COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A. HONG KONG BRANCH v. SEAPOWER RESOURCES INTERNATIONAL LTD

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JUDGMENT

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Introduction

1. On 11 December of this year, the petitioner filed petitions for the winding up of the five respondents all of whom are part of what I will call 'the Seapower Group'. The petitions are to be presented for the first time to a registrar of this Court on 20 February 2002, some seven weeks hence.

2. On 22 December of this year, by way of an ex parte summons-but upon notice to the respondents-the petitioner applied for the appointments of Cosimo Borrelli and Fan Wai Kuen as provisional liquidators of the respondents. That application has been opposed by the respondents.

3. The matter came before me for hearing on the first working day after the Christmas break. On that occasion, Mr Bunting, for the respondents, sought an adjournment of the application for the appointment of provisional liquidators for a period of four weeks, or such lesser period as the Court thought appropriate.

4. Mr Bunting argued that no reasonable opportunity had been given to the respondents to file evidence in opposition. The problem, of course, was that any lengthy delay would of itself effectively undermine the petitioner's application. In any event, Ms Shirley Choi, the Chairman and Chief Executive officer of the 1^st respondent, Seapower Resources International Limited, was able within the time available to her to formulate and file a detailed affirmation in opposition on behalf of all the respondents. The affirmation ran to some 14 pages. Mr Bunting was able to use the affirmation as the foundation for many of his submissions. Indeed, the hearing lasted a full day.

5. Mr Bunting further sought an adjournment on the basis that creditors had only just been presented with detailed proposals for a scheme that would, if accepted, avoid the need for winding-up. It is true that the proposal ------ called the 'White Knight proposal' by the parties ------ had only come into existence two or three days before Christmas. It is further true that it had not yet been considered by all the major creditors of the Seapower Group. However, the petitioner, which is part of and represents a syndicate of bank creditors, was aware of the proposal. A meeting had, in fact, taken place to discuss its merits. Creditors present had rejected the proposal as being unacceptable. As will be seen later in this judgment, those creditors hold something like 40% of the respondents' indebtedness to bank creditors.

6. As it transpired, after I had ruled that there would be no adjournment, an affidavit was filed by Ms Ching Kreider, the authorised representative of the petitioner, confirming that she had been in contact with the representatives of the bank creditors in the syndicate. She confirmed that each of them had considered the terms of the 'White Knight proposal', but had found the proposal "completely unacceptable" and wished to proceed immediately to seek the appointment of provisional liquidators.

7. In summary, although the 'White Knight proposal' was of very recent genesis, it had already been considered and rejected by creditors representing approximately 40% of the Seapower Group's indebtedness to financial institutions.

8. Mr Bunting underscored his arguments in support of an adjournment by saying that any rescue proposal, to be effective, would have to be based on the operations of the Seapower Group continuing. However, because of the special nature of those operations ------- essentially the management of cold storage facilities ---- the appointment of provisional liquidators would effectively destroy those operations as going concerns. While obviously the appointment of provisional liquidators is a step of very considerable consequence, in this particular case I did not believe that the appointment of provisional liquidators would necessarily bring the operations of the Seapower Group to an end. It had to be remembered that notice of the filing of the petitions for winding-up was already in the public arena. Indeed, Ms Shirley Choi, in correspondence placed into evidence, spoke of the flight of customers caused by that news. A state of uncertainty was therefore already in existence. In any event, in my judgment, this argument went more to the merits of the appointment of provisional liquidators than to the matter of whether there should be an adjournment.

9. Mr Bunting, in seeking his adjournment, further contended that it had not in any way been established that the assets of the respondents were in imminent jeopardy of dissipation. That, again, I consider to be a matter that went more to the merits of the appointment of provisional liquidators than to the question of an adjournment. In any event, I was concerned that there was evidence of a pattern of non-cooperation by the senior management of the Seapower Group with many of the Group's major bank creditors. This had in the past resulted in the movement of founds internally within the Seapower Group, those founds being moved from individual companies which were 'debtor' companies to other companies which were not. With matters now coming to a head by reason of the winding-up petitions being filed, I was of the opinion that there was substance in the concerns of the petitioner that further movement of funds ---- equaling their dissipation ---- may take place.

10. Accordingly, I ruled that there would be no adjournment of the hearing, and that I would move directly to the merits of whether provisional liquidators should or should not be appointed. However, in order to afford the respondents a further opportunity to consider their position, the matter was held over until the following day.

11. That being the case, I am satisfied that the respondents were given sufficient opportunity to make representations. However, it was always a matter of balance. The resolution of the petitioner's application could not be allowed to drag; that, as I have said, would of itself go a long way to undermining the application.

The parties

12. The first respondent, Seapower Resources International Limited, is a public company listed on the Hong Kong Stock Exchange. The 2^nd, 3^rd and 4^th respondents, which are wholly-owned or majority-owned subsidiaries, are all operating companies; by that I mean that they operate cold storage facilities in Hong Kong. The 5^th respondent, South East Asia Overseas Finance Limited, is described as the 'finance arm' of the Seapower Group. There are other subsidiary companies in the Group but they are not indebted to the petitioner or the banks that it represents.

13. The petitioner itself is a bank incorporated under the laws of the Netherlands. It has offices in Hong Kong and carries on business here. In December 1998, the petitioner joined together in a syndicate with three other banks to advance loan facilities to the Seapower Group in an amount of some HK$480 million. The three other banks in the syndicate were the Standard Chartered Bank, the Wing Lung Bank and the Wing Hang Bank. The petitioner in these proceedings acts for itself and also as agent for those other banks.

14. The loan facilities were, in fact, advanced to the 5^th respondent, South East Asia Overseas Finance Limited, the 'finance arm' of the Group. The terms upon which the facilities were advanced were governed by a loan agreement. The remaining respondents are bound to that indebtedness by way of guarantees.

15. As security, the Syndicate obtained mortgages over two of the cold storage facilities owned and operated in Hong Kong by the Seapower Group. These facilities were owned by individual companies within the Group and leased by those companies to other companies within the Group.

A brief history

16. In terms of the loan agreement, the capital sum advanced to the 5^th respondent was to be repaid in 14 successive quarterly payments. The first such payment fell due in September 1999. However, only partial repayment was made on due date, the balance being received several weeks later. It appears that this was the only repayment of capital made; no repayments have been made since then.

17. In addition to the repayment of capital, the loan agreement obliged the 5^th respondent to make regular interest payments. I am told that the respondent was able to honour this obligation until October 2000. But since that time no interest payments have been made. It appears that unpaid interest due to the Syndicate at this time exceeds HK$37 million.

18. It was therefore apparent to the Syndicate from the latter part of 1999 that the Seapower Group was having difficulty in servicing its level of indebtedness. The extent of this difficulty became evident after March 2000. In March of that year, the firm of accountants, KPMG, was retained by the Seapower Group to review the Group's financial position and to make regular reports to its major banking creditors. These reports revealed that the Group was unable to meet its debts as and when they fell due.

19. By late 2000, major creditors of the Seapower Group, including the Syndicate, agreed to an 'informal standstill' in respect of payments of both capital and interest due. According to Ms Ching Kreider, the 'informal standstill' was agreed so that the Seapower Group, with the assistance of KPMG, would be able to formulate proposals for restructuring its debt, the object being to enable it to continue in business and thereby to offer creditors a better prospect of recovering monies due to them than would in all likelihood be available to them through liquidation proceedings.

20. Although a programme of asset disposal was undertaken, it appears to have been insufficient to have had any real impact on the Group's indebtedness to creditors. By March of this year, KPMG had informed creditors that the Group recognized that the only viable option now open to it to materially reduce its debt burden was either to sell the core cold storage operations or to seek significant third party investment in those operations. KPMG informed creditors that senior management of the Group was in active discussions with a number of potential purchasers and/or investors.

21. However, despite periodic indications of progress, no firm proposals acceptable to creditors have been forthcoming. At the end of March, the petitioner wrote to the senior management of the Seapower Group to the following effect:

".... The Syndicate is not confident that the Group is able and willing to secure an early sale on terms more favourable than could be achieved by the Syndicate itself through the appointment of Receivers. With every month passes, the condition of the properties deteriorates and their value diminishes,.,.."

22. In June of this year, steps were taken by the Syndicate to exercise the rights given to it in terms of the mortgages it held over two of the Seapower Group's cold storage facilities. To this end, two receivers were appointed, both being members of the firm of Ernst & Young. In attempting to dispose of the cold storage facilities, it appears that the receivers have been less than happy with the co-operation obtained from the senior management of the Seapower Group. In a lengthy affidavit, Ms Yeo Boon, a principal of Ernst & Young, has chronicled a history of what, in her view, has amounted to delay and evasion on the part of the senior management of the Seapower Group. The result of this delay and evasion has, according to her, been the frustration of several possible sales to willing purchasers. As an example, in paragraph 9 of her affidavit, Ms Yeo says the following:

"Although Ms Shirley Choi had promised to cooperate with the receivers, there were occasions on which the cooperation was markedly absent. For example, one interested party, namely China Resources, expressed an interest in pursuing negotiations to purchase the properties subject to being able to carry out site inspections. Access to enable such inspections to take place was requested by us on 19 July 2001, 16 August 2001 and again on 24 August 2001 but [Seapower] refused to allow access as a result of which no negotiations with China Resources were able to proceed."

23. Ms Yeo speaks of another potential purchaser, AIF Funds Management Limited, a company which after initial negotiations, declined to make a formal offer. Ms Yeo says :

"I have been informed by... AIF that the reasons for AIF being unable to make an offer are as follows:

24. Ms Ching Kreider also speaks of several unsatisfactory incidents with the senior management of the Seapower Group. For example, she speaks of a management agreement entered into between, on the one hand, the companies owning and operating the cold storage facilities mortgaged to the Syndicate, and, on the other hand, another wholly-owned subsidiary in the Group -- a company not in any way indebted to the Syndicate -- called iPower B2B.com. The management agreement states that iPower B2B.com will receive 10% of the annual operating revenues of the cold storage facilities, those sums to be paid every six months for a term of 15 years. Ms Ching Kreider has commented that, in her view, the management agreement does not appear to be for a 'valid business purpose'. The agreement, she says, has imposed an additional, long-term financial burden on the companies operating the cold storage facilities at a time when their cashflow is insufficient to meet existing commitments.

25. In her detailed affirmation, Ms Shirley Choi, who has denied any lack of cooperation for other then valid commercial reasons, has explained the management agreement by saying the following:

"The Warehouse Management System (WMS), which includes the computer software and customer database for operation of the cold storage facilities, is used by the operators for their businesses, but was developed by, and at the expense of, Seapower Resources International Ltd ('SRIL'). iPower is a wholly owned subsidiary of SRIL. It was considered fair and appropriate that the operators should pay a reasonable fee to SRIL (or in this case to iPower) for their use of the WMS system. The management agreement was signed to formalise this intra-group arrangement. This was part of an overall strategy to formalise all intra-group arrangements wherever possible as part of restructuring SRIL and its subsidiaries and so that, if the restructuring later required separate divisions of the SRIL Group to be sold separately, formal arrangements would exist. Again, there was no intention to prejudice the Petitioner."

26. Whatever the intention of the senior management, the result is that 10% of operating revenues are now removed from companies indebted to the Syndicate to one that is not. In my view, the timing of the management agreement appears unfortunate and it may even be said that its formulation has been tactical.

27. In the result, on the papers placed before me, it is apparent that over the past 14 months, while the 'informal standstill' has been in operation, a number of incidents have occurred which, taken cumulatively, have led the Syndicate to lose faith in the abilities of the Seapower Group's senior management to bring about a satisfactory restructuring and/or orderly disposal of assets. The Syndicate believes that the senior management, effectively in the hands of the Choi family, is equally concerned with securing the position of the majority shareholders, namely, the Choi family itself, as it is with securing the best interests of all creditors.

28. It is the view of the Syndicate that it has allowed the senior management of the Group and its advisors more than adequate opportunity to bring about a restructuring and/or orderly disposal of assets and that now the indebtedness of the Seapower Group can only be satisfactory dealt with by means of liquidation proceedings.

The law

29. In the present case, the petitions for winding-up have been made on the basis that the respondents are insolvent, a fact, contends the petitioner, that is demonstrated by both an examination of the consolidated accounts (the balance sheet test) and by the acknowledged fact that the respondents are unable to pay their debts as they fall due. Against that background, I am satisfied that, in deciding whether to exercise its power to appoint provisional liquidators, the Court should consider two matters. First, whether the petitioner has made out a good prima facie case for a winding-up order at the hearing of the petitions and, second, if that case has been made out, whether it would be right in all the circumstances that provisional liquidators be appointed.

30. The second question has to be decided on the basis of commercial realities, the degree of urgency and need established by the petitioner and the balance of convenience dictated by the circumstances.

31. In this regard, in In re Five Lakes Investment Company Limited v. Multiford Company Limited [1985] HKLR 273, Clough J said:

"Section 193(1) of the Companies Ordinance, which corresponds with s. 238(1) of the Companies Act 1948, provides that subject to the provisions of that section the court may appoint a liquidator provisionally at any time after the presentation of a winding-up petition. The language of the subsection is general and although in practice where applications for the appointment of provisional liquidators have been opposed it has been more common for appointments to be made in situations where it can be shown that there is jeopardy to the assets of the company or obvious insolvency or the company has admitted that there is no defence to the petition, I respectfully adopt the decision of Plowman, J. in Re Union Accident Insurance Co. Ltd. [1972] 1 ALL ER 1105 at p. 1109 to the effect that the relevant provision confers a general power on the court to appoint a provisional liquidator depending on the particular circumstances of each case."

Clough J continued:

"As regards the exercise of the power to appoint a provisional liquidator I also follow the approach of Plowman, J. in treating two matters as relevant for consideration. The first is whether Gala Land, as the petitioner, has made out a good prima facie case for a winding-up order at the hearing of the petition. This matter is to be considered on the basis that any views expressed by the court on the merits of the petition are provisional only because at this stage the court is not trying the petition. Secondly, if the court concludes that a good prima facie case for a winding-up order has been made out the question arises whether it is right that a provisional liquidator be appointed in all the circumstances. As Bright, J. pointed out in Re Club Mediterranean Pty. Ltd. [1975] 11 SASR 481 this question has to be decided on the basis of commercial realities, the degree of urgency and need established by the petitioner and the balance of convenience according to the circumstances. The circumstances will of course vary in every case....."

32. As was said by Godfrey JA in Securities and Futures Commission v. Mandarin Resources Corp. Ltd [1997] 2 HKC 166:

"There are no hard and fast rules as to how a judge ought to exercise his discretion when called on to appoint, or discharge, or re-appoint, provisional liquidators. There cannot be any such rules. The judge's decision must, ultimately, depend on the view he forms as to whether, on the material before him, the balance of justice and convenience comes down in favour of granting or refusing the particular application in question....."

A good prima facie case for a winding-up order

33. It is not disputed that the 5^th respondent has defaulted in its obligations under the loan agreement nor that the remaining respondents, despite demand, have failed to honour their guarantees.

34. The 'informal standstill' agreed to by bank creditors is itself a strong indicator of the dire financial difficulties which have faced the Seapower Group over the past 14 months or so. However, the indulgence given by the bank creditors does not appear to have had a material impact. In her affirmation, Ms Ching Kreider has pointed to the fact that in February of this year the Seapower Group's indebtedness to its bank creditors amounted to some HK$1.285 billion. As at the end of October of this year, that indebtedness had only been reduced by some HK$41 million to HK$1.244 billion. Of that total, the Syndicate is owed HK$487 million. As I have said earlier, this figure is close to 40% of the amount due to bank creditors.

35. In the course of his submissions, Mr Bunting accepted that at this time the respondents were unable to pay their debts as they fell due.

36. In the circumstances, I am satisfied that the petitioner has shown a good prima facie case for winding-up of the respondents.

In the circumstances, should provisional liquidators be appointed?

37. Central to the respondents' opposition to the appointment of provisional liquidators is the contention that, rather than stablizing and securing the core cold storage operations of the Group, such appointments will so stultify those operations that they will rapidly become unviable and will be forced to close. In the result, what will remain will be buildings, fixed assets and machinery: all designed for a specialised purpose but no longer serving that purpose. This will have two consequences. First, any possibility of a viable scheme of arrangement will fall away because such a scheme will have to be founded on the operations being sold (or bought into) as going concerns. Second, even if liquidation is inevitable, creditors will be prejudiced because the opportunity to sell the cold storage operations as going concerns will be lost.

38. This view has most strongly been expressed by Ms Shirley Choi. She has, however, received support for the view --- although not in such strong terms --- from Mr Paul Brough a partner of KPMG. Mr Brough, who has assisted the Seapower Group, has said the following in an affirmation:

"The significant customers of the cold storage operations include food retailers (eg. McDonalds and KFC), caterers including Cathay Pacific (in-flight catering service), Japan Tobacco International (HK) Ltd, Watsons and a cross-section of medium and small food and wine companies. These customers would be likely to find out about the appointment of provisional liquidators either following its announcement by SRIL (which I understand would be required under the Listing Rules) or from other sources, for example operational staff or existing management of the Companies with whom such customers usually conduct their dealings or negotiate terms, or from the provisional liquidators themselves. They would likely deduce, rightly or wrongly, that the operations of the Companies would be wound down following such appointments."

He has continued by saying:

"Upon hearing of the appointment of provisional liquidators. It is my opinion that many of such customers would seek to withdraw their goods from the cold storage facilities as soon as possible and to use cold storage facilities owned by industry competitors which are not, in their assessment, undergoing a formal insolvency procedure."

39. Mr Brough's conclusion is that:

".... following the appointment of provisional liquidators, customers would seek to withdraw goods and new placings of goods would reduce significantly. As a consequence, the turnover and profitability of the cold storage businesses would be greatly reduced. In such circumstances, there would be a significant risk of a cessation of trading occurring as a result of the Companies being unable to meet essential operating expenses, absent third party funding."

40. But, as Mr Harris for the petitioner has pointed out, this opinion appears to ignore the fact that news of the impending winding-up petitions is already in the public arena and has already caused a degree of uncertainty. For example, CLP, the major supplier of the Group's energy needs to keep the cold storage facilities in operation, is now demanding increased security. I am told that negotiations are underway in order to satisfied CLP's demands. However, nothing has been placed before me to confirm that the problem has been settled. Does the Seapower Group have sufficient funds available to meet demands of this kind? That is a mute point.

41. In my judgment, commercial reality dictates that many customers will already know or will know in the next few days that winding-up petitions are to be presented in February. Are those customers likely to be assured by the overtures of the present senior management which has been under siege for so long? That, I doubt. Certainly, Ms Yeo of Ernst & Young is of a different opinion to Mr Brough. In her affidavit, she has said the following:

".... provisional liquidators should be appointed over Seapower Resources International Ltd and the operating companies to preserve the assets and businesses, to the extent that it is possible. It is likely that such an appointment would help stabilise the operations and reassure customers (and CLP) by going some way towards removing the uncertainty which has clearly been created by the commencement of winding up proceedings. The receivers would wish to work together with provisional liquidators to determine whether the cold storage businesses can be continued to maximise the value achieved by selling the businesses as going concerns..." [my emphasis]

42. That begs the question of course of whether the provisional liquidators will be able to muster the skilled resources necessary to be able to continue to manage the cold storage operations in a viable fashion and to reassure customers that their continued patronage will not be to their prejudice. In this regard, the intended provisional liquidators have already taken steps to recruit an experienced management team and that team, it appears from the papers placed before me, will be ready to assume control of the cold storage facilities without delay. In setting out their management proposals, the provisional liquidators have promoted their new management team in the following terms:

"Our management team enjoys the following features which we believe are beneficial to the operation:

43. While I accept that some of what is said as puffery, it does show that the intended provisional liquidators have put together an experienced team, one which knows the facilities and which will be able to begin operations almost immediately to secure the cold storage operations.

44. In the circumstances, I believe that customers are more likely to be assured if a new, experienced management team under the supervision of provisional liquidators is put into place. That will have the very real benefit of removing present uncertainties.

45. I believe, too, that, on balance, creditors will be better protected if provisional liquidators are appointed. The present senior management of the Seapower Group is inextricably associated with the present majority shareholders, namely, the Choi family. Indeed, Ms Shirley Choi and her brother are at the management helm of the Group. The Syndicate, representing the single biggest deditor, has clearly lost trust in the present management because it is believed to be as motivated by the interests of the majority shareholders as by the interests of creditors. There is evidence, in my opinion, to indicate that this loss of trust is well founded. The movement of various funds between wholly-owned subsidiaries within the Seapower Group is part of that evidence. The provisional liquidators, on the other hand, will come to their work as experienced and entirely objective managers seeking only to promote the interests of creditors.

46. Although it is not a decisive issue, in my judgment, the fact that Seapower Resources International Limited (and through it the Group) is a public company must a also be borne in mind. In my opinion, provisional liquidators will be better equipped to ensure that the public trust is not undermined.

47. In the course of his submissions, Mr Bunting made reference on several occasions to the present senior management of the Seapower Group being willing to give undertakings. These undertakings, he suggested, would be able to so constrain the present management team that there would be no possibility of dissipation of assets and the like. While I accept that undertakings often have a material role to play in matters of this kind, they are not a panacea for all ills. They have their limitations. The giving of undertakings was therefore a matter which I took into account but, at the end of the day, I did not believe that they could so shore up matters as to make it unnecessary for provisional liquidators to be appointed.

Conclusion

48. For the reasons given in this judgment, I am satisfied that it is in the interest of creditors generally that provisional liquidators be appointed. I will therefore make the necessary order subject to agreement with the Official Receiver as to terms and conditions of appointment, or, failing such agreement, subject to any further directions that I am required to make.