CHAN HOW CHUNG, VICTOR AND ANOTHER v. TKR FINANCE LTD AND ANOTHER

HCCW 657/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 657 OF 2004

______________________

______________________

______________________

______________________

D E C I S I O N

______________________

1.  This is an application under Section 199 of the Companies Ordinance, brought by TingKong RexCapital Holdings Limited  (“Holdings”) a creditor and contributory of TingKong-RexCapital Finance (“Finance”), a company presently in liquidation.

2.  In summary, what Holdings seeks to achieve is a consolidation of all the remaining debts of Finance owed to its remaining creditors in its liquidation into a single debt owed to Holdings, and the satisfaction of that debt by the taking of an assignment from Finance of certain of Finance’s assets in the form of debts due to Finance by certain individuals and companies which are believed to have some value.

3.  The background to the application is that Finance was incorporated in Hong Kong and is effectively a wholly owned subsidiary of Holdings.  The only other shareholder of Finance is Mr Victor Chan who was a director of that Company and who appears to be the moving force behind Holdings.  Finance was a part of the TingKong-RexCapital Group which was a joint venture between the RexCapital Group, a group of companies in which Mr Chan was interested, and a Taiwanese group of companies known as the Taiwan TingKong Group.  The business of Finance was the provision of financial services, such as debt finance, bridging loans and acquisition financing for acquisition of listed companies, and other general financing lines to borrowers for the making of investments or working capital purposes.  Generally speaking, such finance was collateralised by shares in listed companies.

4.  As a result of litigation, the details of which I need not go into, Finance was ordered to be wound up on 21 July 2004.  According to Finance’s records, it had some 17 creditors.  Of those creditors, 13 filed proofs of debt; four of them did not.  Of the remaining 13 creditors, the debts of five were settled by Holdings resulting in the proofs they lodged being withdrawn.  That left a total of seven creditors, one of which is Holdings, five of which are companies associated with Holdings, and the last of which was a company called RexCapital Finance.

5.  Although there was initially some doubt as to the position of RexCapital Finance, it is now accepted by the Liquidators that the position of RexCapital Finance has been resolved, in that RexCapital Finance has, in August this year, written to the Liquidators to indicate that its debt, in respect of which it had lodged a proof, had been settled in full by a third party and that it accordingly wished to withdraw the proof of debt that it had filed in Finance’s liquidation.  The effect of this is that RexCapital Finance is no longer a creditor of Finance and its position need not be considered for the purposes of this application.

6.  As far as the remaining creditors are concerned, they are, as I have said, all companies related to Holdings.  The proposal, in effect, is that the companies should assign the claims that they have against Finance to Holdings.  That, it seems, has not yet been done and it is this that has given rise to the main concern on the part of the Liquidators in relation to this application.

7.  If the debts are assigned, the result will be that Holdings will be a creditor in respect of Finance in the principal amount of $436 million-odd, that being the amount that was outstanding as at the date of Finance going into liquidation.  Since then, there will have been, additionally, interest accruing on the debts, but whether or not such interest will ultimately be payable in the course of the liquidation depends on whether or not Finance proves to be solvent or, perhaps more accurately, has a surplus available after the paying of all debts in respect of which proofs have been lodged.

8.  The assets that are proposed to be acquired are the debts owed to Finance by two companies and an individual, the companies being entities called Kingly Profits Corporation and Tees Corporation, and the individual being a Mr Leung Chung-shan.  These are debtors of Finance in the total sum of HK$326 million-odd by way of principal, although with accrued interest, the debts now stand at slightly under HK$500 million.  Each of these three debtors has provided security to Finance in the form of listed shares in various companies.  In the case of Kingly Profits, it has pledged some 717 million shares of RexCapital Financial Holdings Limited, and just under 5 million shares of a company called New Times Group Holdings Limited.  In the case of Tees Corporation, it has pledged some 780 million-odd shares of a company called eForce Holdings Limited, and in respect of Mr Leung, there has been a pledge of some 58  million-odd shares of eForce Holdings Limited. 

9.  As a result of recent price movements in the stock market, these shares, the value of which was previously insufficient to cover the debts owed to Finance, are now worth considerably in excess of the debts that are owed.  The latest position appears to be that the total market value of the various shares that have been pledged to TKR Finance is somewhere in the region of HK$1.2 billion, just under two and a half times the amount of the debts that they secure. 

10.  The main concern that the Liquidators have in relation to the proposed arrangement is that this may amount, in effect, to a scheme of arrangement in that the five creditors whose debts are proposed to be transferred to Holdings will be giving up their rights to claim in what would appear to be a substantially solvent liquidation in which they would be entitled to, in effect, 100 cents in the dollar on their proofs, and something more in the way of interest, to the extent that there remains a surplus in the liquidation after payment of their proved debts and the costs, charges and expenses of the liquidation.  They will be giving up that right in exchange for something that they will be obtaining from Holdings.  The precise nature of what they will be obtaining has not been made entirely clear but it appears, from the correspondence that has been exhibited to the evidence filed for these proceedings, that the nature of the consideration is likely to be a capitalisation issue in Holdings itself.

11.  The main concern of the Liquidator is that little is known as to the precise arrangements as between Holdings and the five companies whose debts are proposed to be assigned to it.  The Liquidator has indicated that he does not feel able to consent to the proposal or indicate that he agrees to it without having further information as to these matters.  I think it is fair to say that the precise nature of this concern was not fully spelt out until the Liquidator’s skeleton submissions were received last night.  They were amplified by Mr Tollan, who appeared for the Liquidators in the course of this hearing.  It was suggested that questions of corporate governance arise, given that the five companies whose debts are proposed to be transferred to Holdings are all associated companies of it, which are effectively under the control of Mr Chan. 

12.  It seems to me that, while the possibility that there may be such issues arising cannot be ruled out, at the end of the day, whether or not the companies in question should enter into the arrangement that is proposed is a matter for those companies to consider.  At this stage, there the companies are not themselves in liquidation and there is nothing to suggest that they are not solvent.  In those circumstances, it seems to me that the Court is not in a position to, and should not, speculate as to the precise reasons that may have motivated them to enter into this proposed arrangement, and as to whether such reasons were good, bad or indifferent.  That is a matter for the directors and shareholders of the companies concerned.

13.  In my view, the position would have been greatly simplified had, prior to this application being made, or at least before its hearing, steps been taken to secure that the companies had in fact assigned their debts to Holdings and withdrawn the proofs of debt which they had lodged with the Liquidator and Holdings had amended its proof of debt in order to include within it the amounts that would be due to it as a result of the assignments it would thus have taken from the five other companies.

14.  Mr Yuen has suggested that it would be open to the Court to make an order substantially in terms of that which is proposed, subject to a condition that assignments and the consequent withdrawal and amendment of proofs of debt be entered into.  It seems to me that this is an acceptable way forward which will, at least, have the effect of reducing costs and avoiding the need for a further hearing.  It seems to me, at the end of the day, that it is a matter for the companies concerned as to whether or not they wish to enter into the arrangements that are proposed.  If the companies do so, then, it seems to me, that once assignments have been entered into and the proofs of debt in Finance’s liquidation withdrawn, the Liquidator will have no reason to be concerned about the relationship between the companies and Holdings itself.  If there is anything untoward in that relationship, that is a matter that will have to be considered at some other time, should anyone who is entitled to do so seek to complain about it.  At this stage, there is no suggestion that any such person or entity might exist or be anywhere in the offing, and I do not think that it would be right to proceed on the basis that there is any real basis for such a concern today.

15.  In the circumstances, therefore, provided that the five companies concerned have in fact assigned to Holdings the debts that are owed to them by Finance and have lodged with the Liquidator a formal withdrawal of their individual proofs of debt in the liquidation of Finance, subject to any other concerns or points raised by the Liquidators, there is no reason why this application should not be approved.

16.  As far as other considerations are concerned, the Liquidator raised a number of other matters.

17.  The first was a concern as to the position of RexCapital Finance, whose debt was not to be dealt with in the same way.  However, this concern has, as I have indicated above, now been dealt with.

18.  Secondly, it was suggested that the proposed arrangement might amount to a scheme of arrangement and should be proceeded with as such, under the provisions of section 166 of the Companies Ordinance.  As to this, it seems to me that, provided that the assignments are entered into as I have indicated, this point would fall away as that there would then only be one remaining creditor of the Company and it would be open to that creditor to propose the present arrangement without going through the scheme of arrangement procedure under section 166 of the Companies Ordinance.  In any event, I do not think that this is a problem even in the absence of the assignments, since it is always open to creditors to make such arrangements between themselves, or between themselves and the company, by agreement.  The scheme of arrangement procedure is designed to meet a situation in which it is not possible to resolve matters by unanimous agreement of all parties concerned, and provides a mechanism by which an arrangement can be made binding on all parties concerned by the agreement of the requisite majority.

19.  There was, thirdly, a question as to the actual amount of the debts that would be the subject of this arrangement so far as Holdings and the five companies are concerned.  The position as to this is that, leaving aside interest that may have accrued, under the terms of the contracts governing the debts, since the date of liquidation, the amount of the debts is less than the amount of the assets that are proposed to be transferred to TKR Holdings in the form of the three debts that are secured by the listed shares.

20.  However, it is common ground that, to the extent that there is a surplus in the liquidation after payment of the costs, charges and expenses of the liquidation and settling the debts in respect of which proofs have been lodged, such surplus will fall to be distributed to the creditors who have lodged proofs, to settle post-liquidation interest.  It is, I think, common ground that the amount of post-liquidation interest will exceed any surplus that there might be in respect of the assets of Finance after payment of the proofs of debt.  I therefore do not think that that is a real problem in this case.

21.  There are, however, two other areas that require consideration.  The first is that there is at present outstanding an application for a permanent stay of the liquidation.  That has yet to be heard.  One of the issues that may arise in the context of that application is whether or not there is any purpose in continuing the liquidation, for example in order to enable possible proceedings to be taken against directors of TKR Finance, such as disqualification proceedings.  I do not consider that the approval of the proposed arrangement at this stage will be likely to have any significant impact on that hearing.  I therefore do not think that the fact that that hearing is pending is a reason for withholding approval of the proposed arrangement.

22.  Secondly, and finally, it does seem to me that it is necessary to ensure that the position of the Liquidator and the Official Receiver in respect of any fees, costs and charges that may be payable to them is adequately provided for.  I am informed that, apart from the three debts that are proposed to be transferred, the Company has currently a credit balance of about HK$5 million in the Liquidator’s bank account and it is thought likely that this will be sufficient to cover all future costs, charges and expenses in relation to the liquidation.  However, to the extent that that is not the case, Mr Yuen, appearing for Holdings, has indicated that Holdings is prepared to undertake to make good any shortfall that there may be in respect of the Liquidator’s and Official Receiver’s fees and costs.  I think it would be right to accept that undertaking so that the Liquidator and Official Receiver are not left out of pocket as a result of the approval of the proposed arrangements.

23.  Thus, the outcome of the application is that, upon Holdings’ undertaking to pay to the Liquidator and/or the Official Receiver any shortfall that may exist in respect of their respective fees, costs, charges and expenses at the end of the day, I shall approve the proposed arrangement conditional upon Holdings obtaining and producing to the Liquidator assignments to Holdings from the five companies concerned of their claims against Finance, and conditional also upon the five companies formally withdrawing their proofs of debt in the liquidation of Finance and the amendment by Holdings of its proof in the liquidation of Finance to incorporate the amount of the proofs withdrawn by the five companies concerned.

(Submission on costs)

24.  As far as the costs of this application are concerned, these should be paid by TKR, and will include the costs of the Liquidator and any costs incurred by the Official Receiver.