RE TAI KAM CONSTRUCTION ENGINEERING CO LTD

HCMP 177/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 177 OF 2005

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REASONS  FOR  JUDGMENT

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1.  This is a petition presented by Tai Kam Construction Engineering Company Limited (“the Company”) acting by its provisional liquidators to seek the sanction of the court to a creditors’ scheme of arrangement (“the Scheme”), under section 166 of the Companies Ordinance, Cap. 32. At the conclusion of the hearing, I made an order in terms of the draft submitted. These are the reasons for judgment.

2.  The Company was incorporated on 19 March 1996, with an authorised capital of HK$3.7 million, divided into 3.7 million shares of HK$1.00 each, all of which were issued and fully paid. Its current shareholders are Lee Hoi Nam (50%), Pa Ng Keung (25%) and Li Kwok Kwong (50%). Mr. Li is now bankrupt and the Official Receiver is the trustee of his estate. The principal activity of the Company is to carry out construction works for the Government as an approved contractor.

3.  On 3 August 2004, a creditor presented a petition to wind up the Company. Provisional liquidators were appointed by the court on 13 August 2004. The winding-up petition was heard and has been adjourned to 18 April 2005.

4.  The Company had been facing serious cash flow difficulties and had been unable to pay its debts as they fell due since early 2004. It is insolvent on both the cash flow and balance sheet tests. In the event of liquidation, the Company would have no valuable assets which could be realised for the benefit of creditors.

5.  The provisional liquidators have taken the view that the best way forward is to restructure the Company to allow the Company the opportunity to realise contract income for its creditors by continuing to operate the three contracts on hand and for an investor who might be interested in the status of the Company as an approved Government contractor to inject funds into the Company. The income to be generated under one of the three contracts has been estimated to amount to at least HK$1.8 million. In the event of a winding up, such income would not be available to the creditors. Further, should the Company fail to complete the contracts, the Government would be entitled to claim liquidated damages and to withhold payments due to the Company.

6.  The Company is on two of the Government’s lists of approved contractors. The two listings are valuable assets, as this would enable the Company to tender for Government construction works. The status is not a tradable commodity and if the Company were wound up, it would be permanently removed from the lists. The Works Bureau of the Government had confirmed to the provisional liquidators that provided the outstanding contracts of the Company were carried out to the satisfaction of the Works Bureau, a change of the shareholding in the Company would not affect the approved Government contractor listing status.

7.  It was against this background that provisional liquidators were appointed for the Company to explore the possibility of restructuring and to implement a scheme of arrangement.

8.  The investor, Ease Geotechnical Engineering Company Limited (“the Investor”), is an independent third party not connected with the directors or shareholders of the Company. Following arm’s length negotiation with the provisional liquidators, an agreement to restructure the Company was reached on 8 October 2004, by which the Investor agreed to make available HK$750,000.00 (“the Cash Investment Money”) and gave an undertaking to provide a further HK$2.5 million (“the Cash Injection Money”) to the Company. Meanwhile, the Investor has already injected approximately HK$2 million into the Company since the appointment of the provisional liquidators, and the money has been used to employ additional staff, and to maintain a sufficient list of plant and machinery and level of working capital.

9.  The essential terms of the Scheme are that the Scheme Creditors as defined will compromise their claims (other than the preferential claims which will be paid in full out of the Scheme funds) against the Company in consideration of the Investor making available to the Company the Cash Investment Money and the Capital Injection Money. The primary object of the Scheme is to enable the Scheme Creditors to reap the benefit of the contract income expected to be HK$1.8 million, which will become part of the Scheme funds. Upon the Scheme becoming effective, the Cash Investment Money will also be made available to the Scheme Creditors, subject to the costs of implementing the Scheme. In return, the directors of the Investor will become the sole shareholders of the Company.

10.  The principal features of the Scheme are as follows:

(1)	The Cash Investment Money will be made available by the Investor to the Company by way of an unsecured loan. This amount, with the payments already received and to be received from the Government under the outstanding contract in question, will constitute the Scheme funds and be made available to the Scheme Creditors on a pari passu basis, subject to the costs of implementing the Scheme.
(2)	The Capital Injection Money will be made available to the Company by way of an unsecured loan. This will be injected into Company for the purpose of meeting the relevant financial and technical requirements of the Works Bureau to maintain the approved Government contractor listing status.
(3)	The indebtedness of the Company to the Scheme Creditors will be repaid in cash by way of full and final settlement of their claims.
(4)	Upon the Scheme becoming effective, the Investor agrees to waive, release and discharge its claim against the Company for repayment of the unsecured loans.
(5)	Upon the effective date of the Scheme, the existing directors and shareholders of the Company will transfer 100% of their shareholding in the Company to the directors of the Investor at a value of HK$1.00.
(6)	All assets of the Company, other than the payments already received or to be received under the outstanding contract in question, shall remain the assets of the Company.

11.  The Scheme Creditors consist of all creditors of the Company with claims as at the effective date, with the exception of the related parties, preferential creditors to the extent of their preferential claim amount and secured Scheme Creditors to the extent of their secured claim amount. The Investor and the related parties will not participate in the Scheme or share in the Scheme funds. The claims of the secured Scheme Creditors in respect of their secured claim amounts will be discharged on realisation or release of their security interests, or on earlier agreement with the Scheme administrators of a value for their security interests.

12.  After payment of the costs and expenses of the Scheme, which have been capped, the estimated dividend payable to Scheme Creditors is 3.9%. In the event of winding up, based on available information, there would be no prospect of dividend to unsecured creditors and little prospect of payment to preferential creditors.

13.  An order was made on 1 February 2005 to convene a single meeting of all the Scheme Creditors to consider the Scheme. Directions were given on the advertisement of a notice of the meeting and the despatch of the Scheme documents to the Scheme Creditors and they have been complied with.

14.  The Scheme meeting was held on 4 March 2005. A resolution to approve the Scheme was passed by a majority of the Scheme Creditors in number representing over three-fourths in value of the unsecured debts. As shown in the report of the chairman of the meeting, 78.1% in number of the Scheme Creditors present and voting holding 75.3% in value of the unsecured indebtedness owed to them had voted in favour of the Scheme.

15.  The Investor has indicated its willingness to be bound by the Scheme and given an appropriate undertaking to the court. The Official Receiver has confirmed by letter his agreement as the trustee of the estate of Li Kwok Kwong to the transfer of the latter’s shares in the Company to the directors of the Investor.

16.  The jurisdictional requirements for the sanction of a scheme of arrangement have all been complied with. I am satisfied that the Scheme is such that an intelligent and honest man, as a member of the class concerned and acting in respect of his interest, might reasonably approve. I have therefore sanctioned the Scheme.