RE CHINA CITY CONSTRUCTION (INTERNATIONAL) CO LTD

HCCW 166/2018

[2019] HKCFI 1617

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 166 OF 2018

________________

________________

________________

D E C I S I O N

________________

1.  This is the hearing of the petition of Amuse Peace Limited (“Amuse Peace”) for the winding up of China City Construction (International) Co, Limited (the “Company”). There is no dispute that the Company is insolvent or that it should be wound up. It is already in creditors voluntary liquidation. Effectively, this is an application that the creditors’ voluntary liquidation (“CVL”) should be converted into a compulsory liquidation and new liquidators appointed.

2.  The petition was originally issued on 19 June 2018 by Value Partners Hong Kong Limited (“Value Partners”). Value Partners held bonds issued by the Company in July 2014 with a three-year maturity on which it has defaulted.  The petition was adjourned on a number of occasions to allow restructuring discussions to take place.  Value Partners came to a settlement with the Company, which led to Amuse Peace being substituted as petitioner on 7 January 2019.

3.  During the restructuring discussions Value Partners required the Company to appoint an independent financial adviser (“IFA”). On 10 August 2018 the Company engaged KPMG Advisory (Hong Kong) Limited (“KPMG”) as the IFA on the recommendation of the bondholders-ad-hoc committee led by Value Partners.  It does not seem to be in dispute that KPMG were suggested by the Company for consideration because KPMG had no existing relationship with it or the Group of which it forms part.  KPMG produced an independent business review to assess the Company’s financial position as at 31 August 2018.  The review was commenced in early October 2018 and completed on 13 November 2018 and issued to the Company on 11 December 2018.

4.  It would appear from information provided to KPMG that  it is the Company’s position that on 7 January 2019 the board passed a resolution that a general meeting be convened at which its shareholder could consider and resolve putting the Company into CVL pursuant to section 228 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32.  On 11 January 2019 the resolution was passed. On 7 January 2019 the relevant notice was submitted to the Government publisher for publication in the Gazette and Patrick Cowley and Tiffany Wong of KPMG provided the disclosure statements required by section 262C of the Ordinance.  On 9 January 2019 the necessary notice of a meeting of creditors to take place on 18 January 2019 was sent to creditors and the notice was published on 10 January 2019 in  The Standard and the Sing Tao Daily.  The creditors meeting was held on 18 January 2019, but as it appeared certain creditors had not received the notices the meeting was adjourned until 25 January 2019.

5.  On 25 January 2019 the following resolutions were passed: Patrick Cowley and Tiffany Wong be appointed as Liquidators (“Liquidators”), the Liquidators would be paid at Panel A rates and the Liquidators be at liberty to exercise all or any of the powers specified in Part 1 Schedule 25 of the Ordnance as applicable to CVLs under section 251(1)(a)(ii) of the Ordinance.  Relevantly, as a consequence of the votes cast by the Company’s parent and largest creditor, China City Construction Holding Group Company (“CCCH”), a resolution to appoint a committee of inspection (“COI”) failed.

6.  Also on 7 January 2019 Amuse Peace was ordered to substitute as petitioner for Value Partners and filed on 9 January 2019 its  Re-Amended Petition in respect of which the Company has not filed any evidence in opposition.

7.  Amuse Peace argues that the CVL should be converted into a compulsory liquidation for the following reasons, which I now summarise, and explain more fully in [12] to [19].

(1) The commencement date of winding up will be 11 January 2019 rather than 19 June 2018 if the CVL proceeds.  It is desirable that the earlier date is the commencement date in order to extend effectively the  claw-back period.

(2) The Company has provided no explanation for putting the Company into CVL in January rather than allowing it to go into compulsory liquidation, which invites concern about its motives particularly having regard to the next matter.

(3) There are a number of dubious transactions that need investigation.

(4) There is no supervision by the Official Receiver of a CVL and given the concerns of Amuse Peace and other supporting creditors this is undesirable.

(5) Concerns about KPMG’s independence.

8.  The principles by reference to which applications of this sort are determined are explained in detail in [23] to [29] and [44] of my decision in Joint Silver Limited[1].

“23. A creditor is entitled to petition for the winding up of a company indebted to him under section 177(1) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (‘Ordinance’). It is well established that as between a petitioner and a company, the petitioner is entitled ex debito justitiae to a compulsory winding-up order notwithstanding that the company is already in voluntary liquidation. Section 257 of the Ordinance expressly provides for this:

‘The winding up 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.’

24. This is unsurprising. A voluntary liquidation will have been commenced by a resolution of the company’s shareholders or in limited circumstances by a resolution of its directors: sections 228 and 228A of the Ordinance. If the company is insolvent, as in the present case, it is the interests of its creditors, which are the paramount consideration. If one of the creditors wishes to convert the voluntary liquidation into a compulsory liquidation, which is the normal consequence of a failure by a company to pay its creditors, it is to be expected that this wish will be acceded to unless there is good reason not to do so. This has always been the case although the statutory provisions have been amended over time to make this clearer. Section 197 of the Companies Act 1908 provided that:

‘The voluntary winding up of a company shall not bar the right of any creditor or contributory to have it wound up by the court, if the court is of opinion, in the case of an application by a creditor, that the rights of the creditor or, in the case of an application by a contributory, that the rights of the contributories will be prejudiced by a voluntary winding up.’

25. The Companies Act 1929 introduced section 255, which removed the qualification in the case of an application by a creditor to wind up a company already in voluntary liquidation. The section reads:

‘The winding up 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 wind up.’

26. In James Millward and Company Limited [2] Scott LJ explains these developments in the law:

‘The present Act has altered the law in regard to the burden of proof that had to be met by a creditor, who desired a compulsory order for winding up when there was a voluntary liquidation already in progress. He used to have to show that the position of the creditor would be prejudiced in some way, otherwise he did not get the compulsory order. The present Act, by s. 255, explicitly, and without any ambiguity whatever, removes that burden of proof and leaves the position that the creditor is entitled ex debito justitiæ to an order. I may perhaps have overstated the burden upon the creditor even under the previous legislation. The underlying principle undoubtedly was that the creditor was entitled ex debito justitiæ to his order, but there is equally no doubt that the Act has made a difference in the respect of the burden of proof. As it stands to-day he has not to prove any facts beyond his judgment debt, that the debt has not been satisfied, and that he desires a compulsory winding up.’

27. Section 257 of the Ordinance is in the same terms as section 255 of the Act and the Hong Kong authorities are consistent, as one would expect, with James Millward and Company Limited. In Young Cruise Company Limited [3] Yuen J says this at paragraph 20:

‘As between the Petitioner and the Company, it is clear that the Petitioner is entitled ex debito justitiae to a compulsory winding-up order notwithstanding that the company is in voluntary liquidation.’

28. In STX Pan Ocean (Hong Kong) Co Ltd [4] Godfrey Lam J is to similar effect:

‘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.’

29. As this paragraph notes the position is different if there is a dispute between creditors about whether or not the company should remain in voluntary liquidation. There is a larger body of authority dealing with the principles by reference to which such a contest is to be judged, in particular Re Goldcone Properties Ltd [5], which Godfrey Lam J discusses in paragraph 51. I will return to these principles later in this judgment. However, if a petition is not contested by another creditor the petitioner is entitled to a compulsory winding-up order. It is his decision whether or not it is preferable to convert the voluntary liquidation into a compulsory winding up. If the liquidator accepts that the company over which he has been appointed does owe the petitioner the debt he relies on then he should play no role in the proceedings other than confirming the debt is due. It will only be in exceptional circumstances that a liquidator needs to file substantive evidence or incur costs in being represented at the hearing.

…

44. Similar views can be found in the judgment of Robert Walker (as Lord Walker then was) in Gordon & Breach Science Publishers Ltd [6].”

9.  The principles of immediate relevance are these.  First, that if a CVL is already in progress and the majority of the creditors in value prefer it to continue the petitioner will have to show some valid reason or special circumstance why the majority view should not prevail.  Secondly, less weight is to be given to creditors who are related to the management of the company.  Thirdly, the liquidators must not only act impartially but be seen to act impartially.  Fourthly, the court is entitled to have regard to general principles of fairness and commercial morality and not leave substantial creditors with a legitimate sense of grievance.  Fifthly, questions of additional expense including ad valorum fees payable to the Official Receiver are best left to the majority of creditors.

10.  Clearly the majority in value of creditors wish the Company to remain in CVL.  However, this is in large part because of the size  of CCCH’s debt. As CCCH is the Company’s shareholder and the management of the Company related to CCCH the significance of its views are not as great as they would otherwise be.  However, that does not mean that it is unnecessary for Amuse Peace to identify a valid reason for converting the present CVL into a compulsory liquidation, particularly as it says that part of its reasons have to do with the avoidance of ad valorum fees, which are estimated at HK$4,000,000 if the recoveries assumed in the Statement of Affairs are correct, although as Mr Ho fairly points out the estimates are likely to have been conservative[7].

11.  The first, third and fourth principles apply to the reasons advanced by Amuse Peace for wanting a compulsory liquidation. I will start with the Liquidators’ independence.

12.  The evidence filed by Amuse Peace in support of the application all comes from Au Hoi Wun Laura (“Ms Au”), who is an assistant solicitor at Amuse Peace’s solicitors.  The evidence relevant to Amuse Peace’s concerns about KPMG is contained in one paragraph in her 3^rd affirmation, namely, [20]

“The appointment of Ms Wong and Mr Cowley of Messrs KPMG is also of some concern because these are candidates put forward by the directors of the Company. Whilst there is no attack on the integrity or competence of these individuals, it is difficult to see how these individuals can be seen to be independent since they were essentially chosen by the very persons/ entities whose conduct and affairs require investigation.”

13.  This evidence is of little assistance and amounts to no more than a submission.  It is quite normal in my experience in the case of large companies with sizable financial debt owed to sophisticated creditors for those creditors to require the appointment of independent insolvency specialists as independent financial advisers to report on the financial state of the company.  Given that the independent financial advisers will acquire useful knowledge of the company’s affairs it is common in my experience for them to be appointed liquidators if the company goes into liquidation and for this to be at the suggestion of the financial creditors who are likely to be more familiar with corporate liquidation than trade creditors. This is recognised by David Richards J (as he then was) who has considerable experience in this area in  Bank of Scotland Plc v Targetfollow Property Holdings Ltd[8].

“It is common for banks to appoint practitioners as administrators who have, in the months prior to their appointment, been involved with the parties and indeed acted on the bank’s instructions…

I can see no basis on which one can conclude that the proposed administrators would not act with that impartiality which they are required by statute to display.  If, in fact, they subsequently were to act in a partial, as opposed to an impartial way, then there are remedies available under [the Insolvency Act 1986]. But as I say, I see no basis for thinking either that they will not perform their duties as required by statute, or that the bank would encourage them to act in breach of their statutory duties.”

14.  I see no reason why Amuse Peace or any other creditor should not think KPMG is independent if their role as IFA has been properly explained to them.  Given Ms Au’s evidence we do not know if it has been or indeed whether Amuse Peace has any particular concerns and if so how they arise.  Mr Wong in his submissions attempted to make some forensic points from a close reading of some paragraphs of Ms Tiffany Wong’s affirmation describing the voting at the meeting on 25 January 2019 suggesting that they were slanted, but it seems to me that there is nothing in these points.  I would have thought that the kind of situation that would justifiably cause concern would be if rather than the Company put forward for appointment partners from the IFA it had proposed liquidators from another firm having less experience of large liquidations.

15.  It would seem to me that there is no fair reason for the Liquidators’ impartiality to be doubted.  It also seems to me that  the concern about the lack of supervision by the Official Receiver  is a point of little substance.  The assumption underlying it is that  the Official Receiver’s Office closely monitor liquidations carried  out by independent insolvency practitioners (which now they all  are as far as I am aware). As I understand the position the Official Receiver’s Office do not do so.  They will check that things like liquidation accounts are properly filed and will address complaints about liquidators, but the suggestion that they provide some kind of check on the way large liquidations are conducted is illusory.

16.  I agree that it is desirable that there is COI. The Liquidators say that they intend to propose a COI and Mr Ho undertook on behalf of CCCH that they would not vote against such a proposal.  It will always be open to an aggrieved creditor to make an application to the court for relevant orders.  The fact is that a compulsory liquidation would not result in the Companies Court proactively supervising the liquidation.  Unless an application is made for directions or an order,  the administration is left in the hands of the liquidators and the Companies Court has no knowledge or involvement in the vast majority of compulsory liquidations.

17.  The questionable transactions are three-fold:

(1) The statement of affairs states that the Company has HK$4,463,489,248.08 in accounts receivable, the bulk of which are from related companies.  However, the estimated realizable amount is zero.  These clearly do require investigation.  A compulsory liquidation is not required in order that such an investigation is undertaken.  The question is whether or not there is any credible and fair reason to think it cannot be carried out by the Liquidators in the present CVL.  In my view there is not.

(2) The statement of affairs states that the Company owes CCCH HK$2,832,665,405.02, however, CCCH’s claim  the Company owes CCCH HK$3,810,444,564.33.   No explanation has been provided by the Company or CCCH for this discrepancy.  It seems to me that the position in respect of this transaction is the same as the last one.

(3) The final transaction relates to the transfer of shares  in China Huarong Asset Management Co, Ltd (“China Huarong”).  This is a listed company and the shares were of considerable value, but according to a public announcement they have been transferred to unspecified investors for zero.  Mr Ho took me to the evidence. Apparently the full announcement has not been exhibited, but he was able to demonstrate from what documents are in the evidence that the transfer (and this he says is explained in the full announcement) took place as a consequence of the Company failing to meet a capital call from the private equity company through whose subsidiaries the shares in China Huarong are held by investors in the private equity company including the Company.  Once again this needs to be checked and investigated.  I can see no reason why this cannot be done by the Liquidators in the CVL.

18.  Mr Wong also argued that the absence of any explanation for the Company, if by January 2019 it recognised that it had no choice but to go into liquidation, not simply consenting to a winding up order raised doubts about its motives.  It is correct that the reasons given in answer to questions about this at the creditors meeting reveal no particular reason.  There is no reference, for example, to avoiding ad valorum fees.  However, it does not seem to me that there is anything inherently surprising in the Company being advised (and presumably it was so advised otherwise its board would not have known that the option was open to it) to go into CVL.  The fact that this is what happened rather than allow itself to be wound up and embark on the, at least initially, slower process of a compulsory liquidation is in my view unsurprising.  It would be conventional advice from experienced insolvency practitioners and, although it is not clear who gave the advice, the Company having filed no evidence itself in opposition, it is clear from the documents that whoever prepared the documents was experienced.

19.  Mr Wong made the more general point that Amuse Peace should not be left with a justifiable sense of grievance that the liquidation is being left in an opaque process conducted by liquidators whose impartiality is subject to legitimate concerns; although there is no suggestion of actual partiality.  Whether or not Amuse Peace would have a sense of grievance (which as I have said is not dealt with in the evidence) and if so whether or not it is justifiable, will depend on what they have been told.  If they have been properly advised about how and why KPMG came to be appointed IFAs, their role as IFAs and their experience I would not expect them to be concerned.  If they have been encouraged by the advice they have received to be sceptical they may have a sense of grievance, but it will not be justified, but attributable to unsatisfactory advice.

20.  So far as the commencement date of the winding up is concerned there is nothing in the evidence to suggest that anything will turn on this, but I agree with the Liquidators’ proposal that the petition can be stayed with liberty to apply and I will so order.  I will make a costs order nisi that the costs of the parties be paid out of the assets of the Company, with a certificate for two counsel in the case of Amuse Peace such costs to be taxed if not agreed.