RE GRAND PEACE GROUP HOLDINGS LTD

HCCW 410/2019

[2021] HKCFI 2361

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 410 OF 2019

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D E C I S I O N

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Introduction

1.  The present Petition was issued on 19 December 2019.  It has been adjourned on a number of occasions to allow the Company, which is incorporated in Bermuda and listed on the Main Board of the Hong Kong Stock Exchange (“HKEX”), the opportunity to restructure its debt.  One of the Company’s creditors, Chan Tsik Yan, has become increasingly dissatisfied with the adjournments of the Petition because of what he considers to be the unattractive and vague restructuring proposal, which the Company has told creditors and the Court it is attempting to progress.  Mr Chan issued an application on 21 May 2021 to be substituted as the Petitioner and wishes the opportunity to persuade the Court to make an immediate winding up order.  It was agreed by the Petitioner, Mr Chan and the Company that the application should proceed on the basis that the Petitioner was neutral and that the determination of the substitution summons would determine the Company’s opposition to the Petition, which goes to jurisdiction, and whether or not a further adjournment should be granted.  Although the Company takes the position that this is not a proper case for the Court to exercise its discretionary jurisdiction to wind up a foreign incorporated company, the Company does not if the Court accepts its submissions on this issue, seek an immediate dismissal of the Petition as the reality is that if the restructuring is unsuccessful, liquidation would be inevitable and the Company would not oppose a winding up order.

2.  So far as the prospective restructuring is concerned, the position at the hearing of the Petition on 5 August 2021 was as follows.  The Listing Committee had determined that the Company’s shares should be delisted.  The Company proceeded to appeal this decision.  On 23 July 2021 the Listing Review Committee heard the final stage of the appeal process and dismissed the appeal on 16 August 2021.  The consequence of this is that the form of restructuring that had been envisaged and justified adjourning the Petition is no longer feasible.  Although I was told on 5 August 2021 that in the event that the Listing Review Committee dismissed the appeal the Company wished to have the opportunity to develop an alternative proposal, there was no evidence before the Court of what it might consist of and in my view, subject to the jurisdiction issue, the appropriate course is to make the usual winding up order.

Jurisdiction

3.  Given the way that the matter has developed the issues the Court has to determine is limited to jurisdiction.  The issues concern the utility of the Hong Kong Court making a winding up order.  This is relevant to the second of the three core requirements that have to be satisfied before the Court will exercise its discretion to wind up a foreign incorporated company pursuant to section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32.  The three core requirements are:

(1)  There has to be a sufficient connection with Hong Kong, but this does not necessarily have to consist of the presence of assets within the jurisdiction;

(2)  There must be a reasonable possibility that the winding up order would benefit those applying for it; and

(3)  The court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets [1].

Second Core Requirement

4.  There is no dispute that the first and the third requirements are met in the present case.  The Company argues that the second core requirement is not.  Until recently satisfying the second core requirement has given rise to limited controversy.  However, partly because of the structure and character of the businesses operated by companies that have been subject to winding up petitions in the last few years, and partly because of the decision of the Court of Appeal in Shandong Chenming Paper Holdings Ltd v Arjowiggins HKK 2 Limited [2], the second core requirement has become a more prominent consideration.  The vast majority of companies incorporated in foreign jurisdictions are holdings companies, and in the case of those coming before the Court in the last 18 months commonly listed, who hold operating and asset owning subsidiaries in the Mainland through intermediate subsidiaries incorporated in another offshore jurisdiction, of which the British Virgin Islands (“BVI”) seems to be the most popular.  In order for a liquidator of the holding company to realise any value in the Mainland subsidiaries prior to the signing on 14 May 2021 by the Secretary for Justice and the Supreme People’s Court of a cooperation agreement for mutual recognition of insolvency processes (“Cooperation Mechanism”), the impact of which I explain later, it was necessary for the intermediate subsidiary to be put into liquidation in its place of incorporation, because to the extent to which a Mainland court would have any regard to the status of a foreign liquidator, the foreign liquidator would have had to be appointed by the courts of its place of incorporation [3].  As I explain in Re China Huiyuan Juice Group Limited [4] the authorities in Bermuda, the Cayman Islands and the BVI would appear to establish that the courts of the BVI would not recognise liquidators appointed in Hong Kong over a company incorporated in Bermuda (as in the present case) or the Cayman Islands as having the authority to take control of a subsidiary of the company, which is incorporated in the BVI.  This would suggest that it is futile to appoint liquidators over a company incorporated in Bermuda in order to take control of its subsidiaries incorporated in the BVI with the ultimate aim of taking control of subsidiaries in the Mainland owned by the BVI companies.  The correct course is to seek to wind up of the holding company in its place of incorporation.

5.  Mr Lai argued that the Court of Final Appeal’s decision in Yung Kee suggested a method by which this problem could be circumvented.  In [39] of their joint decision in Yung Kee Ma CJ and Lord Millett NPJ say this:

“Although there is no doctrinal reason to exclude a connection of a foreign company with the jurisdiction through a wholly-owned subsidiary, there may be a practical reason for doing so where the subsidiary is also a foreign company. It is necessary that the assets within the jurisdiction should be capable of being made available to a liquidator appointed by the court. Counsel for the petitioner was confident that this was the case even without the assistance of the Court, since it would be sufficient for the liquidator to replace the directors of Long Yau by his own nominee. We do not share his confidence, for a change in the composition of the board of a company must be effected by its shareholders, and we are not convinced that the registrar of companies in the BVI will alter the register of members of a BVI company in order to replace the shareholders by a liquidator appointed by a Hong Kong court. Every court, however, has an implied jurisdiction to make whatever orders are necessary to give effect to its own judgments. In the present case all the individual respondents reside in Hong Kong and are subject to the in personam jurisdiction of the Hong Kong Court. Accordingly were this Court to be of the view pursuant to the discussion which follows that a winding-up order ought to be made, we would propose to give leave to the petitioner or the liquidator to apply to the Court of First Instance for such further orders whether by way of injunctions or otherwise as may be necessary to make the underlying assets of the Company available to the liquidator.”

6.  This suggests, so argued Mr Lai, that as in the present case the majority of directors are in Hong Kong and thus subject to the in personam jurisdiction of this Court that liquidators could apply to Court for an order that the directors execute the documents necessary for the liquidators to take control of the BVI subsidiaries.  I accept that [39] of Ma CJ and Lord Millett NPJ’s decision does suggest that action of this sort could be taken with a view to obtaining control of the BVI subsidiaries, but on a detailed consideration of the private international law principles that are engaged as a consequence of the structure of the group of companies of which the Company is the apex (and this has become the common structure for listed groups in the last couple of decades) it seems to me that the suggestion that the refusal of the Registrar of companies in the BVI to alter the register of members at the request of a liquidator appointed by the Hong Kong court, could be circumvented by orders requiring the directors of the holding company to execute the necessary documents is doubtful.

7.  As I explain in China Huiyuan [5] the reason why I would not expect a BVI court to recognise a liquidator appointed by the Hong Kong court over a BVI subsidiary of a Cayman Islands incorporated holding company (and by parity of reasoning a Bermuda incorporated company) is that it is a principal of BVI private international law that only a liquidator appointed by the court of the place of incorporation will be recognised and assisted.  Therefore, one would reasonably expect that if the BVI Registrar of companies was alerted to the fact that documents with which he had been presented had only been executed under the compulsion of an order made by a Hong Kong court on the application of a liquidator appointed in Hong Kong, the Registrar would refuse to effect the changes, because he might reasonably take the view that to do so would be substantively inconsistent with the principle of BVI law to which I have referred.  Even if the Registrar ignorant of the circumstances in which the documents came to be executed made the change presumably an application could be made to the BVI court by a disgruntled creditor or member for an order seeking rectification of the register and public records.

8.  It is not only BVI substantive private international law, which creates an impediment to a liquidator obtaining control of a BVI subsidiary.  I explain in [4] of Joint Official Liquidators of A Co v B [6] that as a matter of Hong Kong law generally matters concerning the constitution and management of the affairs of a foreign company are determined by the laws of the place of its incorporation:

“These rules recognise that, as one would expect, generally matters concerning the constitution and management of the affairs of a foreign company are determined by the laws of the place of its incorporation. The authors of Conflict of Laws explain in paras.30-102 of the 2nd volume that Rule 179 is justified because the law of the place of incorporation determines who is entitled to act on behalf of a corporation and in footnote 430 various authorities are cited as establishing this principle. The authors go on in the same paragraph to explain that ‘If under that law [the law of the place of incorporation] a liquidator is appointed to act then his authority should be recognised here’. It follows that if a person in Hong Kong receives a request or instruction from a liquidator of a foreign corporation, with which if it had come from the board of directors of that foreign corporation he would have complied, he should once he is satisfied that the liquidator was properly appointed in the place of incorporation act upon the request or instruction. In practice this is not what happens. It appears to be a common response of banks and other parties to a request for information from a foreign liquidator, and was so in the present case, that his appointment is not effective in Hong Kong and that they require an order from the Hong Kong courts before they will act.”

9.  This being the case one would expect the Hong Kong court to have regard to whether as a matter of Bermuda law and BVI law, which as I explain in China Huiyuan [7] are the same,  liquidators appointed by the Hong Kong court would be the lawful agents of the Company with the power to exercise its voting rights as a shareholder of a BVI Company.  It would appear that they would not.  It would on the face of the matter appear inconsistent with the principle I have explained in the previous paragraph for the court to make an order, which necessarily involves treating the liquidators of the Company as being the agents of the Company with the authority and power to exercise voting rights, which as a matter of Bermuda law and BVI law they would not be.  Even if the Hong Kong court took the view that this principle is not an impediment to making such an order in respect of assets within its jurisdiction, for example, the shares of a Hong Kong Company, it would seem to me highly questionable whether it should do so in respect of an asset in another jurisdiction particularly if that jurisdiction’s own substantive law would not recognise the Hong Kong winding up.  I should add that counsel have not been able to find any authority, which addresses this issue.

10.  Mr Ho submitted that there is a further difficulty with using orders directed to the directors to obtain control of subsidiaries.  It is a well-established principle of corporate insolvency that once a winding up order has been made the directors’ powers cease and the liquidators are the only agents of a company in liquidation with the power to act on its behalf.  This has been recognised to be the position since the late 19^th century.  In Re Ebsworth & Tidy’s Contract [8] an issue arose concerning who was entitled to act on behalf of what appears to have been an unregistered company, which had advanced money by way of mortgage for the purchase of land, and which had gone into liquidation.  In analysing the law Lord Esher MR says this at page 43: “If a registered company goes into liquidation the Court has power to appoint an official liquidator; if it does so, what is the position of the persons who were the directors? To my mind they have ceased to exist.”  The issue is considered more comprehensively 30 years later in the context of the Companies (Consolidation) Act, 1908 by the then Master of the Rolls Lord Sterndale MR in Re Farrow’s Bank [9] in which he explains the following:

“The question turns upon the position of a liquidator in a compulsory liquidation. I am not going to read all the sections of the Companies (Consolidation) Act, 1908, which deal with his powers. It is sufficient to refer to s. 151, which, by sub-s. 1, provides that the liquidator in a winding up by the Court shall have power ‘(a) to bring or defend any action or other legal proceeding in the name and on behalf of the company; (b) to carry on the business of the company, so far as may be necessary for the beneficial winding-up thereof’; and sub-s. 2 (a), which provides that he shall have power ‘To sell the real and personal property, and things in action of the company by public auction or private contract, with power to transfer the whole thereof to any person or company, or to sell the same in parcels.’ But the whole of these powers given to him are to do acts on behalf of the company. There is no express provision in the Act in the case of a compulsory liquidation as there is in the case of a voluntary liquidation, that the powers of the directors shall cease on the appointment of a liquidator (see s. 186 iii.), but they do in fact cease on the appointment of a liquidator in a compulsory liquidation. In that case the liquidator is imposed upon the company compulsorily by the Court to do acts on behalf of the company and to carry on the business of the company so far as it shall be necessary for the purposes of the winding up. It is quite true that the company does not choose him; he is put there by the Court; but he is put there to do the acts which the directors of the company did before their powers ceased …”

11.  It is clear from recent English authorities that it remains the established English position that in the case of a compulsory liquidation once a company has been ordered to be wound up and a liquidator appointed (commonly the Official Receiver in the first instance) the powers of the persons who had been directors cease [10]. There appears to be no Hong Kong authority, which is on point, but it seems to me that there is no reason to suggest that the law in Hong Kong is any different.  This is consistent with the position in the case of voluntary liquidation.  Although the office of director is not terminated, section 244(2) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32, provides that: “On the appointment of a liquidator, all the powers of the directors shall cease, except so far as the committee of inspection, or if there is no such committee, the creditors, sanction the continuance thereof.”

12.  It follows that on the assumption that the law of Bermuda and the BVI is the same as Hong Kong (which I think it reasonable to assume and, in any event, as there is no opinion evidence before me, I should assume) the directors would not have the power to change the shareholders of a BVI subsidiary.  As a matter of Bermuda and BVI law it may well be that the directors would still be the authorised agents of the Company as the Hong Kong liquidators would not be recognised in either jurisdiction, but submitted by Mr Ho, it would be artificial and somewhat disingenuous, for this court to make an order compelling directors to execute document at the request of liquidators, who as a matter of the law of Bermuda are not lawful agents of the Company, on the basis that by virtue of the fact that the acts of the liquidators would not be recognised in Bermuda, but the acts of the directors would be, a change in the shareholders of the BVI subsidiaries could be engineered.  I agree.

13.  It seems to me for the above reasons that it would be wrong to proceed on the basis that if I make a winding up order the liquidators will be able to obtain control of the BVI subsidiaries by seeking orders against the Company’s directors unless there is some other overriding principle, which justifies treating the Hong Kong liquidators as the agents of the Company.  In the present case there is none.  There would be, however, if it could be demonstrated that the centre of main interests (“COMI”) of the BVI subsidiaries were in Hong Kong and what was sought was the appointment of liquidators in Hong Kong with a view to an application being made to one of the Intermediate People’s Courts, which under the Cooperation Mechanism have the power to recognise insolvency processes conducted under the jurisdiction of the High Court of the Hong Kong SAR.  The Cooperation Mechanism applies to companies wherever incorporated, which have had their COMI in Hong Kong for six months or more prior to the application for recognition being commenced in the Mainland.  It follows that modification of the common law principles of private international law to which I have referred is justified when dealing with processes, which take place within the jurisdictions of the four courts in the People’s Republic of China, to which the Cooperation Mechanism applies [11]. However, I am of the view that this is an exception to the general principles, which I have explained and does not justify making in personam orders against directors of foreign companies that are inconsistent with those principles unless the company’s COMI is in Hong Kong and it is intended to make applications pursuant to the Cooperation Mechanism.

14.  It follows that I am not satisfied that winding up the Company in Hong Kong for the purpose of obtaining control of the BVI subsidiaries provides sufficient benefit to satisfy the second core requirement.  Mr Lai argued that even if I were to reach this conclusion the second core requirement was satisfied by the evidence of assets in Hong Kong.  Before turning to consider the evidence, which is brief, I will explain what the second core requirement requires a petitioner to establish on the balance of probabilities.  This is most conveniently done by reference to my recent decision in Re Huiyuan Juice Group Limited [12].  I explain the following in [23], [26] and [29]:

“23. After this Petition was heard the Court of Appeal handed down its judgment in Shangdong Chenming Paper Holdings Ltd v Arjowiggins HKK 2 Ltd [13]. This was an unusual case. The Company is incorporated in the Mainland and has listings both in Shenzhen and Hong Kong. It is solvent. It refused to pay an arbitration award, which the Defendant was given leave to enforce in Hong Kong as a judgment. The Company refused to pay the judgment. The Defendant threatened to issue a petition to wind-up the Company on the grounds of insolvency. The Company issued an application for a declaration that the Defendant would not be able to demonstrate that the three core requirements could be satisfied and, therefore, it should be enjoined from presenting a petition. It was not in dispute that both the first and third core requirements were satisfied. The Company argued that its only connection with Hong Kong was its listing and that no benefit would be derived by the Defendant if a winding-up order were to be made and thus the second core requirement could not be satisfied. The Court of Appeal agreed with my decision that a benefit to the Defendant would result from a winding-up order by virtue, and I summarise, of the pressure that a liquidation in Hong Kong, or the prospect of such a liquidation, would put on the Company to settle the debt. This effect largely arose from the fact that the Company was clearly solvent and wished to access Hong Kong’s capital and debt markets. The only reason for not paying was recalcitrance. It will be appreciated that the facts were unusual and, hopefully, are not likely to arise again. The relevance of the Court of Appeal’s decision is the following statement in the judgment, which was given by Barma JA, about the second core requirement. Barma JA says this at [27]:

‘Moreover to insist on this requirement being met is clearly sensible, in that there would seldom be circumstances in which it would be justified to set in motion the court’s winding-up machinery where to do so could provide no reasonable prospect of benefit of any kind to the petitioner. That said, the overarching nature of the enquiry, the purpose of which is to ascertain whether it would be appropriate to put into motion the winding-up machinery in respect of a particular overseas company, would, I think, allow for some flexibility as to the nature or extent of the likely benefit to the petitioner that should be shown in order to satisfy the second core requirement, as long as the benefit can be said to be a real possibility, rather than a merely theoretical one.’

…

26. As the passage I have quoted in [23] makes clear, in determining whether or not the second core requirement is satisfied the court will take a pragmatic approach. It will not be necessary for a petitioner to identify with great precision what the benefit will be or quantify with exactness the value of the benefit. But the petitioner must be able to point to a discernible and real benefit. Hypothetical benefits that potentially arise in all cases will be insufficient to satisfy the second core requirement. An example of such a hypothetical benefit would be the investigation of the affairs of a company by a liquidator, which might, but then again might not, identify a claim against officers of the company or locate an asset unidentified at the time of presentation of the petition, which would increase the assets available for distribution amongst creditors. In my view, it is clear from Barma JA’s judgment that these possible benefits would be too theoretical to satisfy the second core requirement ...

29. In conclusion, it seems to me that it is necessary for a petitioner to demonstrate by evidence that there is a real possibility of a tangible benefit to creditors.  The relevant facts and matters, which the evidence is adduced to prove should be set out in the petition and if it is not the petition is demurrable.”

15.  The evidence on which Mr Lai relied is contained in [8]–[12] of the 3^rd affirmation of Chow Wai Leong Eric on behalf of the Company.  Mr Chow says this:

“8. The Company now has 10 wholly-owned subsidiaries, 9 of which are companies incorporated in the British Virgin Islands, with the remaining one, Great Mark Holdings Limited (‘Great Mark’), being a company incorporated in Hong Kong. There is now produced and shown to me marked ‘CWLE-5’ the current corporate chart of the Group. Great Mark does not have any actual commercial activity, and it is now solvent.

9. Among the Company’s principal areas of business in Hong Kong,

(a) Merit Vision Holdings Limited (‘Merit Vision’) carries on funeral business; and

(b) Elite Finance Global Limited (‘Elite Finance’) carries on loan financing business through its wholly-owned subsidiary, Join Wealth Finance (Hong Kong) Limited, a company incorporated in Hong Kong and a money lender licensed under the Money Lenders Ordinance (Chapter 163 of the Laws of Hong Kong),

and both Merit Vision and Elite Finance are companies incorporated in the British Virgin Islands. The principal assets of both Merit Vision and Elite Finance are account receivables, and they are now cash flow insolvent.

10. EMAX Venture Limited and General Asia Holding Limited, both being companies incorporated in the British Virgin Islands, carry on funeral and elderly home business in the Mainland, respectively. Both these companies do not have any assets, and they are now insolvent.

11. The remaining 5 wholly-owned subsidiaries of the Company, namely, Able Benefits Holdings Limited, Gainer Power Limited, Successful Asia Limited, Most Earning Limited and Earn Fine Limited, all being companies incorporated in the British Virgin Islands, do not have any actual commercial activity, and they are all insolvent. Further, all these 10 wholly-owned subsidiaries owe money to the Company, but none of them have any means to make any repayment at this juncture.

12. The Company has banking accounts, and the aggregate amount currently in such accounts is around HK$78,686.”

16.  The evidence suggests that the BVI subsidiaries have their COMI in Hong Kong with one exception, which as its name suggests, Ming De Tang Trading (Shenzhen) Limited, carries on business within the jurisdiction of the Shenzhen Intermediate People’s Court.  But as its COMI does not appear to be in Hong Kong the Cooperation Mechanism does not apply to it. The only other Mainland company seems to be based in Nansha, which I understand is not within the jurisdiction of the Shenzhen Intermediate People’s Court.  Further Mr Chow expressly states that the Mainland companies have no assets.  In my view this evidence is not capable of satisfying the second core requirement.  Neither is the value of the Company’s listed status, which has now been lost by virtue of the shares being delisted.

17.  Mr Lai submitted that although this evidence might not demonstrate anything that could be recovered in the Mainland, it acknowledged that the subsidiary incorporated in Hong Kong, Great Mark Holdings Limited (“Great Mark”), owes money to the Company, although there is no indication of how much it owes or, as it is insolvent, how much of the debt it might be able to pay.  Mr Lai accepted that it was difficult to justify winding up the Company in Hong Kong to recover a debt of HK$78,686, which would not cover the costs of the Petition, but argued that the existence of an albeit unquantified debts owed by Great Mark was sufficient to satisfy the second core requirement.

18.  As I explain in [26] of China Huiyuan [14], which I have quoted in [14], in order to satisfy the second core requirement, a petitioner must be able to point to a discernible and real benefit.  It is not necessary for the petitioner to identify with great precision what the benefit will be or quantify with exactness the benefit’s alleged value.  However, the court must be satisfied that the benefit is tangible and justifies putting in motion the entire Hong Kong insolvency regime rather than proceeding in what Ma CJ and Lord Millett NPJ refer to in [19] of their judgment in Yung Kee[15] as the generally most appropriate jurisdiction under our principles of private international law namely, the jurisdiction of incorporation and, if necessary, the liquidators appointed in the place of incorporation applying for recognition and assistance in Hong Kong, which generally will be more straightforward and cost effective. I am not satisfied that the second core requirement has been met, particularly as on Mr Chan’s case most of the assets are owned through BVI incorporated entities, which I have already found can probably only be accessed by liquidators appointed in Bermuda.

19.  I dismiss the substitution application with costs to the Company and will list the Petition for hearing on 30 August 2021.