RE Z-OBEE HOLDINGS LTD

HCMP 1563/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1563 OF 2017

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D E C I S I O N

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Introduction

1.  On 15 August 2017 I granted the Petitioners (who I shall describe in more detail later) leave to convene a scheme meeting of the unsecured creditors of Z‑Obee Holdings Limited (“Z-Obee”) for the purpose of voting on a scheme of arrangement compromising their debts. 

2.  The meeting was held on 16 October 2017.  Eight scheme creditors voted by proxy at the meeting all in favour of the scheme.  The total value of their indebtedness was HK$672,028,655.  Four of the creditors were banks with operations in Hong Kong which provided facilities to the group of which Z-Obee was the listed holding company.  Their debt, I am told, represented more than 75% in value of the total amount voted.  The other four creditors were principally service providers in Hong Kong. 

3.  On 23 October 2017, a petition was issued seeking the court’s sanction of the scheme approved by scheme creditors on 16 October 2017.  A similar petition has been issued in Bermuda, the place of incorporation of the Z-Obee, which will be heard today Bermuda time by Chief Justice Kawaley.  A separate scheme meeting was held to consider the scheme introduced in Bermuda.  A similar result took place with seven scheme creditors voting in proxy in favour of the scheme and none voting against.

4.  Z-Obee was incorporated in Bermuda on 30 January 2007. On 6 November 2009, it was registered as an overseas company in Hong Kong under Part XI of the then Companies Ordinance, Cap 32, and has remained so registered to date.  The shares of Z-Obee were listed on the main board of the Stock Exchange of Hong Kong on 1 March 2010 and on the main board of the Singapore Exchange on 21 November 2007.  With effect from 14 June 2013, Z-Obee converted its listing status on the Singapore Exchange to a secondary listing whilst leaving the primary listing status on the main board of the Stock Exchange of Hong Kong.

5.  Z-Obee’s principal business was the distribution and marketing of mobile handsets and the provision of design and production solution services for such handsets and computer tablets.  By early 2014, Z-Obee and its subsidiaries had run into financial difficulties.  On 4 April 2014, The Australia and New Zealand Banking Group Limited (“ANZ”) presented winding-up petitions in Hong Kong for the winding up of both Z-Obee and one of its principal subsidiaries, Max Sunny Limited (“Max Sunny”).

6.  Following the presentation of the winding-up petitions in Hong Kong, Z-Obee and Max Sunny engaged in negotiations with ANZ with the view to reaching a settlement.  Z-Obee reached in‑principle agreement on 2 May 2014 and a deed of settlement was executed on 7 May 2014.  The deed of settlement was entered into amongst ANZ, HSBC, Z-Obee and Max Sunny in full and final settlement of the loans due to both ANZ and HSBC, and provided for an agreed amount to be paid in five instalments following which the winding-up petitions would be withdrawn.

7.  In light of the deed of settlement, the winding-up petitions were adjourned by the court to 2 July 2014, and summonses for the appointment of provisional liquidators which had been issued were adjourned on the basis that they could be restored urgently by ANZ in the event that Z-Obee or Max Sunny defaulted on their obligations under the deed of settlement.

8.  On 6 June 2014, Z-Obee and Max Sunny failed to pay the third instalment due under the deed of settlement and accordingly, the summonses for the appointment of provisional liquidators were duly restored. The court made orders appointing Mr Yat Kit Jong and Mr Donald Edward Osborn of PricewaterhouseCoopers (“PwC”) as joint and several provisional liquidators of both companies. On 2 June 2015, Mr  Man Chun So of PwC was appointed as an additional joint provisional liquidator to both companies.  The limitations of our legislative framework and restrictions on the use of provisional liquidators in Hong Kong to restructure companies in financial distress, created a risk that the court might be constrained to wind up Z-Obee, precluding the proposed restructuring.  In order to alleviate these concerns, Z-Obee acting by its board took steps to invoke the jurisdiction of its place of incorporation, Bermuda (where provisional liquidation may in appropriate circumstances be used to facilitate a restructuring), to cause provisional liquidators to be appointed in that jurisdiction.  By the order of the Supreme Court of Bermuda dated 17 February 2017, Donald Edward Osborn, Yat Kit Jong and Man Chun So were appointed as the joint provisional liquidators of Z-Obee and are authorised to, inter alia, undertake the restructuring.  The provisional liquidators applied for, and were granted by this Court on 17 March 2017, a letter of request for recognition of and assistance to them at common law.

9.  By the orders of the court dated 27 March 2017 and 29 March 2017 and both sealed on 11 April 2017, the court discharged Donald Edward Osborn, Yat Kit Jong and Man Chun So as provisional liquidators appointed by the court and granted their recognition as provisional liquidators appointed by the court in Bermuda.

The Petition

10.  The present petition is the first that has come before the Hong Kong Companies Court in the circumstances I have just described.  Mr Maurellet SC invited me to consider who was the proper person to present the petition.  This requires consideration as a consequence of the terms of section 673(4) of the present Companies Ordinance, Cap 622. That sub-section reads:

“If the company is being wound up, an application for the purposes of subsection (2) may be made only by the liquidator or provisional liquidator.”

Mr Maurellet SC suggested that this language might be open to the reading that the presentation of a petition to wind up Z-Obee in Bermuda and the appointment of provisional liquidators in that jurisdiction engaged sub-section (4), and that had a bearing on who could permissibly issue a petition in Hong Kong seeking the court’s sanction of the proposed compromise. 

11.  I disagree.  It seems to me that the natural reading of the sub‑section is that it applies once a winding-up order has been made by the Hong Kong Companies Court.  The reference to provisional liquidator should, therefore, be read as a reference to a provisional liquidator appointed pursuant to section 194 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32.  This being the case, it follows that the relevant sub‑section of section 673 is (3), which provides that an application made for the purposes of sanctioning a compromise can be made by a company or its creditors affected by the compromise. 

12.  The introduction to the petition is worded as follows:

“The humble petition of Z-Obee Holdings Limited (Provisional Liquidators Appointed in Bermuda) (融達控股有限公司) (已委任臨時清盤人) (the ‘Company’) and Messrs. Donald Edward Osbom, Yat Kit Jong and Man Chun So in their capacity as the joint provisional liquidators of the Company appointed in Bermuda (collectively, the ‘Petitioners’) showeth as follows: ”.

It therefore purports to be a petition issued both by Z-Obee and also by the joint provisional liquidators appointed in Bermuda. 

13.  It seems to me that the distinction that is drawn does not constitute a meaningful difference.  This court has recognised the appointment of the provisional liquidators by the court in Bermuda and the powers that have been granted to them to act as the agent of Z-Obee to introduce a scheme compromising debt.  It seems to me that Z-Obee has, therefore, issued the petition and sub‑section 673(3) is satisfied.

The Scheme

14.  It is not necessary to describe the terms of the scheme in detail.  In short, it compromises the unsecured debt of Z-Obee other than preferential debt.  A significant part of the debt is governed by Hong Kong law.

Legal Principles

15.  The principles by reference to which the Companies Court determines petitions of this sort are well‑established.  I summarise them as follows in paras 15 to 16 of my decision in Re Winsway Enterprises Holdings Ltd:[1]

“15. The statutory procedure by which a company can compromise its debts with its creditors is contained in Part XIII of the Companies Ordinance (Cap.622). Section 673(2) provides that ‘The Court may, on application made for the purpose of this subsection, sanction the arrangement or compromise’ which is (sub-s.(3)(a)) ‘entered into with the creditors of a company, the company or any of the creditors’ if (sub-s.1) the creditors ‘with whom the arrangement or compromise is proposed to be entered into, agree or agrees to the arrangement or compromise’. Sections 670 and 671 provide the mechanism for creditors to agree to a proposed scheme of arrangement or compromise. An application is made by the company to the court for an order convening a meeting of creditors or a discrete class of creditors if only a section of creditors is affected by the scheme. The notice of any meeting ordered by the court must be accompanied by an explanatory statement. Section 671(3)(b)(ii) provides that it must state the effect of the arrangement or compromise. Section 674(1) specifies when an arrangement or compromise between creditors and a company is treated as agreed for the purposes of s.673(1):

The creditors agree to the arrangement or compromise if, at a meeting of the creditors summoned under section 670, a majority in number representing at least 75% in value of the creditors present and voting, in person or by proxy, agree to the arrangement or compromise.

16. The function of the Court in determining a petition to sanction a scheme is summarised in Buckley on the Companies Acts (14th ed.) at p.473:

Function of the Court In exercising its power of sanction the Court will see, first that the provisions of the statute have been complied with, second that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.”

Jurisdiction

16.  The circumstances in which the Companies Court has and will exercise its discretionary jurisdiction to sanction a scheme of arrangement made between the creditors of a company incorporated in a foreign jurisdiction and its creditors have been discussed in a number of recent Hong Kong authorities, in particular the decision which I have just referred to, Re Winsway Enterprises Holdings Ltd, paras 23 to 31. 

17.  In this regard the present case is straightforward.  As I have already mentioned a substantial proportion of the debt is governed by Hong Kong law.  It is an established principle of Hong Kong law that a debt can only be compromised under the law governing the debt: Gibbs v Societe Industrielle.[2] That and the desire to protect Z-Obee’s listed status in Hong Kong, which is central to the efficacy of this cross‑border restructuring, clearly provide sufficient connection between Hong Kong and the scheme to justify this court exercising jurisdiction under section 673.

Conclusion

18.  I am satisfied that the necessary statutory majority was obtained at the scheme meeting, that the class was fairly represented by those attending the meeting, and also that the arrangement is such as an intelligent and honest creditor might reasonably approve as demonstrated by the unanimous vote in favour of the scheme.  I will therefore sanction the scheme introduced in Hong Kong.