RE FUJIAN GROUP LTD.

HCCW68/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.68 OF 2003

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REASONS FOR DECISION

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1. This is an ex parte summons on notice taken out by the petitioner for an appointment of provisional liquidators in respect of Fujian Group Limited ("the Company"), a public listed company. On 15 January 2003, I allowed the application and made an order in terms of the draft order with some minor amendments. These are my reasons.

Background

2. The events leading to the petition and the present application, as described in the petition and the second affirmation of Jackie Wong Chi Lung in support (both filed on 15 January 2003), can be summarized as follows.

3. As at 19 November 2002, the Company owed a total sum of HK$50,423,401.02 to the petitioner. It has been in default of its payment obligations to the petitioner since November 1998. Since October 2002, the petitioner has been acting as liaison bank for other creditors. According to the Company's published accounts, the amounts owed to those creditors (including the petitioner) stood at some HK$613 million, which comprised about 96% of the Company's total liability.

4. On 21 January 2002, former employees of the Company commenced winding-up proceedings against the Company. By then, the Company was already discussing with the petitioner and the above creditors its inability to repay the debts due to them.

5. By the first hearing of that petition in April 2002, the Company and those creditors had reached an advanced stage of negotiation to restructure its debts, based upon an injection of funds by a third party. For this reason, the hearing of the petition was adjourned. However, the negotiation fell through after the investor withdrew. Efforts were continued to be made to invite an alternative investor. The petition was further adjourned in May 2002 to enable the Company and its creditors to have further time to explore restructuring alternative to liquidation.

6. On 19 June 2002, the Company made an announcement together with Soundwill Holdings Limited ("Soundwill") that the Company had entered into a number of undertaking concerning certain restructuring proposals. The petitioner was not aware of it beforehand. Negotiations between the petitioner and the creditors and Soundwill began and reached an advanced stage in early January 2003. However, on 6 January 2003, the petitioner was told by Soundwill that it was unable to complete the restructuring because it could not agree terms with one of the potential investors. The petitioner was later approached by Asian Capital (Corporate Finance) Limited ("Asian Capital") that an investor, whom Asian Capital represented, intended to make a proposal to enable the Company to persuade the Hong Kong Stock Exchange to allow the re-listing of the shares, which has been suspended since 16 February 2001. The details of the proposal would be communicated to the petitioner and the creditors of the Company by 15 January 2003.

7. On 10 January 2003, Asian Capital sent written confirmation of the intentions of their client, Fujian Investment and Development Co. Limited ("FIDC"), indicating that it would be possible to undertake the restructuring by agreement between the Company, FIDC and the creditors through a scheme of arrangement, subject to dealing with the interest of Soundwill.

8. By a letter dated 14 January 2003, Asian Capital told the petitioner that discussions with Soundwill had broken down and that it would only be possible to proceed with the proposed restructuring if provisional liquidators were appointed. The letter pointed out, inter alia, :

(1) that the Stock Exchange has announced that the deadline for the submission of any proposal for resumption of listing in the Company's share is 20 January 2003; and

(2) that FIDC would only proceed if provisional liquidators are appointed and if their offer is accepted by the Company, acting through the provisional liquidators, by close of business on 16 January 2003.

9. Mr Jackie Wong deposed in paragraph 17 of his second affirmation thus :

"I understand from Mr. Yeung of Asian Capital that he and the Investor have been informed by the Company's directors that their board could not reach a consensus in relation to cooperation with the Investor concerning the proposed restructuring in light of Soundwill's exclusivity agreement. It is clear that if the Company remains in the control of the directors there will be no prospect of a restructuring being achieved. I have also been informed by Mr. Yeung that two directors of the Company told him and the Investor and the Investor's solicitors in a meeting on Monday evening, 13th January 2003, that they understood that in the absence of their board's cooperation it was likely that there would be an application for the appointment of provisional liquidators and that they had no objection to such an appointment in the interest of rescuing the Company. At 8:36 p.m. yesterday [i.e. 14 January 2003] Allen & Overy sent a fax to the Company giving notice of HSBC's intention to apply for the appointment of provisional liquidators and asking for confirmation of whether the Company consents. There has been no response to that fax (see pages 66-67). My colleague, Stella Chan, has since attempted to telephone the Company's directors but without success."

10. On 15 January 2003, the petitioner filed the present petition in the morning and the ex parte summons on notice in the afternoon.

The Law

11. The court's power to appoint provisional liquidators under section 193(1) of the Companies Ordinance, Cap.32 is a general power and how it is exercised depend on the particular circumstances of each case. It is not possible to lay down any hard and fast rule and in the past, jurisdiction had only laid down broad guiding principles governing the exercise of the discretion. The first requirement the applicant must meet is to show by believable evidence that they have a good prima facie case for a winding-up order. If this requirement is met, in considering whether to exercise the power, the court will then have to take into account the commercial realities, the degree of urgency and need established by the applicant, the balance of convenience according to the particular circumstances and where any other good cause is shown. See Re Hang Tak Buddhist Hall Association Ltd [2002] 3 HKLRD 863.

Insolvency

12. Here, I have no difficulty in concluding that the Company is unable to repay its debts to the petitioner. Thus a good prima facie case for winding-up on the ground of inability to pay its debts is established.

Just and convenient to appoint provisional liquidators.

13. Appointing provisional liquidators in similar circumstances has been judicially approved recently : see Re Keview Technology (BVI) Ltd [2002] 2 HKLRD 290, Re Luen Cheong Tai International Holdings Ltd [2002] 3 HKLRD 610 and Re I-China Holdings Ltd, HCCW1321/2002, unreported, 11 December 2003.

14. In Re Luen Cheong Tai International Holdings Ltd, Kwan J said at paras.28 to 32 :

"28. What is proposed by BOC and the supporting financial creditors is that provisional liquidators should be appointed to make an assessment of the financial position of the Company with a view to facilitating a restructuring of the Company and its subsidiaries, as they have lost faith in the management of the Company to put forward a viable proposal. It is hoped that the listed status of the Company may be realised in the absence of a winding up order as the financial and regulatory requirements of the Stock Exchange for such a relisting are less onerous than for a relisting by way of introduction where a company has been wound up. Hence, the listed status would be far more attractive to potential investors and could fetch a much higher value than in the situation after a winding up order is made, judging from the price generated for the listed status in Re Keview Technology (BVI) Ltd [2002] 2 HKLRD 290 at 296B. Thus, it is proposed that in the event that provisional liquidators are to be appointed, the petitioner would seek an adjournment of the petition at the hearing on 9 September 2002 for the provisional liquidators to explore restructuring proposals.

29. Is this a legitimate reason to seek the appointment of provisional liquidator? For a provisional liquidator to be appointed, an applicant is required to show a good prima facie case that a winding up order will be made. It may seem paradoxical that in this situation, the objective is not to wind up the company but to adjourn the petition so that a rescue proposal might be explored. In Keview, it was held by Yuen J (as she then was) that there is no jurisprudential objection in extending the powers of provisional liquidators appointed under section 193 of Cap.32 to carry out a corporate rescue role. It seems to me a logical extension of Keview that if provisional liquidators may be empowered by the court to facilitate a restructuring proposal, this recognised function of the provisional liquidators could provide the rationale for appointing them in the first place.

30. The statutory provisions, namely section 193(3) of Cap.32 and rule 28(1) of the Companies (Winding-up) Rules, are wide enough to accommodate such a ground for appointment. The English courts have recognised that the avoidance of a scramble by creditors for assets and the protection of assets pending the putting forward of a scheme of arrangement may be good reasons for the appointment of provisional liquidators in the case of insurance companies, where the administration order scheme is not available (see Keview, supra. at 293G to H; Re English & American Insurance Co. Ltd [1994] 1BCLC 649 at 650b to d; and Lightman and Moss, The Law of Receivers and Administrators of Companies, 3rd ed., para.2-045). I was also referred by Mr Bartlett to an Australian decision, Cope Allman (Marrickville) Pty Ltd v The Marrickville Businessman's Club Ltd (1983) 1 ACLC 1003, in which the court appointed a provisional liquidator for the purpose of ascertaining whether the company's business could be carried on effectively and possibly of ascertaining whether some arrangement or compromise could be reached with the creditors.

31. In Keview, it was held that it is not an abuse of the process for a petitioner to present a petition for the purpose of effecting a freeze on actions against the company, so that a scheme of arrangement can be worked out, adopting the dicta of Harman J in Re Esal (Commodities) Ltd [1985] BCLC 450 at 459 to 460. I respectfully agree. So long as it is intended by the applicant that a winding up order will be sought in the event that a scheme of arrangement cannot be achieved and that it is likely that a winding up order would be granted if it were sought, it does not appear to me there is any abuse of the process of the court.

32. For the above reasons, I accept this is also a proper ground for appointing provisional liquidators in this instance."

I respectfully agree.

15. In Re I-China Holdings Ltd, Deputy Judge Barma SC summarised the position in paragraph 26 thus :

"In the Keview case, Yuen J (as she then was) held that there was no objection to extending the powers of provisional liquidators to carry out a corporate rescue role. In the Luen Cheong Tai case, Kwan J took the decision one step further by recognizing the facilitation of a corporate rescue as a rationale for appointing provisional liquidators in the first place. So long as it is intended to seek a winding up of the Company in the event that any attempted restructuring fails, I agree that there is no reason why this should not be a proper ground for appointment of provisional liquidators. In a sense, it might be regarded as a form of preservation, if not of assets in the strict sense, then at least of value in the Company, for the benefit of its creditors, as it might enable the creditors to achieve a better return through a scheme of arrangement, in the course of which a higher value might be obtained for the benefit of the Company's listed status than would be possible after a winding up order were made (see the Luen Cheong Tai case, at para. 28 of the judgment)."

16. In the present case, I have no difficulty to conclude that, having considered all the circumstances and applying the principles cited above, it is just and convenient to appoint provisional liquidators. The proposed restructuring by FIDC through Asian Capital is the only viable option, the previous one proposed by Soundwill having failed already. It will give the creditors a far better return than on a winding-up, although the creditors will only be able to recover a mere 3% of the debts. In order to realize the opportunity it is necessary to appoint provisional liquidators to take over the control of the Company because firstly, its directors are unable or unwilling to handle or deal with the negotiations because of the exclusivity in favour of Soundwill; and secondly, FIDC so required. Time is pressing. FIDC imposed a deadline on 16 January 2003. If no restructuring proposal is put forward, the Company will not be able to meet the deadline of delisting on 20 January 2003. This will cause severe if not irreparable damage to the Company's listed status, its most valuable interest.

17. For the foregoing reasons, I allowed the application.