RE I-CHINA HOLDINGS LTD

HCCW 1321/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 1321 OF 2002

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REASONS FOR DECISION

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1. On 5 December 2002, I made an order appointing provisional liquidators for I-China Holdings Ltd ("the Company") on the application of the Petitioners, three associated companies of the Company, each of which is a creditor of the Company in respect of loans or inter-company account balances between itself and the Company. The application was made ex parte, although notice was given to the Company, its two principal directors, and the Official Receiver. At the conclusion of the hearing, I indicated that I would give reasons for my decision later. This I now do.

2. The Company was incorporated in Bermuda in 1990. It is registered in Hong Kong as an oversea company under Part XI of the Companies Ordinance (Cap. 32). Its principal place of business is in Hong Kong. It is an investment holding company, and its shares are listed on the Hong Kong Stock Exchange, although they have been suspended from trading since 15 January 2002. It has a number of subsidiaries, the principal activities of most of which are investment or property holding, although there are also subsidiaries which carry on a vehicle trading business, a car rental business, and a money lending business respectively.

3. The Company was formerly known as Seapower International Holdings Ltd. It is controlled and managed by members of the Choi family, in particular Shirley Choi and Norman Choi ("the Chois"), who are its Chairman and Deputy Chairman respectively. The Chois formerly controlled a number of other Seapower companies, including the Petitioners in these proceedings. The 1st Petitioner, Seapower International Resources Ltd, is also listed on the Hong Kong Stock Exchange. It is now in provisional liquidation, having been placed into provisional liquidation at the end of 2001 by Hartmann J. The background to and reasons for the appointment of provisional liquidators in respect of the 1st Petitioner are set out in the Judgment of Hartmann J in HCCW 1325-1329 of 2001, dated 31 December 2001. One of the provisional liquidators of the 1st Petitioner is Mr Cosimo Borrelli, of RSM Nelson Wheeler Corporate Advisory Services Ltd, who has made the principal affidavits in support of this application. Mr Borrelli is also a director of the 2nd and 3rd Petitioners, both of which are subsidiaries of the 1st Petitioner, having been appointed as a director of those companies in order to enable the provisional liquidators to take control of the 1st Petitioner's subsidiaries.

4. On 3 July 2002, the 1st, 2nd and 3rd Petitioners served statutory demands on the Company at its registered offices in Bermuda, and at its principal place of business in Hong Kong, respectively claiming repayment of sums of HK$242,258.50, HK$5,008,916.51 (and further interest since 1 April 2002), and HK$161,000.00. Although the Company sought and was provided with supporting documents and records in respect of these claims, they remain unpaid. It does not appear that the Company disputes that it is indebted to each of the Petitioners, although it is suggested in letters from the Company dated 22 July 2002 and 18 August 2002 there is some doubt as to the exact amount of such indebtedness. However, it has never indicated what it considers the correct amount of such indebtedness to be. The fact that the Petitioners are creditors of the Company appears also to be acknowledged in a letter dated 4 December 2002 from the Company to Messrs Allen & Overy, the Petitioners' solicitors. In the letters of July and August 2002, mention was also made of a Mareva injunction which was said to prevent payment. This was not, however, mentioned in the letter of 4 December 2002.

5. The 1st Petitioner itself is insolvent. However, its provisional liquidators have put forward a restructuring proposal for it, which, if successful, is thought likely to produce some return for its shareholders. The precise amount of this return is uncertain, but Mr Borrelli suggests, on the basis of his knowledge of similar restructurings, that it might be in the range of HK$1.7 million to HK$7.7 million. The restructuring will result in the transfer of control of the 1st Petitioner to new investors, who wish to take advantage of its listed status. It involves (among other things) a shareholder scheme of arrangement in respect of the 1st Petitioner. The shareholder scheme is to be voted on at an Extraordinary General Meeting ("EGM") of the 1st Petitioner to be held next Monday, 9 December 2002. If the EGM does not pass a special resolution approving the shareholder scheme, the restructuring will not go through. In that event, it is anticipated that the 1st Petitioner will be put into liquidation and, having regard to the 1st Petitioner's insolvency, there is not likely to be any recovery for its shareholders. The independent financial adviser appointed to advise the independent shareholders of the Company as to the merits of the scheme has advised them that it considers the restructuring to be in the interests of the Company, and that the terms of the scheme are fair and reasonable, and has recommended that they should vote in favour of the scheme.

6. One of the Company's assets is a 27.54% shareholding in the 1st Petitioner, which it holds through two wholly owned subsidiaries. It appears that part of this shareholding may have been charged by the Company some of its lenders. Nonetheless, the 1st Petitioner regards the support of the Company for the shareholder scheme as important. If the Company is free to vote as it wishes in respect of the whole of its shareholding, a vote against the scheme would clearly be fatal to the prospects of the restructuring going through. Even if less than the whole of this shareholding is at the Company's disposal for voting purposes, such amount as it can vote freely may well make the difference between success and failure of the shareholder scheme, depending on the number of shareholders who actually attend and vote, in person or by proxy, at the EGM, as explained by Mr Borrelli in his 2nd Affidavit dated 2 December 2002.

7. Given the importance of the votes attached to the Company's shareholding to the proposed restructuring, the provisional liquidators of the 1st Petitioner say that they were concerned to find that the Chois were raising criticisms of the way in which the restructuring was being handled, by claiming to have valid share options in respect of the 1st Petitioner and writing (through their lawyers) to the Hong Kong Stock Exchange and to the Securities and Futures Commission, alleging that a circular dated 14 November 2002 sent to the 1st Petitioner's shareholders (explaining the shareholder scheme and soliciting shareholders' support for it) was misleading in failing to draw shareholders' attention to such options. These allegations were persisted in after the Securities and Futures Commission had dismissed their complaints. This caused the provisional liquidators to fear that the Chois might cause the Company's shareholding in the 1st Petitioner to be voted against the shareholder scheme, notwithstanding that to do so would result in the Company losing any value that such shareholding might otherwise have.

8. In an attempt to ascertain the Company's position in respect of the forthcoming EGM, Mr Borrelli wrote to the Company on 29 November 2002 expressing his concerns, and seeking an indication as to how it intended to vote. When no such indication was forthcoming, he formed the view that there was a real risk that the Company, if left in the control of the Chois, might use its shareholding to block the shareholder scheme, and thus to thwart the restructuring, even though there appeared to be no rational basis for doing so. It was therefore decided that the Petition should be presented, and this application made, in order to ensure that the Company's shares would be voted in favour of the shareholder scheme at the EGM. Mr Bartlett, who appeared for the Petitioners, relied on this as one of the bases for the application. This was also relied upon as the basis for contending that the matter was urgent, so as to justify an ex parte application.

9. The Petition was presented on 3 December 2002, and was verified by the 1st and 3rd affidavits of Mr Borrelli dated 2 and 4 December 2002. Also on 3 December 2002, an ex parte Summons was issued seeking the appointment of Mr Borrelli and Mr Joseph Fan Wai Kuen (the other provisional liquidator of the 1st Petitioner) as provisional liquidators of the Company. This summons was supported by Mr Borrelli's 2nd affidavit, dated 2 December 2002. All of the documents dated 2 and 3 December 2002 were served on the Company, the Chois and the Official Receiver the same day. It appears that the Chois were also served late on 2 December 2002 with the affidavits and drafts of the Petition and ex parte Summons. On 4 December 2002, the Company wrote to Messrs Allen & Overy, making observations about the proposed application. This letter was copied to the Court. In the event, it was also exhibited to Mr Borelli's 4th affidavit dated 4 December 2002.

10. At the hearing, the Chois attended as representatives of the Company. However, they made it clear at the outset that they did so simply as observers, and did not intend to make submissions on the application, which therefore proceeded as an ex parte application. At the end of the hearing, Ms Shirley Choi indicated that she wished to say something, but I declined to hear her on behalf of the Company as she did not appear to have any form of written authorisation from the Company to do so. I also explained that she did not have locus to make a statement as a director of the Company, since she was not herself a party to the proceedings in that capacity.

11. Mr Bartlett, for the Petitioners, submitted that this was an appropriate case for the appointment of provisional liquidators, whether the matter was approached on what he described as the "traditional" basis or on a "modern" basis. As to the former, it was submitted that this was a case in which the appointment of a provisional liquidator was necessary in order to preserve the assets of the Company. It was also suggested that an appointment was justified in view of an apparent lack of control by the Company's management over its assets. As to the latter, it was submitted that provisional liquidators should be appointed to explore the possibility of a restructuring of the Company, with a view to maximising the value that could be obtained for its listed status for the benefit of its creditors.

12. The basis on which the Court exercises its discretion as to whether or not to appoint provisional liquidators in respect of a Company against which a winding up petition is outstanding is well established. It is necessary for the applicant to show first that there is a good prima facie case for the making of a winding up order at the hearing of the petition, and secondly that it is appropriate for a provisional liquidator to be appointed, having regard to the commercial realities, the degree of urgency and need established by the applicant and the balance of convenience in all the circumstances of the case (see Re Five Lakes Investment Co. Ltd [1985] HKLR 273, at 285A-C).

13. In this case, I am satisfied that a good prima facie case for the making of a winding up order has been shown.

14. As I have noted, there does not appear to be any dispute but that the Company is indebted to the Petitioners. While suggesting that there may be a question as to the amount of the debts owing to the Petitioners, the Company has never ventured to state the amount which it considers is owing, notwithstanding that it should have its own records from which this could presumably be ascertained. The suggestion that it is prevented from making payment by reason of a Mareva injunction against it does not appear to be borne out, having regard to the description of the injunction contained in the Company's own Annual Report for the year ended 31 March 2002, which indicates that the injunction is limited, so far as the Company itself is concerned, to an amount of some HK$6 million, which appears to have been paid into Court. The existence of debts to one or more of the Petitioners is also confirmed by note 24 to that Annual Report, which discloses debts of in excess of HK$5.2 million to the 1st Petitioner or its subsidiaries. I am therefore satisfied that the Petitioners have the necessary standing to present the Petition in this case.

15. So far as the insolvency of the Company is concerned, quite apart from the fact that it is to be deemed to be insolvent, having failed to pay the Petitioners despite the service of the statutory demands on 3 July 2002, it is clear from the Company's Annual Report that it is insolvent. The Group (of which the Company was the holding company) had current assets of some HK$10,320,000.00 as at 31 March 2002, but had current liabilities of HK$667,208,000.00, including bank and other borrowings of HK$538,808,000.00, all of which were due for repayment. The Company itself had, according to its balance sheet, net liabilities of HK$513,083,000.00 (all of which were current), so that it is not only unable to pay its debts as they fall due, but also has an excess of liabilities over assets. Such insolvency is also implicitly recognised in the letter of 4 December 2002, where it was said that the Company would make its decisions having regard to the interests of its creditors, as well as of its shareholders.

16. In these circumstances, there is clearly a good prima facie case for the obtaining of a winding up order against the Company.

17. So far as the second stage of the test is concerned, Mr Bartlett submitted that the Company's assets were in jeopardy, so that it was appropriate to appoint provisional liquidators to protect such assets in the interests of the Company's creditors.

18. It is said first that the Company's 27.54% shareholding in the 1st Petitioner is in jeopardy, in that this shareholding will be valueless unless the restructuring of the 1st Petitioner is implemented. That restructuring is dependent on the passing of special resolutions by the 1st Petitioner's shareholders at the EGM on 9 December 2002, and there are, it is said, real grounds for concern as to how the Company will vote its shares at the EGM, based on the Chois past behaviour (which is detailed in the judgment of Hartmann J which I have referred to), on their recent complaints to the Securities and Futures Commission and the Hong Kong Stock Exchange, and on the failure to respond to requests for an indication as to the way in which the Company intends to vote this shareholding.

19. In the Company's letter of 4 December 2002 to Messrs Allen & Overy, it is said that:

"... we are still considering [the restructuring] proposals and will reach a conclusion before the meeting next Monday. We are not under any obligation to notify the provisional liquidators of [the 1st Petitioner] how we intend to vote at the meeting; that is our decision as shareholders. We will then act on that decision and vote accordingly at Monday's meeting. Should it assist you, we are presently minded to vote in favour of the resolution proposed although, as we say, we are still considering the proposal and that view may change. In this regard, the Company has a number of independent directors who still need to be consulted as to the final decision."

and

"... we will vote at next Monday's meeting as we consider to be in our best interests as shareholders. We will of course take into account the fact that, as a corporate shareholder, we must consider the interests of our own shareholders and, more importantly, our creditors."

20. Mr Bartlett submitted, and I agree, that this provides no real comfort at all to the applicants. Although an indication is given that the shares will be voted in favour of the resolution, it is made clear that this may change, and that no final decision has been reached. It is difficult to see how it could be otherwise than in the interests of the Company, its shareholders and creditors to vote in favour of the resolutions proposed at the EGM, particularly having regard to the advice of the independent financial advisors to the independent shareholders, and to the fact that the consequence of the failure of the restructuring proposals in respect of the 1st Petitioner are almost certain to result in the shares in the 1st Petitioner being rendered valueless.

21. In these circumstances, I am satisfied that there is a real risk that unless provisional liquidators are appointed to ensure that the shares are voted in favour of the shareholders scheme, the Company's shareholding in the 1st Petitioner may be rendered valueless. As I can see no sensible basis on which such shares should be voted against the proposed scheme, I do not see any real detriment to the Company of making such an appointment. I bear in mind that the powers sought for the provisional liquidators extend beyond simply voting the Company's shares in the 1st Petitioner at the forthcoming EGM, but for the reasons explained below, I do not consider this to be an obstacle to the appointment. Given that the EGM is to be held next Monday, the situation is clearly one of some urgency, and justifies the making of an ex parte application.

22. Mr Bartlett also submitted that jeopardy to the assets of the Company or lack of management control is demonstrated by the fact that the report of the Company's auditors, Messrs Deloitte Touche Tohmatsu, on its accounts was heavily qualified. The auditor's report stated that the auditors were unable to form an opinion as to whether the financial statements gave a true and fair view of the state of affairs of the Company and the Group as at 31 March 2002, or of the loss and cash flows of the Group for the year then ended, and as to whether the financial statements had been properly prepared in accordance with the disclosure requirements of the Companies Ordinance. The reasons for this included:

(1) lack of evidence to assess whether the value of the interest in the 1st Petitioner was fairly stated as at 31 March 2001, and insufficient evidence in relation to the Group's share of losses by the 1st Petitioner and losses arising from a partial disposal of the interest in the 1st Petitioner;

(2) insufficient evidence as to ownership of properties with a carrying value totalling HK$147,800,000.00;

(3) insufficient evidence of the validity of disposals of certain properties by financial creditors by whom such properties had been seized;

(4) insufficient evidence as to selling expenses in relation to disposals of certain other properties disposed of by financial creditors who had seized them;

(5) insufficient evidence as to whether or not certain other properties seized by financial creditors had actually been disposed of, so as to be able to be satisfied whether the carrying value of such properties (totalling some HK$8,000,000.00) were fairly stated, and whether the balance of borrowings of HK$48,690,000.00 were fairly stated;

(6) inability to obtain confirmations from banks and other lenders so as to be satisfied that outstanding borrowings of HK$521,936,000.00, related interest expenses of HK$67,314,000.00 and accrued interest of HK$109,295,000.00 were fairly stated;

(7) fundamental uncertainties in relation to litigation and the validity of preparing the accounts on the going concern basis.

23. Although the Company's directors responded to these qualifications by stating that it had repeatedly requested the necessary information from the banks and financial institutions, and that financial information in relation to the 1st Petitioner was unavailable because of the ongoing restructuring of the 1st Petitioner, this does not address the absence of evidence as to ownership of investment properties valued at HK$147,800,000.00, which represents virtually the whole of the investment properties held by the Group.

24. This does, it seems to me, indicate a lack of proper record keeping and management control, and provides further support for the application for the appointment of provisional liquidators.

25. The third main ground relied upon by Mr Bartlett was that the Petitioners desired the appointment of provisional liquidators in order protect the Company and the interests of creditors while exploring the possibility of a restructuring of the Company, so as to realise some value from its listed status. Mr Bartlett described this as a facet of the "modern" approach to the appointment of provisional liquidators. He referred me to the cases of Re Keview Technology (BVI) Ltd [2002] 2 HKLRD 290, and Re Luen Cheong Tai International Holdings Ltd (unreported, 5 September 2002, Kwan J) in support of this submission.

26. 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 that decision one step further by recognising 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).

27. In this case, it appears that the Company itself has explored the possibility of a restructuring in some form. There is reference to a restructuring of debts being explored, in the Chairman's Statement and the Auditors' Report in the Company's Annual Report dated 31 March 2002. However, it appears that these restructuring negotiations with the Company's bankers started in October 2001, but have as yet led to no concrete proposals being put forward. I was told by Mr Bartlett, on instructions to be confirmed by a further affidavit from Mr Borrelli, that enquiries were made of China Merchant Bank (a substantial creditor of the Company) as to what the current position was in relation to restructuring proposals, and as to its attitude to the present application as a means of promoting a restructuring, but that the response was to the effect that nothing proactive should be expected.

28. In these circumstances, where the Company's efforts to achieve a restructuring appear to have ground to a standstill, and little initiative appears to be displayed by a major creditor, it seems to me to be perfectly proper for the Petitioner to seek to inject some fresh impetus into such efforts by the appointment of a provisional liquidator who will be empowered to explore restructuring proposals. If the provisional liquidator is able to put forward a viable restructuring proposal, this seems likely to produce additional benefit for the creditors of the Company. I therefore consider that this ground too, would justify the appointment of a provisional liquidator in respect of the Company.

29. I have also considered what, if any, detriment the Company would be likely to suffer from the appointment of a provisional liquidator. It appears that the Company is no longer maintaining any significant level of operations, and that this was a reason for the suspension of trading in its shares on 15 January 2002. It also appears apparent from the audited accounts of the Group that it has little in the way of turnover. In these circumstances, I can see little risk of detriment to the Company in having a provisional liquidator appointed.

30. I therefore considered that this was an appropriate case to appoint provisional liquidators in respect of the Company.

31. So far as identity of the provisional liquidators to be appointed was concerned, the Petitioners proposed the appointment of Mr Borrelli and Mr Fan. The Company, in its letter dated 4 December 2002, suggested that as they were also provisional liquidators of the 1st Petitioner, there was the potential for a conflict of interest. It seems to me that the appointment of Mr Borrelli and Mr Fan would have the advantage that they are already familiar with the affairs of the 1st Petitioner, which is closely connected to the Company. Moreover, it appears that they are familiar with various matters concerning the affairs and assets of the Company (as an example, the Company owns certain property in China in the same development as the 1st Petitioner). It therefore seems likely that the appointment of Mr Borrelli and Mr Fan is likely to be more cost effective than the appointment of other persons.

32. Further, although I note that the Company has suggested that there might be a conflict of interest, it seems to me at this stage that such a conflict should be regarded as more theoretical than real. While it is possible that there may arise a conflict in relation to the amount of the debts of the Company to the Petitioners, this is by no means certain to happen - at this stage, the Company has not put forward any different figures in relation to such indebtedness to those asserted by the Petitioners. If, on investigation of the Company's books, it appears that there is some scope for argument as to this, appropriate directions can be sought as to how these should be dealt with (I note that the applicants have indicated that should such a situation arise, they would propose to refer the matter to an independent insolvency practitioner who would be asked to adjudicate any claims that may arise as between the Petitioners and the Company).

33. I also considered whether or not fortification of the Petitioners undertaking in damages should be ordered. Mr Bartlett frankly accepted that the Petitioners were not in a position to provide any meaningful fortification. However, having regard to the fact that the operations of the Company appear to be of minimal extent, it seemed to me that there any damage the Company might suffer from the making of the order would be very slight, in comparison with the damage that would be inflicted on the Petitioners and its other creditors were the order not to be made. I therefore did not require that the undertaking be fortified.

34. For all of these reasons, I made an order appointing Mr Borrelli and Mr Fan as provisional liquidators of the Company, in terms of the draft order submitted by the Petitioners, as amended at the hearing. I also ordered that the costs of the application, including those of the Official Receiver, be taxed and paid out of the assets of the Company in the first instance.