RE UP ENERGY DEVELOPMENT GROUP LTD

HCCW 91/2016

[2021] HKCFI 2595

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 91 OF 2016

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D E C I S I O N

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1.  I have in various cases during the course of recent years commented on the unhappy complications that arise in dealing with insolvent Mainland business groups either listed in Hong Kong or, in the case of private companies, based here as a consequence of the common corporate structures and the absence of any statutory mechanism in Hong Kong for restructuring debt and obtaining a moratorium from creditor enforcement. This case is perhaps a paradigm example of the mess that can result.

2.  Up Energy Development Group Limited (“Company”) is incorporated in Bermuda, owns such of its operating and asset owning subsidiaries as may have any value, which are based in the Mainland, through intermediate subsidiaries incorporated in the British Virgin Islands (“BVI”).  It is listed on the Main Board of the Stock Exchange of Hong Kong (“HKEX”).

3.  On 29 March 2016 a petition was issued in Hong Kong to wind up the Company on the grounds of insolvency.  It was amended on 31 May 2016 and 12 July 2016.  I have before me an application to make further amendments.  They are not contentious and largely recite the progress of the restructuring and I will allow them.

4.  The general rule is that a company should be wound up in its place of incorporation[1].  Applying to wind up a foreign incorporated company in Hong Kong invites the Court to exercise its statutory discretionary jurisdiction given to the Court by section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32, to treat the case as an exception to the normal rule.  There are well-known criteria by reference to which the Court determines whether a particular case justifies making a winding up order in Hong Kong rather than leaving a creditor or member to seek such an order in its place of incorporation[2].  They are commonly called the three core requirements.  To the extent necessary I explain them below.  There was no explanation in the evidence filed in support of the petition for the decision to issue the petition in Hong Kong rather than Bermuda.  However, the absence of any plea of how the three core requirements are satisfied in the petition suggests that the Petitioner’s solicitor were not aware of the law, which was all too common until quite recently.  However, it would appear that this was not so in the case of another creditor, Credit Suisse AG, who on 18 May 2016 filed a winding up petition in Bermuda.  On 7 October 2016 and 28 October 2016 the Bermuda court appointed joint and provisional liquidators (“JPLs”) over the Company with powers to restructure the debt.  I ordered that the JPLs be recognised in Hong Kong on 16 August 2017.  The petition in Hong Kong has been adjourned by consent since that time to allow the JPLs to introduce a scheme of arrangement.

5.  A scheme was introduced in Bermuda and sanctioned by the court on 1 November 2019.  As one would expect it was a condition of the scheme that the HKEX would list the new shares that would be issued to the investor, who was to finance the scheme in return for obtaining control of the Company.  However, on 6 April 2020 the Listing Committee decided to delist the Company’s shares.  The Company took this decision through the appeal process.  On 3 May 2021 the Listing Appeals Committee upheld the Listing Review Committee’s decision that the shares of the Company be delisted on 13 May 2021.  On 6 July 2021 the Company lodged an ex parte application for judicial review of this decision.  Coleman J ordered a rolled up hearing of the judicial review, but I understand that dates have not yet been fixed.  There are apparently approximately 50 possible judicial reviews of delisting decisions pending.  As so far as I am aware there has never been a successful (rather unsurprisingly) judicial review of a delisting decision, which suggests that the Company’s application is a triumph of optimism over experience or, a cynical observer might suspect, self-interested professional advice.  Realistically, therefore, the Company will be wound up and given the structure of the Group, of which the Company is the apex, the obvious place to do so is Bermuda, which would not only be consistent with established Hong Kong principles of private international law, but would be more practical as a liquidator appointed by the Hong Kong court would not be able to obtain control of the BVI intermediate subsidiaries[3]. In these circumstances it might be thought surprising that a creditor would want to incur the costs of making an application to this court for an immediate winding up order of a company, which has been subject to a winding up petition for five years.

6.  The reasons for the application advanced by Mr Lok, on behalf of the Petitioner, which go to the 2^nd core requirement, are as follows.  First, on the basis of an observation of mine in China Huiyuan that “… for the limited purpose of taking control of a Hong Kong company’s mainland subsidiary on occasions it has proved possible for Hong Kong liquidators to obtain recognition of their status as the legal representatives of a Hong Kong company for the limited purpose of taking control of a Hong Kong company’s mainland subsidiary” suggests that a liquidator appointed in Hong Kong could obtain control of the Mainland subsidiaries.  This, however, was a reference to a Hong Kong company that had been put into liquidation in Hong Kong.  There is no evidence that suggests that the Hong Kong subsidiaries owned by the BVI intermediate subsidiaries could be put into liquidation by a Hong Kong liquidator appointed over the Company.  The liquidator would not be able to obtain control of the BVI subsidiaries for the reasons I explained earlier, and through control of the BVI subsidiaries shareholding take control of the Hong Kong subsidiaries qua member.  There is no evidence that the Hong Kong subsidiaries are debtors of the Company and the liquidators could petition for their winding up in Hong Kong.

7.  Secondly, that it would avoid further delay because if the Company is put into liquidation in Hong Kong it avoids having to seek a winding up in Bermuda and a further recognition application.  This ignores both the points that (1) prima facie the appropriate place to wind up the Company is Bermuda, where proceedings are already on foot, which have been recognised, and (2) also that it is probably necessary to put the Company into liquidation in Bermuda in order to obtain control of the Group.

8.  The Petitioner’s proposed Re-re-amendments do not introduce any new factual assertions that address the above issues.  I will not make an immediate winding up order, but as the Company suggest adjourn the Petition until the 2^nd Monday after the handing down of the decision in the judicial review proceedings commenced by the Company. If the judicial review is unsuccessful presumably the Company will be wound up either in the Bermuda or possibly if there is no opposition, I may be prepared to make an order in Hong Kong. The Petitioner will pay the Company’s costs of and incidental to today’s application forthwith such costs to be taxed if not agreed.

9.  As I said at the outset this case illustrates the difficulties in dealing with insolvent companies listed in Hong Kong with assets in the Mainland.  There are now authorities which explain the relevant principles and how they apply.  In summary the principles are as follows[4]. A creditor of a holding company incorporated in an offshore jurisdiction, which owns a subsidiary incorporated in another offshore jurisdiction, which in turn owns operating and asset owning companies in the Mainland should normally petition to wind up the holding company in its place of incorporation unless the creditor can demonstrate that a liquidator appointed in Hong Kong will probably be able to obtain control of the Mainland subsidiaries.  The creditor is unlikely to be able to do this unless:

(1)  The intermediate offshore subsidiary’s centre of main interest is in Hong Kong and thus recognition in the Mainland is possible under the cooperation arrangement signed on 14 May 2021 by the Secretary for Justice and the Supreme People’s Court; and

(2)  A liquidator appointed over the holding company can petition to wind up an offshore subsidiary in Hong Kong as a creditor.

10.  Unless this can be demonstrated fairly easily a creditor should be advised that a petition should be issued in the place of incorporation because this is more straightforward and effective.  I understand that in the present case the petition was issued before many of the decisions, which explain the relevant principles, but going forward the court should not find itself having to deal with the type of unsustainable arguments advanced in the present case.