory demand on the company for US$1,199,796.71, and terminated the charterparty for repudiation by PO Korea on 2 July 2013.  Like Rostrum, Lauritzen says it has a claim for damages for lost income on account of the future hire, estimated to be in the region of US$58 million.

19.  Lauritzen also entered into a settlement with PO Korea in the context of the rehabilitation proceedings.  By that settlement, which covers the charterparty mentioned above and another unrelated charterparty, US$95.7 million was admitted as the total claim Lauritzen had in the rehabilitation, of which US$59,589,240.98 was attributable to Lauritzen’s claim under the charterparty guaranteed by the company.

Voluntary liquidation

20.  In around August 2013, Mr Kang, the sole director of the company since 5 August 2013, considered that the company was insolvent and, as the company did not have any further access to working capital from PO Korea, formed the opinion that the company was not able to continue its business by reason of its liabilities.  He convened both an extraordinary general meeting and a first creditors’ meeting of the company to be held on 26 August 2013.

21.  A notice of meeting of creditors was issued on 16 August 2013, asking creditors to submit proofs by 23 August.  The accompanying proxy form referred to Mr Kennic Lui and Mr Frank Yuen of KLC Kennic Lui & Co as being proposed for appointment as liquidators of the company.

22.  On 26 August 2013, the extraordinary general meeting was held at which a special resolution was passed by PO Korea as sole member for the winding up of the company pursuant to s. 228(1)(c) of the Ordinance.

First creditors’ meeting

23.  On the same day, the creditors’ meeting of the company was held pursuant to s. 241 of the Ordinance.  It was chaired by Mr Kang, the sole director of the company, who was accompanied by a solicitor from Messrs. Simmons & Simmons, and attended by the following creditors: the representatives of Rostrum, Lauritzen and Kirmar respectively, one Mr Kim as proxy of PO Korea and STX Pan Ocean (America), Inc. (“STX America”), a proxy of KDB Asia and a proxy of KEB HK.  Mr Frank Yuen, one of the two proposed liquidators, was also present.

24.  The creditors were informed that the company had passed a special resolution earlier for winding up in accordance with s. 228 of the Ordinance and that the company had resolved to appoint Mr Kennic Lui and Mr Frank Yuen as its liquidators.  Lauritzen proposed instead that Mr Gregory Keith of Grant Thornton Recovery & Reorganisation Ltd be appointed.  Mr Keith was present at the meeting as an observer.

25.  The meeting appears to have been at times occupied by heated exchanges between Lauritzen’s and Rostrum’s representatives on the one hand and the chairman and his solicitor on the other.  Two issues were particularly controversial.  First, Rostrum and Lauritzen had submitted proofs of debt in the amount of US$163,118,954.28 and US$59,589,128.38 respectively. The chairman, however, admitted only US$342,790.43 and US$1,199,796.71 respectively for voting purposes at the meeting.  This caused much consternation on the part of Rostrum and Lauritzen who considered it part of a concerted attempt by the related creditors to outvote them and to put in place liquidators of the company’s choice.

26.  There is, however, no longer any dispute that the chairman’s decision had specific legal basis.  Rule 125 of the Companies (Winding-up) Rules (Cap 32H) provides:

“A creditor shall not vote in respect of any unliquidated or contingent debt, or any debt the value of which is not ascertained, …”

It is now accepted by Rostrum that the bulk of its claim and that of Lauritzen was for unliquidated damages and as such could be excluded for voting purposes at that meeting.  (There is some basis for suggesting that, despite rule 125, where a creditor with an unliquidated claim is able safely to swear to a certain minimum amount in which the company is indebted to him, he may nevertheless be admitted for voting in respect of that amount: In re Dummelow, ex parte Ruffle (1873) LR 8 Ch App 997; In re Canadian Pacific Colonization Corp Ltd [1891] WN 122; Re Rickett; Ex parte Insecticide Activated Products Ltd v Official Receiver [1949] 1 All ER 737, 741-742.  But neither Lauritzen nor Rostrum adopted this approach.)

27.  Rostrum submits, however, that rule 125 was not in fact the reason for the chairman’s decision but was a ground subsequently discovered and relied upon in hindsight.  In my view, given that Mr Kang has stated on affirmation that he did rely on rule 125, this is not a matter that I can resolve in favour of the petitioner in the absence of cross-examination.  I must proceed on the basis that the chairman, or at least the company’s legal advisers, did have in mind rule 125 in deciding to admit only a small part of Lauritzen’s and Rostrum’s proofs for the purpose of voting at that meeting.  While it was unfortunate that rule 125 was not mentioned at the meeting, causing much unnecessary agitation on the part of Lauritzen and Rostrum, I do not think that any justifiable grievance arose from the fact that their proofs were not wholly admitted for voting.

28.  The second procedural issue arose from the fact that PO Korea had submitted a proof of debt for US$61,081,214.  Lauritzen’s representative requested for an adjournment of the meeting so that he could examine the voluminous documents submitted by PO Korea in support of its proof but the chairman only allowed 15 minutes which Lauritzen considered to be wholly inadequate.  The representatives of the trade creditors clearly felt that they had been given insufficient opportunity to ask questions about the debts said to have been incurred by the company to its parent, and that the company and related creditors were trying to bring the meeting to a quick conclusion.  When asked for his opinion, Mr Frank Yuen said he considered that the creditors had been given reasonable information about the debts.

29.  It is unnecessary for present purposes to say whether the chairman should have allowed more time and whether he should have assisted by explaining PO Korea’s claims to Lauritzen, as it requested.  The conduct of a meeting is generally in the hands of the chairman.  By virtue of rule 128, it is for him to decide whether to admit or reject a proof for voting purposes, taking a broad-brush approach (see Re Days International Ltd [2014] 1 HKLRD 20 at §9) and of course acting in good faith.  The incident no doubt intensified the trade creditors’ distrust in the company’s former management and in the STX group generally, but does not vitiate the vote of the creditors as such.

30.  At the meeting the trade creditors also asked Mr Frank Yuen when his firm was first approached by the company.  His reply was that it was at around the time when the notice to creditors was sent out.  A post-meeting note in the minutes clarified that his firm was first approached to act for the company on 9 August 2013.  Lauritzen, however, subsequently learnt that Ms Lauren Lau and Mr Kennic Lui of the same firm had been proposed as liquidators for PO Korea in its own winding-up petition in Hong Kong dated 11 July 2013.  While I accept Mr Yuen’s explanation in his affirmation that in fact they had only been asked for a fee quote in connection with being put forward as candidates for appointment as PO Korea’s liquidators, the potential appointment of Ms Lau and Mr Lui as liquidators of PO Korea had no doubt increased the trade creditors’ scepticism of the liquidators put forward by the company’s management and parent.

31.  In the result, the liquidators proposed by the company were appointed by the creditors, with votes received exclusively from PO Korea, STX America, KDB Asia and KEB HK.

32.  In addition, the creditors voted on the appointment of the committee of inspection.  There were five places on the committee (see s. 243(1) of the Ordinance).  Lauritzen asked whether, in light of its small claim, STX America would be prepared to stand aside, but it refused.  Of the seven creditors attending, PO Korea, STX America, KDB Asia and KEB HK received the highest votes in value.  Rostrum, Lauritzen and Kirmar each received an equal amount of votes in value, consisting apparently of the votes from themselves only.  They agreed that of the three of them, Kirmar should be elected to the final place on the committee.  As a result, the following creditors were elected to the committee of inspection: (i) PO Korea; (ii) STX America; (iii) KDB Asia; (iv) KEB HK; and (v) Kirmar. 

33.  The fact that PO Korea, STX America, KDB Asia and KEB HK had voted together in such a way that STX America, a related company with a miniscule debt, was elected a member of the committee of inspection in preference to Lauritzen and Rostrum, has only exacerbated the apparent lack of independence in the whole voluntary liquidation process from the point of view of Lauritzen and Rostrum.

THE PETITION

34.  About two and a half months after the commencement of the voluntary liquidation, on 14 November 2013, Lauritzen presented a petition for the compulsory winding-up of the company.

35.  The petition was in the early stages supported by Rostrum and Kirmar, but opposed by PO Korea, STX America, KDB Asia and KEB HK.

36.  At the end of April 2014, however, Lauritzen sold its claim against the company to a company called SC Lowy.  As SC Lowy did not wish to proceed with the petition, Rostrum was substituted as the petitioner on its own application which was not opposed.

37.  During the adjournment of the hearing of the petition, in late July 2014, Kirmar also sold its claim to SC Lowy and resigned from the committee of inspection.  SC Lowy has since indicated that it opposes the petition and wishes the voluntary liquidation to continue.  The details of the sales of Lauritzen’s and Kirmar’s claims to SC Lowy have not been disclosed and the liquidators have stated they are not clear as to whether the assignments are valid. 

38.  Rostrum and PO Korea attended the hearing of the petition by counsel.  STX America, SC Lowy, KDB Asia and KEB HK wrote letters voicing their opposition to the petition.

39.  The voluntary liquidators also attended by counsel.  In this kind of case, while a voluntary liquidator may give evidence of what he has done and found, he must remain neutral and should merely be there to assist by supplying facts to the court.  He has no locus standi to oppose the petition: Re Roselmar Properties Ltd (No.2) (1986) 2 BCC 99,157 (though he may of course answer allegations made against him).  A voluntary liquidator is not an officer of the court: Re John Bateson & Co Ltd [1985] BCLC 259; Re Collins & Aikman Europe SA [2007] 1 BCLC 182 at §43.  Recognising the liquidators’ limited role, Ms Rachel Lam states on their behalves that they take a neutral position towards the petition.

40.  The Official Receiver has taken a neutral stance and not appeared at the substantive hearing of the petition.

VALUE OF THE CREDITORS’ CLAIMS

41.  While Counsel have initially made various submissions about the value of Rostrum’s claim, it is unnecessary to deal with them in any detail since both Mr Douglas Lam, counsel for Rostrum, and Mr Richard Zimmern, counsel for PO Korea, are in the end content for the court to proceed on the basis that Rostrum has a provable claim in the company’s liquidation for approximately US$86.8 million, which is the amount of the debt admitted, by compromise, in the rehabilitation of PO Korea.

42.  It is common ground that both Rostrum and Lauritzen took part in the rehabilitation proceedings of PO Korea.  Under the approved rehabilitation plan, their claims, like those of other unsecured creditors, are subject, as to 67%, to a debt-to-equity swap on the basis of one share for every KRW10,000 of admitted debt.  The remaining 33% of their claims is to be repaid in instalments, of which 2% is to be paid in two equal amounts in 2014 and 2015, 3% in 2016, 5% in 2017, 22% in two equal amounts in 2018 and 2019, 2% in 2020, and finally 66% in 2021 to 2023.  As a result, their original claims as against PO Korea are settled and released, in return for rights under the rehabilitation plan.

43.  In these circumstances, Miss Lam for the liquidators referred in her skeleton argument to certain legal propositions which she said might potentially extinguish or reduce Rostrum’s debts. However, the rehabilitation was an arrangement between PO Korea and its creditors, not a composition involving the company and its creditors.  There is nothing to suggest that the settlement between PO Korea and Rostrum or the rehabilitation plan contains any terms that prevent Rostrum from pursuing the company.  Moreover, the novation agreements of the charterparties in question expressly provide that the company guarantees the relevant obligations as “primary obligor” and that its liability shall not be discharged or affected by any settlement or arrangement made between the ship owners and PO Korea. 

44.  Counsel are in the end agreed that Rostrum and Lauritzen are entitled to prove in the liquidation of the company for the full amount of the guarantee claims, provided of course that there is no double recovery at the end of the day.  This seems to me to be the correct basis on which to proceed having regard to established principles: see e.g. Re Polly Peck International plc (in administration) [1996]  2 All ER 433, 442; Andrews and Millett, Law of Guarantees (6^th ed, 2008), §13-016.

45.  The voluntary liquidators also tried to put in some late evidence that the debt-to equity conversion has already taken place and that, as a result, Rostrum has been allotted, on account of 67% of its claim, 6,619,328 shares in PO Korea with a market value of US$20.7 million as at 17 July 2014.  However, the share price has already dropped by almost 10% in two months after the debt conversion.[1] Ms Lam has not made submissions as to when or how the value of the shares received should be taken into account.  If the value is to be taken into account to prevent double recovery, then Rostrum can still pursue its proof in full against the company in the hope of receiving, in respect of 67% of its claim, at least an additional US$37 million (US$86.8 million × 67% – US$20.7 million).  Further, although the liquidators adduced only evidence about the amount and value of the shares that Rostrum received, Lauritzen should have acquired shares in the same proportion under the rehabilitation plan.  Since SC Lowy, as assignee of Lauritzen, is now opposed to the petition, any effect of the share swap on the value of Rostrum’s and Lauritzen’s claims against the company would largely cancel each other out.  I shall therefore refer below to the value of their claims without deducting any amount on account of the value of the PO Korea shares.

46.  The claims of the creditors and their latest stance on the petition are set out in the following table:

Creditor	Amount of claim (US$)	Stance on the petition
Rostrum	86.8 million	Support
SC Lowy (Lauritzen)	59.6 million	Oppose
SC Lowy (Kirmar)	3.1 million	Oppose
PO Korea	61.1 million	Oppose
STX America	0.03 million	Oppose
KDB Asia	5.1 million	Oppose
KEB HK	7.0 million	Oppose

THE PRINCIPLES

47.  The jurisdiction to wind up a company is conferred by s. 177(1) of the Ordinance.  The grounds for winding up are set out in paragraphs (a) to (f) of that sub-section.

48.  The court may order the compulsory winding-up of a company despite that it is already in voluntary liquidation.  S. 257 provides:

“The winding up[2] of a company shall not bar the right of any creditor or contributory to have it wound up by the court, but in the case of an application by a contributory, the court must be satisfied that the rights of the contributories will be prejudiced by a voluntary winding up.”

No such prejudice is required by statute to be shown in the case of a creditor’s petition.

49.  An undisputed creditor is generally, as against the company, entitled ex debito justitiae to a winding up order.  But where the company is already in voluntary liquidation, and the contest is between creditors, some favouring and some opposing a compulsory winding-up order, the court is not bound to make a winding up order but has an unfettered discretion. 

50.  The discretion of whether to make a compulsory order or allow a voluntary liquidation to continue is a broad one and unfettered by rules.  The discretion must of course be exercised judicially, taking into account all material factors.  Precedents are only guide-posts in a case of this sort, as examples of the way in which judges have thought fit in the past to exercise the discretion, providing illumination and guidance rather than any binding rule of law or practice.

51.  With that caveat in mind, a number of guiding principles can be found in the authorities, especially those discussed and applied in Re Goldcone Properties Ltd (in creditors’ voluntary liquidation) [1999] 4 HKC 602.  They may be summarised as follows:

(1) A helpful way of approaching the court’s decision is to see “whether the class remedy of liquidation is better satisfied by the continuation of the voluntary liquidation or is better served by being superseded by a compulsory liquidation”: Re Southard & Co Ltd [1979] 1 WLR 1198 at 1211B; Re Rhine Film Corporation (UK) Ltd (1986) 2 BCC 98,949 at 98,950; Goldcone, p 615B-D.

(2) In deciding whether to wind up a company already in voluntary liquidation, the court will have regard to the wishes of the creditors as permitted by s. 287(1) of the Ordinance.  In doing so, regard shall be had to the value of each creditor’s debt: s. 287(2).  However, the views of the majority are not decisive: Re Southard & Co Ltd at 1208D.

(3) In general, the court should grant a compulsory winding up order, even where the company is in voluntary liquidation, if the majority of the creditors so wish: Re Falcon RJ Developments Ltd [1987] BCLC 437 at 448f-449d; Re William Thorpe & Son Ltd (1989) 5 BCC 156; Re HJ Tomkins & Son Ltd [1990] BCLC 76 at 78.

(4) If however a voluntary liquidation already in progress is preferred by the majority of creditors, it is incumbent upon the petitioner to show some “valid reason” or “special circumstances” why the majority should not, as the majority of a class ordinarily would, prevail over the minority: In re B. Karsberg Ltd [1956] 1 WLR 57;In re J D Swain Ltd [1965] 1 WLR 909, 914; Goldcone, p 614B-D.

(5) The court is not bound to give equal weight to all debts of equal amount.  It is not simply a head count or value count of creditors.  A qualitative, as opposed to a purely quantitative approach to the majority, has to be taken.  The court will have regard to other interests which may influence the views of a particular creditor.  Less weight is given to creditors who are related to the management of the company, especially where the reason for seeking a compulsory winding up is the need for independent investigation into the management: Re Lowerstoft Traffic Services Ltd [1986] BCLC 81 at 84a-b; Re Palmer Marine Surveys Ltd [1986] 1 WLR 573 at 578D; Re Falcon RJ Developments Ltd [1987] BCLC 437 at 445; Goldcone, p 641B-D; Re Lummus Agricultural Services Ltd [1998] BCC 953, 958B-C.

(6) Where the petitioning creditors rely on the need for investigation to seek a compulsory winding-up, the court asks itself whether the matters which they say require investigation are on the evidence questions which rational creditors could think need investigation and in which the outcome may be financially favourable for them: Re William Thorpe & Son Ltd (1989) 5 BCC 156 at 159C; Goldcone, pp 618G-619B. 

(7) A factor given significant weight is that liquidators must not only act independently and impartially, they must be seen to be doing so, particularly where possible wrongdoing by the directors has to be investigated and possibly pursued in litigation.  It is in the public interest that the creditors should have confidence in the independence of liquidators; Goldcone, p 631H; In re Palmer Marine Surveys Ltd [1986] 1 WLR 573; Re Lowerstoft Traffic Services Ltd [1986] BCLC 81, 84.  Thus a compulsory order might be made in preference to a voluntary liquidation even though no attack was made on the probity or the competence of the voluntary liquidator: Re Falcon RJ Developments Ltd [1987] BCLC 437, 442e.

(8) The court is entitled to have regard to the general principles of fairness and commercial morality which underlie the details of the insolvency law as applied to companies.  A judicial exercise of discretion should not leave substantial independent creditors with a strong and legitimate sense of grievance: In re Palmer Marine Surveys Ltd [1986] 1 WLR 573.

(9) The question of whether additional expenses both in terms of the liquidators’ fees and disbursements and ad valorem fees payable to the Official Receiver should be incurred are usually best left to the majority of the creditors: Re Falcon RJ Developments Ltd, at 448; Re Lowerstoft Traffic Services Ltd [1986] BCLC 81; Goldcone, p 641E-I.

52.  In the light of these principles, I shall first consider the matters that Rostrum says call for investigation by liquidators who are not only independent but enjoy the appearance of independence, under the supervision of the court.  I shall then assess the weight to be given to the various creditors’ views, before considering the remaining points made by the parties.

THE INVESTIGATIONS SAID TO BE NECESSARY

53.  As Mr Douglas Lam pointed out at the beginning of his submissions, there is a massive deficiency of assets in this liquidation.  There are claims of over US$223 million in aggregate but the assets realised to date and to be realised would come to a total of about US$22 million only.  This of itself is not an indication of any wrongdoing but it does call for a closer examination of the company’s finances to see how the insolvency arose and whether there are matters that warrant scrutiny.

Fraudulent trading

54.  The only audited financial statements of the company placed before the court were those for the years ended 31 December 2011 and 31 December 2012.  An examination of these statements reveals that:

(1)   The company had, since at least the end of 2010, had a deficiency of current assets over current liabilities, and a deficiency of assets over liabilities generally.  The increasing net liabilities as at the end of 2010, 2011 and 2012 were US$10.2 million, US$18.1 million and US$34.2 million respectively. 

(2)   The company incurred losses of US$21.4 million, US$7.89 million and US$16.06 million for the years 2010, 2011 and 2012 respectively. 

(3)   The net cash flow from operating activities was US$9.14 million in the negative in 2011.  Net cash increased during 2011 only because the company received US$34.11 million from bank loans.  In 2012, net cash flow from operating activities was US$6.56 million in the positive, but net proceeds from bank loans were US$41 million in the negative, indicating that the bank loans were repaid, resulting in a net decrease in cash of US$33.11 million.

55.  Among the company’s liabilities were very substantial amounts due to the immediate holding company, i.e. PO Korea.  They accounted for US$41.2 million in 2010, US$82.8 million in 2011 and US$61.9 million in 2012. 

56.  The company had clearly had negative shareholders’ equity since at least 2010.  It appears that the auditors were prepared to audit the accounts on a going concern basis only because PO Korea had unconditionally and irrevocably undertaken to provide the necessary financial resources for the company to meet its liabilities as and when they fell due.  The picture is therefore one of the company being “propped up” by PO Korea by shareholder’s loans.  As Mr Kim Tae-Hyung, head of the finance management department of PO Korea, stated in his affirmation, “PO Korea has enabled the Company to continue to trade by refraining from demanding immediate repayment by the Company.”

57.  There is no statutory provision on wrongful trading or insolvent trading in Hong Kong, but Rostrum contends that in these circumstances a real possibility exists that fraudulent trading had occurred.  Fraudulent trading may be found to exist if “any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person”: s. 275 of the Ordinance.

58.  In my view, the fact that a subsidiary with a massive deficiency of assets is allowed to carry on trading through loans advanced by the parent company is not of itself indicative of fraudulent trading.  But equally the fact that a subsidiary has hitherto been enabled to trade by such loans does not mean that there can have been no fraudulent trading.  The gist of fraudulent trading is intent to defraud creditors.  Potentially material to that is the question of whether the subsidiary continued to trade even when it had become clear that the parent would not, or could not, provide the necessary further financial support to keep it afloat.

59.  Thus in Aktieselskabet Dansk Skibsfinansiering v Brothers (2000) 3 HKCFAR 70, 76G, a case in which a subsidiary of Wheelock Marden & Co Ltd was allowed to go into insolvent liquidation by the withdrawal of parental support, “it became apparent and was agreed the question of whether the directors could be said to have traded with fraudulent intent turned upon whether they honestly believed that WM [i.e. the parent company] would provide the necessary support to enable the company to trade through the trough in the trade cycle and return to prosperity”.  In fact, it was held at first instance there that the parent company was a de facto and shadow director of the subsidiary: see Barnett J’s judgment in HCMP 2625/1988 and HCA 1670/1989 dated 25 March 1997, parts 7.1 and 7.3.  This finding was not challenged on appeal.

60.  So the question of whether and if so when PO Korea ceased to have the intention or capacity to support the company can be relevant to whether investigation along the line of fraudulent trading should be further pursued.

61.  There is little direct evidence on this question.  However, the application for rehabilitation of PO Korea, dated June 2013, stated that the “financial structure” of PO Korea had “rapidly worsened for the last three (3) years”.  The debt-equity ratio increased from 102% to 268% during the three years.  Over the same period of time the cash equivalents dwindled and short-term borrowing increased so that by March 2013 short-term borrowing was over twenty times the cash equivalents.  By the end of 2012, PO Korea’s current liabilities had exceeded its current assets.  Further, there is some basis for saying that among the directors of the company, at least Mr Seo, who was a director of the company until 5 August 2013 and who was also an executive director of PO Korea, would be well aware of the financial condition of PO Korea at all material times.

62.  It does not appear from the liquidators’ report that there has been any investigation along these lines.  What the liquidators have said instead, in their third report filed in evidence on 30 June 2014 under the heading “Insolvent trading”, is that there was no record of any discussion in board meetings or general meetings suggesting financial difficulties or insolvency of the company at the time. The liquidators expressed the view that based on the investigation thus far, there was unlikely to be insolvent or fraudulent trading in 2011 to 2012.

63.  However, it appears that the liquidators’ conclusion was based on, or at least influenced by, their way of looking at the balance sheet of the company.  In their report, the liquidators noted that the amount due to PO Korea was interest-free, unsecured and has no fixed term of repayment, and that PO Korea had undertaken to provide the necessary financial resources to the company to maintain the company as a going concern.  They then said:

“109. In analysing the financial position of the Company, the debts owed to PO Korea should be considered as a part of the owner’s equity in the Company. Without taking into account the debts due to PO Korea, the Company was solvent with net asset value of US$27,700,785 and US$64,624,221 as at 31 December 2012 and 2011, respectively.”

64.  I can understand a statement that the company could be treated as a going concern despite its negative balance sheet, for as long as PO Korea could and would support it.  But the liquidators’ suggestion that the company was solvent with net assets of millions of dollars is difficult to defend.  Even PO Korea, through Mr Zimmern, expressly disassociated itself from the liquidators’ view as stated in that paragraph.  The amount due to PO Korea was not capital; it was debt, as demonstrated by the fact that PO Korea now claims to be creditor to the tune of US$61.1 million, ranking equally with other unsecured creditors.  The company did not at the time have net assets of US$27.7 million or US$64.6 million; it had a very substantial deficiency of assets. 

65.  While fraudulent trading which requires proof of subjective dishonesty is generally not easy to establish, in all the circumstances of this case a creditor can in my view legitimately think that the question ought to be looked at afresh without assuming that parental support is the end of the matter.

Voyage Charter Re-lets

66.  Rostrum contends that there were various arrangements and transactions between PO Korea and the company which need to be investigated.  As stated above, the company’s business was heavily dependent on PO Korea and the company, inter alia, acted as PO Korea’s shipping agent.  It has also transpired from PO Korea’s proof of debt that a majority in value of the company’s debts owed to PO Korea arose from voyage charter re-lets from PO Korea to the company.  In 2012, the company incurred freight-related expenses in the sum of US$86.54 million payable to PO Korea which represented over 60% of the company’s total cost of sales in 2012.  It may also be noted that, based on the two years’ accounts disclosed, the company had continuously suffered losses from its operations, namely, US$20.69 million in 2010, US$7.78 million in 2011 and US$14.80 million in 2012.

67.  As is well known, intra-group trading activities provide opportunities for manipulating profit and loss: Re Gordon & Breach Science Publishers Ltd [1995] BCC 261, 269H.  The question has been raised early on as to why vessels were re-let from PO Korea to the company in the first place, but no answer had been provided either by the evidence filed by PO Korea or in the liquidators’ reports.  The affirmation of Mr Kim Tae-Hyung filed on behalf of PO Korea simply relied on the fact that the debts owed to PO Korea were reflected in the company’s audited financial statements.  In circumstances where a subsidiary is massively insolvent, it is in my view not unreasonable for the trade creditors to ask why vessels were hired by PO Korea and re-let to the company and in particular whether this worked to financial detriment of the company.  As I understand her position, Miss Lam for the liquidators does not dismiss these questions as pointless, but submits that the liquidators will examine PO Korea’s claims in the context of adjudication of proofs.

Unfair preferences

68.  Rostrum has also raised the need to investigate whether payments had been made amounting to unfair preferences of some creditors over others.  It has not been able to point to any specific payment.  The liquidators have stated that they have reviewed all significant payments in the two years prior to liquidation out of the company’s bank accounts and are not aware of any transaction which appears to be subject to challenge as unfair preference.

69.  It is however unclear whether the liquidators have based their examination on their view of the solvency of the company referred to above.  Insolvency is relevant in determining whether unfair preference occurred: see s. 51(2) of the Bankruptcy Ordinance (Cap 6).  In that context, the statute provides that a debtor is insolvent if “(a) he is unable to pay his debts as they fall due; or (b) the value of his assets is less than the amount of his liabilities, taking into account his contingent and prospective liabilities”: s. 51(3).  On this basis, the company was clearly insolvent at the material times having regard to the deficiency of assets.

“Loans” to STX UK and STX Singapore

70.  Another aspect of the company’s affairs that Rostrum says requires investigation is two apparent “loans” to two related companies, namely, STX UK and STX Pan Ocean Singapore Pte Ltd (“STX Singapore”), in the amounts of US$3,887,598.85 and US$721,581.68 respectively, totalling US$4,609,180.53.  These two companies are both wholly-owned subsidiaries of PO Korea.  The loan agreements were both dated 1 July 2013.  The loans, carrying interest at 4.25% p.a., were stated to be for one year and repayable on 1 July 2014.  Neither STX UK nor STX Singapore has repaid the principal to the company.  Given the dire financial condition of the company itself on 1 July 2013 and the fact that it was already in default of its obligations to pay charter hire to Rostrum and Lauritzen, if the loans represented actual funds paid to STX UK or STX Singapore, there would naturally be a cause for alarm.

71.  It transpires, however, that the amounts were not direct “loans” from the company as such.  What happened was that more than two years before the “loan agreements”, on 7 June 2011, six subsidiaries of PO Korea entered into a pooling facility agreement with Standard Chartered Bank, Singapore Branch.  They included the company, STX UK, STX Singapore, as well as STX America and two other subsidiaries. 

72.  For the purposes of that facility agreement, all these subsidiaries maintained accounts with the bank.  The material effect of the pooling arrangement was that, first, each participating borrower was jointly and severally liable with the others for all sums owing to the bank and, secondly, the bank was entitled to set off the indebtedness of any of the participating borrowers against the credit balance in the accounts of any other participants.  Remarkably, the agreement provided that each participant agreed not to exercise any rights to be indemnified or claim any contribution from any other participant, though it is not clear whether this clause was intended to survive the termination of the arrangement.

73.  On 1 July 2013, shortly after PO Korea applied for rehabilitation, the bank terminated the pooling arrangement and exercised its right of set off in respect of the company’s account which then stood in credit for US$4,609,180.53, against the indebtedness of other participants. 

74.  It appears that STX UK and STX Singapore were net borrowers under the pooling arrangement as at the termination date, although precisely how much was owed by them and how the amount set off was apportioned as between them and any other net borrowers are unclear.  As a result of the set-off, the company had effectively repaid the debts owed by STX UK and STX Singapore to the bank on their behalves to the tune of US$4,609,180.53. As explained by Mr Tae-Hyung Kim, the former finance head of the company, the loan agreements were in fact entered into around 1 July 2013 in order to recognise and record the obligation of STX UK and STX Singapore to reimburse the company.

75.  Mr Lam submits, however, that this is not the end of the matter.  He asks: why should the company have entered into the pooling facility agreement in the first place?  Furthermore, STX UK was massively insolvent as of 1 January 2011.  Its balance sheet showed net liabilities in excess of £18 million.  If the company’s money were to be used to discharge STX UK’s indebtedness, it is unlikely that the money could be recovered by the company. 

76.  Mr Zimmern retorted that the company itself also had a substantial deficiency of assets and was only kept afloat by PO Korea.  That is true, but it was expressly stated in the accounts of STX UK for the year ended 31 December 2012 that it was dependent for its ability to continue to meet its financial obligations on the continuing financial support not only of PO Korea but also of fellow group companies.  This suggests that funds of fellow group companies were being used for the purposes of paying STX UK’s debts.

77.  Further, why did the directors of the company leave a substantial credit balance in the account with the bank which they knew was subject to the bank’s right of set off?  If that right was exercised, the company would in effect be repaying the bank on behalf of sister companies who were net borrowers under the facility.  It should be borne in mind that by June 2013, the company had already defaulted in its obligation under the charterparties to pay hire to Rostrum and Lauritzen.  A statutory demand had been served on the company by Lauritzen on 17 June 2013.

78.  In my view, these are not fanciful questions but matters that call for inquiry.  Pooling arrangements are by no means to be condemned as a class, but the way they are operated may result in particular companies in the pool being taken advantage of for the purposes of supporting other participants.  That can be a legitimate cause for concern even in a group context, since each company’s directors must first and foremost act in the interests of the company itself.  As Mason J stated in Walker v Wimborne (1976) 137 CLR 1 at 7:

“… it should be emphasized that the directors of a company in discharging their duty to the company must take account of the interests of its shareholders and its creditors. Any failure by the directors to take into account the interests of creditors will have adverse effects for the company as well as for them. The creditor of a company, whether it be a member of a ‘group’ of companies in the accepted sense of that term or not, must look to that company for payment. His interests may be prejudiced by the movement of funds between companies in the event that the companies become insolvent…”

79.  The voluntary liquidators do not dispute that investigations are warranted in relation to the pooling arrangement and its operations.  They say in Mr Yuen’s fifth affirmation filed during the adjournment that they are continuing their investigations and seeking to obtain further information and documents in order to gain a fuller understanding of all relevant facts and circumstances relating to this matter.  In addition, the liquidators say that they are investigating whether it was PO Korea which owed the bank the amount set off.  Plainly, such investigation is potentially adverse to the interests of PO Korea.

80.  As Rostrum pointed out, no such investigation was mentioned in the liquidators’ reports and previous affirmations.  The main thrust of the reports was that the liquidators had caused demand letters to be sent to STX UK and STX Singapore; the liquidators had not received any response from STX Singapore; and there would not be any significant recovery from the loan to STX UK as it was in deep financial difficulties.  Nor did Mr Kim, the person who gave the liquidators information about the pooling arrangement, mention any such arrangement in his own affirmation filed by PO Korea in these proceedings in February 2014.  There he simply stated that according to the loan agreements, a loan was made to each of STX UK and STX Singapore and that according to the liquidators’ second report, STX Singapore proposed to repay the debt in 2014 and UK solicitors were instructed to demand repayment from STX UK.

81.  Further, KDB Asia and KEB HK have stated in their letters in June and July 2014 that they noted from the third report of the liquidators that their investigation into the affairs of the company “has been completed”.  The letters were exhibited by the liquidators as evidence of creditors’ opposition to the petition without any suggestion that the banks’ understanding as to the progress of the liquidation was incorrect.

82.  For these reasons Mr Douglas Lam submits that all references to investigation in this connection in Mr Yuen’s fifth affirmation are an afterthought, prompted only by Rostrum’s late criticism of the liquidators for inaction in respect of the two “loans”.  It is however unnecessary for me to go that far.  It is sufficient for me to find, which I do, that in these circumstances Rostrum can justifiably prefer that the investigation, which the voluntary liquidators themselves admit to be necessary, be pursued by liquidators who are not only independent but are manifestly so, in a process following a compulsory order and supervised by the court.

Conclusion on investigations

83.  On a petition such as this, it is not necessary for the court to come to a conclusion that there is a prima facie case that the directors were guilty of wrongdoing or that certain transactions are voidable.  It is necessary for those favouring a compulsory winding-up to show “there is sufficient prima facie evidence raising issues which rational creditors could think need investigation and further action by the liquidators” (Goldcone, p 619B).

84.  Invariably such investigation is intended to lead to a favourable financial outcome for the creditors even though it may ultimately yield no benefit, but the aims of winding-up are by no means confined to the distribution of assets to the creditors.  As Lord Millett said in The Joint & Several Liquidators of Kong Wah Holdings Ltd (in compulsory liquidation) v The Grande Holdings Ltd (2006) 9 HKCFAR 766 at §23:

“[A liquidator’s functions] are twofold: (i) to collect the assets of the company, settle its liabilities and distribute its surplus funds amongst its creditors; and (ii) to investigate the causes of the company’s failure and the conduct of those concerned in its dealings and affairs: see Re Pantmaenog Timber Co. Ltd [2004] 1 AC 158 at pp 164, 172-3, 177. The first of these functions is primarily of concern to the company’s creditors and shareholders; the second serves a wider public interest in enabling the authorities to take appropriate action against those guilty of misconduct in relation to the company.”

85.  In my view, in all the circumstances, Rostrum’s stance in preferring an investigation by a liquidator under the supervision of the court cannot be dismissed as irrational. 

Whether matters to be investigated need to be stated in petition

86.  I should mention that there is a faint pleading point taken at one stage (though not pressed upon in the end) by Miss Lam, who relies upon Re Tourmaline Ltd [2000] 4 HKC 348, 354B-D in submitting that all matters relied upon by a petitioner must be stated in the petition.  This is of course the general position, even though a petition is not a pleading. However, that submission fails to take account of the nature of this kind of case.  A petition is a proceeding against the company, not a proceeding against opposing creditors or opposing contributories.  A petition is to be served on the company to be wound up, and parties who upon seeing the advertisement of the petition wish to appear at the hearing and be heard are to file a notice of intention to appear pursuant to rule 30 of the Companies (Winding-up) Rules (Cap. 32H), as PO Korea did in this case on 21 January 2014.  An undisputed creditor, as between himself and the company, need not show that he would be prejudiced by a continuance of the voluntary winding up, but is entitled ex debito justitiae to his order: Goldcone, at p 612C; Re King’s Dyeing and Weaving Factory Ltd [1986] HKC 382 at 385A-D.  The matters that may need to be considered where creditors’ preferences for voluntary or compulsory liquidation diverge will only become relevant after the petition is presented and opposition appears.

87.  The effect of this on what needs to be averred in a petition was made clear by Plowman J in Re A & N Thermo Products Ltd [1963] 1 WLR 1341 at 1345-6:

“[T]he effect of the section and the decisions which are referred to in the passage that I have read in Buckley is, I think, this: that for the purposes of the petition a judgment creditor need do no more than allege the existence of a voluntary winding-up. It is quite unnecessary, in my judgment, to go beyond that, as the petitioning creditors did in the present case, and set out in all the detail that I find in the petition the matters that took place at the creditors’ meeting under s 293. Those are matters which may or may not become relevant according to the attitude taken by the other persons concerned on the hearing of the petition; but the ordinary rule of pleading—and I have no doubt it applies equally to a winding-up petition—is that one does not jump until one comes to the stile. One waits until it is seen what the opponent’s case is before setting about answering it and although a petitioning creditor may, for tactical reasons, wish to put in his petition allegations which are not strictly relevant to his cause of action (if I may borrow another expression from pleading), yet, if he does so, he must, I think, do so at his own risk as to costs.”

88.  Generally as a matter of fairness, notice must of course be given of specific points and matters raised, so that other parties are not taken by surprise and have an opportunity of responding to them and so that the issues in dispute can be distilled and determined efficiently.  That was the reason why Miss Lam sought and I allowed an adjournment after the hearing in July so that further evidence may be filed by the liquidators which they did.

THE CREDITORS’ VIEWS

89.  I turn to consider the stance of the creditors. The latest position, as already stated, is that all the creditors other than Rostrum oppose the petition.  However, as I have also stated above, the proper approach goes beyond simple arithmetic and involves an assessment of the weight that should be attached to the views of specific creditors.

90.  The views of creditors are taken into account in determining whether a compulsory order should be made because they have a stake in the assets of the company.  An important yardstick for deciding whether to order the winding up of a company already in voluntary liquidation, though by no means the sole touchstone, is the interests of creditors.  Creditors as a whole are usually the best judge of where their interests lie.  But where a creditor is connected with the management or with potential targets of the liquidator’s investigations or claims, his stance may be motivated by considerations that are quite extraneous or even opposed to the interests of the creditors of the company as a class.  His view is therefore not a reliable pointer as to how the class remedy of winding-up should best be conducted. 

91.  With this in mind I consider that little weight can be attached to the views of PO Korea as opposing creditor.  PO Korea is the parent company.  It is the potential target of much of the investigation referred to above. 

92.  Mr Zimmern seeks to distinguish PO Korea from an ordinary holding company by pointing to the rehabilitation of PO Korea.  He submits that under the rehabilitation the Korean court has appointed a receiver, and that therefore the Hong Kong court should not discount the views of PO Korea in these proceedings.  While the factual premise is correct, I am unable to accept his conclusion. 

93.  First, there is nothing to show that the stance taken by PO Korea in these proceedings has been solely determined by the rehabilitation receiver and not by the directors or with their input. Apparently Mr Seo, who was a director of the company and PO Korea before the STX group’s collapse, is still the Deputy President of PO Korea.  It is not clear whether the rehabilitation is a “debtor in possession” type of restructuring and to what extent the receiver is involved, if at all, in giving instructions on behalf of PO Korea in these proceedings.  Further, according to PO Korea’s own winding-up petition in Hong Kong, one of the rehabilitation receivers is usually appointed from the existing management.  It is not clear whether Mr You Sik Kim, the current sole receiver of PO Korea, was appointed on that basis.

94.  Secondly and in any event, the rehabilitation receiver’s primary duties are presumably to protect PO Korea, rather than the creditors of its Hong Kong subsidiary.  While he may have no motive to protect the former management, he will have an interest in minimising adverse claims against PO Korea.  I do not say this in any pejorative sense; it seems to me simply to follow inherently from his duties towards PO Korea.  As Mr Zimmern himself submits, PO Korea now represents the interests of its creditors.  It is clearly in the interests of PO Korea’s existing creditors to minimise further adverse claims against it and to maximise its proof of debt in the company’s liquidation.

95.  Once the vote of PO Korea is disregarded, as I think it should be, Rostrum’s claim exceeds those of the remaining creditors combined.  For completeness I shall nevertheless state my views in relation to those creditors.

96.  It is impossible to attach much weight to the views of STX America, to whom the company is said to owe US$32,000 – a trivial sum in the scheme of things.  It was and still is a wholly-owned subsidiary of PO Korea.  It was also a participant in the pooling arrangement with Standard Chartered Bank, Singapore Branch, referred to above.  But for the fact that it was a related company, I very much doubt that such a small creditor would have been elected to the committee of inspection.

97.  SC Lowy is apparently unconnected with the STX group, except for the shares that it has received in PO Korea under the debt-to-equity swap in the rehabilitation, on account of Lauritzen’s claim.  I do not think such a small shareholding in PO Korea should lead the court to discount its views.  As stated above, however, there is curiously no evidence to show whether Lauritzen’s and Kirmar’s assignments of their claims to SC Lowy have become unconditional and taken effect.  I am told however that SC Lowy has since 11 August 2014 replaced Kirmar as a member of the committee of inspection.  Assuming for present purposes that the assignments are valid and have become absolute and that SC Lowy has completed all necessary steps in order to be recognised as a creditor on account of those claims, there is a further aspect to be considered which leads me to conclude that I should not attach full weight to its views. 

98.  SC Lowy did not trade with the company.  The misfortune of being an unsecured creditor in a massively insolvent liquidation was not imposed upon it.  On the contrary, it “bought” into the liquidation, no doubt with the hope of making some money out of it.  Both Lauritzen and Kirmar favoured a compulsory order (with Lauritzen in fact being the original petitioner) and continued to do so after most of the evidence had been filed, and have only dropped out because they sold their claims to SC Lowy.  The amounts paid for the assignment of the claims have not been disclosed, but I would be surprised if there had not been a heavy discount.  There is nothing sinister in this.  Trading in distressed debts and claims is part of normal commercial life.  But because SC Lowy has voluntarily come into the liquidation with its eyes wide open, it has not been aggrieved by the collapse of the company in the same way as trade creditors have.  It has not suffered the same loss.  This, in my view, is a relevant matter to be taken into account in terms of considering “the motives of the parties and the solidity of their grievances”, borrowing the words of Robert Walker J (as he then was) in Re Gordon & Breach Science Publishers Ltd (supra) at 262F.

99.  KDB Asia is a Hong Kong based subsidiary of KDB.  As shown in PO Korea’s annual report for 2012, KDB already held 14.99% of the issued shares of PO Korea as at 31 December 2012.  The effect of the debt-to-equity swap executed pursuant to the rehabilitation plan is that KDB has since November 2013 become the largest single shareholder of PO Korea.

100.  Moreover, according to its letter dated 3 July 2014, KDB Asia’s opposition to the petition appears to be based at least in part on an understanding, apparently derived from the liquidators’ third report, that “[t]he Liquidators’ investigation into the affairs of the Company has been completed”.  As stated above, the liquidators have now disavowed any suggestion that their investigation is even near the end.  For these reasons I also consider that the views of KDB Asia should be discounted.

101.  KEB HK has reiterated its opposition to the petition in its letter to the liquidators dated 30 June 2014, which is materially identical to the above-mentioned letter from KDB Asia dated 3 July 2014.  Thus its opposition is also based at least in part on a mistaken view that the liquidators’ investigation was completed and is for that reason also to be discounted.

102.  On the basis of the above analysis, it seems to me there is a clear preponderance in value among the creditors in favour of a compulsory order.

REMOVAL OF LIQUIDATORS

103.  It has been suggested in Re Inside Sport Ltd [2000] 1 BCLC 302 at 305h that where the real purpose of the application is to change the liquidator, the preferable remedy is an application for the removal of the voluntary liquidator (which may be made in Hong Kong under s. 252 of the Ordinance) and it would be inappropriate to petition for a compulsory winding up.  I do not think that the purpose of the petition here is merely to change the liquidator.  The real question is whether Rostrum as an independent creditor “should be able to insist on the company’s affairs being scrutinised by the process which follows a compulsory order”: Re Zirceram Ltd [2000] BCC 1048 at §26 per Deputy Judge Lawrence Collins QC (as he then was).

104.  That process is one that differs in important aspects from a voluntary liquidation.  If I may quote from a decision of my own, in Re ECM Real Estate A.G. (In Liquidation) [2014] 1 HKC 78:

“41. The principal difference is explained by Wynn-Parry Jin Re Phoenix Oil & Transport Co Ltd (No. 2) [1958] 1 Ch 565 at 570 as follows:

“A study of the relevant sections of the Companies Act, 1948, dealing with winding up shows clearly that as regards voluntary winding up the legislature has followed (in pursuance of the policy of previous Companies Acts) a different policy from that laid down in the case of compulsory winding up.  The reason is not far to seek.  In the case of voluntary winding up, the jurisdiction of the court is not invoked in order to place a company in liquidation.  In the case of a creditors’ liquidation, the creditors, through their committee of inspection, are in control as against the contributories; while in the case of a members’ voluntary winding up it is the members who are in control.  In both cases the court is given a certain degree of jurisdiction, but I think it can be accurately, though shortly, said that in both forms of voluntary winding up the court is in the background to be referred to if the necessity should arise.  In the case of a winding up by the court, however, different considerations arise.  In this case the court is conducting an administration, and so, as in the case of an ordinary administration action in the Chancery Division, it retains, under the express provisions of the statute, a much greater degree of control.”

42. Although steps in a compulsory winding up are no longer taken under the immediate superintendence of the chief clerk of the judge to whose court the winding up was attached, as they sometimes were in nineteenth century England, the control of the court over such a winding up is still very real and manifested by the fact that the liquidator is appointed by the court (sections 192-194), is to report to the court (section 191), is free to seek directions from the court (section 200), and exercises powers and performs duties delegated to him by the court as an officer of the court and subject to the control of the court (section 226).

43. A further difference, and one of great practical significance, is that liquidators in a compulsory winding up are subject to a very wide control by the Official Receiver (section 204) including control over the liquidator’s accounts (section 203).  Liquidators in a voluntary winding up are, in contrast, free from such control.”

105.  In short, as summarised in Fletcher, The Law of Insolvency (4^th ed), at §17-007, a compulsory winding-up is “subject to more exacting, and more closely-applied, judicial and administrative control”.

DELAY AND EXPENSES

106.  The length and progress of the voluntary liquidation are relevant, inter alia, in assessing the delay and duplication of expenses that would be caused by converting the liquidation into a compulsory one.  This is obviously a matter of degree.  The liquidators stated in their third report dated June 2014 that the liquidation process was “at an advanced stage”.  Their counsel Ms Lam stated in her original written submissions that the liquidators were “due to complete the winding up in due course, being in the stage of adjudicating proofs already”.  Mr Zimmern’s skeleton argument contained the submission that “there is little further work to be done in the liquidation”.

107.  Any impression that the liquidation is close to completion has, however, been dispelled by the fifth affirmation of Mr Frank Yuen made on 18 July 2014, in response to Rostrum’s allegation of the liquidators’ failure to investigate the loans to STX UK and STX Singapore referred to above.  There it is said that the liquidators had not meant to say that “the liquidation has by any means come to an end”.  Mr Yuen confirmed that the liquidators’ lawyers are assisting the liquidators in obtaining further information from various sources about “various matters”.  He says it would be premature to disclose further details “when so many matters are still being investigated and further legal advice needs to be taken”.  

108.  It seems to me therefore that while the voluntary liquidators have been in office for a year and have done a substantial amount of work, the liquidation is by no means near the end.  Further, a significant part of the liquidators’ work in terms of (i) realisation of assets including the sale of containers and golf membership, recovery of rental deposits, and the recovery of the loan from STX Heavy Industries Co., Ltd including the application in HCMP 3405/2013 for the court’s sanction of the relevant settlement, (ii) disposal of certain legal proceedings involving third parties, and (iii) payment of 17 preferential creditors, will probably require no duplication at all (cf. Goldcone, p 641E).  Investigative work carried out by one liquidator, if it has been properly done and documented, can often be profitably used by a successor as the basis for further investigation.  In any event, as stated above, the question of additional expenses, as well as the ad valorem fee and stamp fee payable to the Official Receiver and the High Court respectively, is usually best left to the majority of the creditors.

109.  In the present case, there was in my view little delay in bringing the petition, which was presented on 14 November 2013, two and a half months after the commencement of voluntary liquidation.  It is unfortunate that the court diary was such that the matter could not be heard until some months later.  In any event, the lapse of time since the commencement of the voluntary liquidation is not in itself a determinative factor.  In Re William Thorpe & Son Ltd (supra), a compulsory order was made even though the company had been in members’ voluntary winding up for five years before the petition.

THE VOLUNTARY LIQUIDATORS

110.  While a number of criticisms have been made by Mr Lam against the voluntary liquidators, I should make it clear that I make no finding of any actual lack of independence or lack of competence on the part of the liquidators.  They have unfortunately found themselves in the invidious position where, in the light of all that has happened, an independent creditor such as Rostrum is entitled to “view with cynicism any investigation undertaken by a liquidator chosen by the very persons whose conduct is under investigation”: Re Zirceram Ltd (supra), p 1054H.

CONCLUSION AND ORDER ON THE PETITION

111.  In conclusion, for the reasons I have endeavoured to explain above, this is a case where there are matters that Rostrum can legitimately expect to be investigated in the liquidation.  PO Korea and the former management of the company are likely to be among the subject of investigation.  Taking a qualitative approach to the views of the creditors, the informed choice of the independent majority in value of the creditors is for a compulsory order to be made.  This preference cannot in any way be said to be irrational, taking everything into account including the potential increase in the expenses of the winding-up.  A compulsory order is warranted by the overall justice of the case.  I shall therefore make the usual winding up order.

112.  I direct Rostrum and PO Korea to lodge their submissions on costs within 21 days after this judgment is handed down.

SUMMONS FOR APPOINTMENT OF PROVISIONAL LIQUIDATORS

113.  Rostrum issued the summons for the appointment of provisional liquidators in anticipation that the application would be heard on an early date before the petition.  As the petition has now been heard and determined, the summons serves no useful purpose no order need be made on it.