RE THE GRANDE HOLDINGS LTD

HCCW 177/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 177 OF 2011

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D E C I S I O N

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1. I have before me a summons issued by a creditor of the Company, Gain Alpha Finance Limited (“Gain Alpha”), for a declaration that it is entitled to have its proof of debt submitted to the provisional liquidators of the Company on 12 March 2014 admitted in full in the sum of US$7,902,154.04 for the purposes of voting at a meeting of creditors. At the hearing before me Gain Alpha was represented by Mr William Wong SC and Ms Ebony Ling. The provisional liquidators were represented by Ms Roxanne Ismail SC and Mr Val Chow.

2. The alleged debt arose as follows. In 2005 the Company acquired a 37% interest in Emerson Radio Corporation from a Mr Jurick for US$52,000,000. Half the consideration was paid in cash.  The remaining US$26,000,000 was settled by a redeemable debenture issued by the Company in favour of Mr Jurick with a redemption date of 5 December 2008.  The Company still owns the shares in Emerson which is listed on NASDAQ.  In early December 2008 Mr Ho, who was then the chairman of the Company, approached a friend, Mr Ko, informing him that he was having difficulty in repaying Mr Jurick.  Mr Ko agreed to lend to the Company sufficient to allow the debenture to be redeemed.  Mr Ko did this as follows.  He obtained a short-term loan from Kingston Securities Ltd (“Kingston”).  The loan was made to his company, Gain Alpha. The amount of the loan was US$27,583,400.  Gain Alpha paid that sum to the Company.  On 5 December 2008 the Company executed a debenture for US$27,600,000 in favour of Gain Alpha.  On 10 December the Company also executed a debenture for the same amount in Kingston’s favour.  Mr Ko says that this was by way of security for Kingston’s loan to Gain Alpha. 

3. Gain Alpha says that between December 2008 and 31 December 2009 a substantial amount of the loan was repaid by the Company and its associates.  This is evidenced by an audit confirmation dated 9 April 2010 issued by the Company’s then auditors, Moore Stephens. The total amount recorded in the audit confirmation was US$8,738,085.34.  The principle shown in the audit confirmation was US$6,777,350.59.  The balance was confirmed by Mr Ko.  Subsequently on 31 December 2010 a new debenture certificate was issued recording the amount of the principle then outstanding as US$5,778,048.71.

4. On about 12 March 2014 Gain Alpha submitted a proof of debt.  The debt claimed was the principal amount of US$5,778,048.71, namely, the full amount of the debenture dated 31 December 2010. In addition interest of US$2,124,105.69 was also claimed.  The calculation of interest appeared in the schedule appended to the proof of debt showing that interest was claimed from 1 January 2011 to 12 September 2013 being the date the company was wound up.  I do not understand it to be disputed that no repayments were made after 31 December 2010 or that if the principal amount due at that date was as stated in the new debenture certificate the interest calculation is incorrect.

5. Before considering why the provisional liquidators refused to admit the proof for voting purposes I will address the principles by reference to which an application of this sort are to be assessed.

6. Rule 128 of the Companies (Winding-Up) Rules, cap 32H, provides:

“The chairman shall have power to admit or reject a proof for the purpose of voting, but his decision shall be subject to appeal to the court. If he is in doubt whether a proof should be admitted or rejected he shall mark it as objected to and allow the creditor to vote subject to the vote being declared invalid in the event of the objection being sustained.”

7. When the court is called upon to determine a challenge to a liquidator's decision to admit or reject a proof for voting purposes, it is not deciding whether the liquidator has made a reasonable decision, but is carrying out an independent assessment of whether or not the proof should be admitted or rejected on the basis of the evidence before the court. In doing so, the court should undertake a broad, macroscopic assessment: Re Days International Ltd [2014] 1 HKLRD 20, §10:

“I also agree with Mr Chain that the court when called upon to determine a challenge to a liquidator’s decision to admit or reject a proof for voting purposes is not deciding whether the liquidator made a reasonable decision, but is carrying out an independent assessment of whether or not the proof should be admitted or rejected on the basis of the evidence before the court.[1] However, I do not accept that this requires the court to undertake a different exercise to the one undertaken by a liquidator. The court should also undertake a broad, macroscopic assessment. It cannot be sensible at the earliest stages of a liquidation of a company, which may prove to have very little assets, to require the liquidator or the court to be drawn into an application which involves considerable work for the purposes of determining whether or not a proof should be admitted for voting purposes.[2] It does not seem to me that there is anything unfair in this. A creditor such as Global which has an unusually complex and problematic debt cannot reasonably expect the limited resources of an insolvent company to be expended, on an expensive review of its debt before a Committee of Inspection has even been elected. Mr Chain disputed this. He argued that because the grounds for valuing the debt at HKD1 were fraud it was necessary for the Liquidators to adduce evidence of sufficient cogency to just rejecting the proof on this ground. Mr Chain argued that it is well established the “the more serious the allegation the more cogent is the evidence required to overcome the unlikelihood of what is alleged and thus to prove it”.[3] This is, of course, correct, but I do not accept Mr Chain’s assertion that it is necessary for the Liquidators to have looked at each individual transaction that allegedly goes to make up the debt and satisfied themselves that there was good reason to think that in each case there was evidence of fraud before valuing the debt at HKD1 or, that unless they adduce evidence in these proceedings addressing each transaction and demonstrating it is fraudulent the court should direct a new meeting of creditors at which Global’s debt is valued at HKD419,645,000. In my view what is required at this stage is for the court to make a relatively broad‑brush assessment of the value at which the debt should be admitted mindful of the fact that as the grounds for rejecting it are fraud the evidence at this stage must be more compelling than would otherwise be the case.”

Re a Company (No. 004539 of 1993) [1995] 1 BCLC 459, at 466b:

“In my view, the task of the court, on an appeal under r 4.70(4) of the Insolvency Rules 1986, is simply to examine the evidence placed before it on the matter and come to a conclusion whether, on balance, the claim against the company is established and, if so, in what amount. I would only add that, in considering the matter, the court is not confined to the evidence that was before the chairman at the time that he made his decision but is entitled to consider whatever admissible evidence on the issue the parties to the appeal choose to place before the court.”

The task of both a liquidator and the court at this stage does not involve determining whether or not the debt claimed is payable, but whether on a macroscopic assessment it seems probable that the debt is payable and accordingly the proof should be admitted for voting purposes in the value of the debt claimed or, if the evidence justifies it, some other sum.  The assessment should be undertaken in a practical way mindful of the fact that at the early stages of a liquidation when the assessment for voting purposes is most likely to arise it will normally be undesirable that excessive, and thus expensive, time is spent on scrutinising a proof. 

8. In undertaking this assessment the court is not confined to the evidence that was available to the liquidator. The court is entitled to consider whatever admissible evidence the parties adduce for the purposes of the application.  The evidence filed for the present application expands the information available to the provisional liquidators for assessing Gain Alpha’s claim, although not substantially so.  The more critical change that has taken place since the proof was rejected is that the provisional liquidators now accept, which they did not initially, that Gain Alpha probably did lend US$27,600,000 to the Company and thus had at one time a claim for that amount.

9. Gain Alpha’s case is straightforward.  It says that the audit confirmation demonstrates how much was owed at the end of 2009 and that the debenture dated 31 December 2010 shows that the principal was reduced during 2010 and that US$5,778,048.71 was outstanding at the end of it.  Thus, asserts Gain Alpha, this sum plus interest is clearly owed to it and its proof of debt should have been admitted in full for voting purposes.

10. The provisional liquidators do not accept that the audit confirmation and new debenture does prove what is due. The provisional liquidators’ grounds for querying the debt, as I understand it, turns on a number of matters.  First that 2 debentures were issued for the same amount in December 2008 to both Gain Alpha and Kingston.  Secondly, that Mr Ko had other financial dealings with the Company, which need to be explained, in particular, it appears that Mr Ko advanced HK$15,902,606 to an associated company, Lafe, on 10 December 2008.  The Liquidators argue that in order to prove its claim Gain Alpha should, as they requested, provide bank statements or similar documents to prove that it actually received repayment from the Company.  I disagree.

11. As I have already explained, at this stage of the liquidation we are concerned with a broad, macroscopic assessment of the proofs and a practical approach needs to be adopted to this process.  The provisional liquidators in my view have not given sufficient regard to the impact of their acceptance that Gain Alpha advanced US$27,600,000 in the first place.  There is no suggestion that Gain Alpha has understated the amount of the repayments it received.  The query, for example, about Mr Ko’s advance to Lafe does not suggest that this may have happened.  To the extent that there is any connection between the two it would only serve to increase, not decrease, the amount owed to Mr Ko either in his own name or through Gain Alpha.  No reason has been given for not giving due weight to the audit confirmation, which if it was produced in the normal way, would have reflected the auditors’ determination from the books of the Company of what was owed to Gain Alpha.  I can see no reason not to assume that the audit confirmation was correct and that the new debenture accurately reflected what was owed at the end of 2010.  It does not seem to me that for the purposes of assessing its proof for voting purposes it is necessary for Gain Alpha to show more than it has done.  I will, therefore, grant the order sought. 

12. I will hear the parties on costs.

Submissions on costs

13. I will order that the costs of the application are paid out of the assets of the Company with a certificate for two counsel.