RE CHINA MEDICAL AND BIO SCIENCE LTD

HCCW 198/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 198 OF 2008

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D E C I S I O N

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1.  This is an application by the provisional liquidators of China Medical and Bio Science Limited (“the Company”) for a validation order under sections 182 and 193 of the Companies Ordinance, Cap. 32. They seek an order in these terms:

(1)  notwithstanding the presentation of the petition, leave be granted to the provisional liquidators to execute the Debenture and the Working Capital Facility Agreement between Tony China Limited (“the SPV”) as borrower and NEUF Capital Limited (“NEUF Capital”) as lender and that the provisional liquidators be allowed to enter into any ancillary or other agreements or instruments incidental thereto or which are necessary to give effect to the Debenture and Working Capital Facility Agreement;

(2)  in the event of an order to wind up the Company being made on the petition filed herein, any disposition of property by virtue of and/or arising from the Debenture shall not be avoided by virtue of section 182.

2.  The orders are sought to facilitate the restructuring of the Company pursuant to an exclusivity agreement entered into by the provisional liquidators with NEUF Capital on 28 July 2009. The provisional liquidators say although they have power under the order of appointment to make arrangements for the restructuring of the Company and the subsidiaries and to set up a special purpose vehicle for that purpose, to avoid any possible misunderstanding and arguments between the creditors and contributories of the Company regarding the execution of the Debenture and Working Capital Facility Agreement and to prevent any disposition of property being avoided by section 182, and out of abundance of caution, they think it prudent to apply to the court.

3.  The Official Receiver has no objection to the application. 8 out of 19 creditors of the Company that have given notices of claims to the provisional liquidators, including the supporting creditor of the petition, whose total claims represent 93.957% of the known liabilities, confirm support for the proposed restructuring.

4.  The only opposition comes from the petitioning creditor, Shantou Xinyuan Trading Company Limited.

5.  The petition was presented on 13 May 2008. Provisional liquidators were appointed on the application of the supporting creditor, Keywise Greater China Opportunities Master Fund (“Keywise”), on 3 December 2008.

6.  The debt owed to the petitioner is RMB 4.4 million odd. The claim of Keywise is in the region of HK$100 million. In terms of percentage, Keywise’s claim is 92.4% of the total claims against the Company, the petitioner’s claim is 4.3%.

7.  Since the appointment of the provisional liquidators, the petition had been brought up for hearing on 15 December 2008, 9 February 2009, 9 March, 4 May, 3 August. On the last occasion, the petition was adjourned to 5 October 2009. On each of these occasions, the petitioner invariably sought an order to wind up the Company immediately. I had refused to wind up the Company and granted adjournments to allow the provisional liquidators to explore and negotiate proposals for restructuring and the resumption of trading of the Company shares on the GEM board.

8.  On the evidence before the court, if the Company is to be wound up, the return to unsecured creditors would be nil or minimal. The restructuring proposals explored and put forward by the provisional liquidators if successfully implemented would enable secured creditors to have some return. According to the successive reports filed by the provisional liquidators, they have made progress in that regard and as mentioned earlier, they have entered into an exclusivity agreement with an investor, NEUF Capital, on 28 July 2009.

9.  The stance of the petitioner in persistently opposing any attempt at restructuring is puzzling. The court is at a loss to understand why the petitioner is so eager to wind up the Company right away when it is clear the likely return to unsecured creditors in a liquidation is nil or minimal. In the absence of intelligible reason for that stance, the objections raised by the petitioner to the proposals for restructuring simply lack conviction.

10.  The present opposition of the petitioner to the validation order is in effect an opposition to the proposed restructuring, which, it says, would delay the making of a winding-up order.

11.  The most valuable asset of the Company is its listed status. For the resumption proposal to be viable, it is a requirement of the GEM listing rules that the listed issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a potential value can be demonstrated to the Stock Exchange to warrant the continued listing of the shares.

12.  As the Company and its subsidiaries are all insolvent, it is proposed to use a special purpose vehicle. On 25 June 2009, the SPV was set up, with the Company as the sole shareholder of 100% of its issued shares and one of the provisional liquidators its sole director. The SPV is to be used as an investment holding company to hold a wholly owned foreign enterprise to be incorporated in the PRC for the purpose of carrying on the business of trading in animal feed and supplements.

13.  NEUF Capital has applied to Xiamen Industrial and Commercial Administration Bureau for incorporating the wholly owned foreign enterprise under the name of Xiamen Dong Yue Trading Company Limited廈門市東岳貿易有限公司with a registered capital of US$200,000, which is wholly owned by the SPV.

14.  NEUF Capital has agreed to deposit sufficient funds up to HK$9 million into a special bank account of the SPV set up by the Company as working capital loan (“Working Capital Loan”) to settle the trading and operating expenses of the SPV, in order to maintain a viable and continuing business of the Company and its subsidiaries through the SPV during the course of restructuring. NEUF Capital has also agreed not to demand repayment of the Working Capital Loan until after 6 months from the date of the exclusivity agreement.

15.  The Working Capital Facility Agreement (being the subject of paragraph 1 of this summons for the validation order) will be executed by the SPV and NEUF Capital for granting the Working Capital Loan. The Working Capital Loan is to be secured by a debenture (this is the subject of paragraphs 1 and 2 of the summons) to be granted by the SPV over its own assets in favour of NEUF Capital.

16.  In addition, NEUF Capital agreed to contribute not more than HK$1 million (“Working Capital Contribution”) in aggregate to the Company to settle the operation expenses of the Group during the course of restructuring. Without the Working Capital Contribution, the Company would not be able to discharge its expenses or to proceed with the restructuring plan or to preserve its major asset. In the event the Company is wound up or upon the termination of the exclusivity agreement, the Working Capital Contribution shall be regarded as unsecured debts against the Company.

17.  The debenture proposed to be executed will not in any way encumber the assets of the Company and the Group. It will be restricted to the assets of the SPV. As funding to the SPV is to be provided by NEUF Capital, all the assets of the SPV will come from the funding without any contribution from the Company or any of its existing assets or funds. Hence, the interest of unsecured creditors of the Group would not be affected. The arrangement does not involve any outgoing payment from the Company’s own funds. The Working Capital Facility Agreement would not create any adverse impact on the interests of creditors of the Company.

18.  As for the Working Capital Contribution, although in the event of the Company being wound up or upon termination of the exclusivity agreement the Working Capital Contribution is to be regarded as unsecured debts against the Company, the unsecured liabilities of the Company would increase by only approximately 1%. As mentioned earlier, the restructuring proposal has the support of creditors of over 90% in value. Apparently, they have made the commercial decision they are willing to pay the price of 1% reduction in the return to unsecured creditors if the restructuring proposal should fail rather than go ahead with liquidation now when the return is nil or minimal.

19.  The submission of the petitioner’s counsel is tantamount to saying that the restructuring proposal and resumption proposal are not viable. He categorised the proposals as an attempt to continue the Company’s failed business using insufficient funds for a period of time. Complaint was also made of the slow progress of the restructuring efforts.

20.  In my judgment, the proposed restructuring should be given a chance to proceed. That would accord with the interest of the vast majority of creditors in terms of value of their claims.

21.  I make an order in terms of paragraphs 1 to 5 of the summons.