CYPRESS HOUSE CAPITAL LTD v. HUA HAN HEALTH INDUSTRY HOLDINGS LTD

HCCW 110/2019

[2019] HKCFI 1826

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 110 OF 2019

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R U L I N G

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Introduction

1.  These proceedings relate to Hua Han Health Industry Holdings Limited (“Company”), a company incorporated in the Cayman Islands, registered as a non-Hong Kong company pursuant to Part 16 of the Companies Ordinance Cap 622, and listed on the Main Board of the Hong Kong Stock Exchange (“HKSE”).  The Company’s business is in the healthcare industry in the Mainland.

2.  The proceedings were commenced by petition dated 11 April 2019 and amended 20 May 2019.  The amended petition was issued pursuant to section 177(1)(d) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap 32 (“Ordinance”), by a creditor on the basis of an unsatisfied statutory demand for a debt of about HK$2 million and the alleged or deemed insolvency of the Company.

3.  However, the petitioner’s debt has now been satisfied by one of the Company’s shareholders Bull’s-Eye Ltd (“Bull’s-Eye”) (holding 29.77% of the shares), and there is a consent summons dated 27 May 2019 to withdraw the amended petition (“Dismissal Summons”).

4.  Prior to that, another of the Company’s shareholders Haw Par Corporation Ltd (“Haw Par”) (holding 10.03% of the shares) had issued a summons dated 7 May 2019 seeking the appointment of provisional liquidators to the Company (“PL Summons”).  That application was led by the affidavit of Mr Tarn Sien Hao, an executive at Haw Par’s parent company and formerly a non-Executive Director of the Company.

5.  In the face of the withdrawal of the amended petition intended by the Dismissal Summons, Haw Par has since issued a summons dated 3 June 2019 for (a) an order that it be substituted as petitioner and (b) leave to file and serve a re-amended petition in the form annexed to the summons.  The basis of the proposed re-amended petition is to seek a winding up on just and equitable grounds (“Substitution Summons”).

6.  I previously directed that I would deal with all matters on 2 July 2019, and naturally the Substitution Summons first.

7.  It can be noted at once that until the very eve of the working day before that hearing the Company had not appeared, and therefore the Company did not seem to oppose either the Substitution Summons or the PL Summons.

8.  However, both summonses were opposed by Bull’s-Eye, as they still are.  Bull’s-Eye’s opposition is led by an affirmation filed by Mr Deng Jie, a director and shareholder of Bull’s-Eye, who is also the CEO of the Company.  The other director and shareholder of Bull’s-Eye is Mr Peter Y Zhang, the Chairman of the Company.

9.  On the eve of the last hearing I received skeleton submissions for the Company, which opposed both summonses, as indeed it still opposes them today.  The Company’s primary position was that I should dismiss the Substitution Summons as a matter of law, and/or alternatively give directions for the filing of further evidence for the proper determination of the PL Summons.

10.  In support of that position, the Company also filed a draft but approved affirmation of Mr Choong Khuat Leok, an INED of the Company, newly appointed on 11 June 2019.  The affirmed version has since been filed.

11.  After hearing argument on the possibility of adjourning for further evidence, I adjourned all matters (including the amended petition, which might otherwise have come before the Master on 3 July 2019) to be heard by me today, 18 July 2019.  I fixed the hearing for one day.

12.  I also gave directions as to the filing of further evidence by the Company.  This was because in his 1^st affirmation Mr Choong exhibited a letter dated 26 June 2019, in which he asked Grant Thornton (“GT”) for some information as to the ongoing investigation being conducted by it (as to which, see below).  I felt on the material then available that there was considerable force in the criticism of that rather gentle and hardly expedited letter, so that when I learned that Mr Choong was in Court, I adjourned to allow him to make what seemed to me to be the obvious phone call he should already have made to make direct enquiry of the partner in charge at GT.

13.  The result of that phone call was for Mr Choong to fix a meeting with that partner at 10am on 3 July 2019.  In light of that meeting, and despite – and, in part, because of – some misgivings about the understandably caveated evidence Mr Choong had already offered, it seemed to me in the exercise my discretion that it was appropriate to adjourn the substantive argument on both the Substitution Summons and the PL Summons, to permit Mr Choong to file further evidence to update the Court with (hopefully) full and more clear materials on which to consider the two summonses.

14.  I required Mr Choong to deal with his discussions with GT, and his understanding of the progress and state of GT’s investigation, by noon on 8 July 2019.  I permitted him until noon on 16 July 2019 to file any further evidence on behalf of the Company.  In response, he filed his 2^nd and 3^rd affirmations respectively.

Haw Par’s Concerns or Complaints

15.  A broad summary of Haw Par’s concerns or complaints, as set out in Mr Tarn’s 1^st affidavit, is as follows.

16.  Dating back to at least 2015, the Company’s executive directors including Mr Zhang and Mr Deng acted in a manner which ignored the legitimate concerns of Mr Tarn and other non-executive directors in pursuing fundraising activities without proper consultation with, or the approval of, those non-executive directors.

17.  In August and September 2016, the Company was the target of a series of short seller reports (one by a company called Emerson), which contained serious allegations that the Company had falsely inflated its revenues on a massive scale, fabricated sales, and overstated the value of its assets to conceal the falsification of its profit.  The core allegation was that the Company’s business was substantially a fraud.

18.  Trading in the Company’s shares on the HKSE was suspended on 27 September 2016, at the Company’s own request.  Trading has not resumed since that date.

19.  On 30 September 2016, the Company announced to the HKSE that its auditors Ernst and Young (“EY”) had identified possible irregularities in their audit of the Company’s financial statements for the year ended 30 June 2016 and had suspended work.  EY also required an independent professional firm to be engaged to investigate the irregularities it identified. The announcement notified that trading in the Company’s shares would continue to be suspended.

20.  On 19 October 2016, the Company appointed an independent board committee comprising the Company’s independent non-executive directors to address the issues raised by EY.

21.  Subsequently on 21 November 2016, GT was appointed as the independent financial adviser.  However, it was not clear what progress GT had made, because the Company made various announcements over the course of 2017 and 2018 that GT’s work was delayed.  Mr Tarn has been unable to obtain an update as to GT’s progress despite his attempts to do so.

22.  On 12 December 2016, the HKSE imposed various conditions upon the resumption and trading of the Company’s shares, including the conduct of an appropriate investigation into the matters raised by EY.  Given the lack of progress in addressing those resumption conditions, it seems that the Company’s listing will be cancelled on 1 August 2019.

23.  By 31 October 2016, the Company was in default of the terms of US$150 million in convertible Notes issued in June 2016, and was required to commence an open tender offer to repurchase those Notes.  However, the repurchase obligations do not appear to have been met.

24.  The SFC has been investigating the Company and its executives since at least 2018, and on 20 November 2018 issued a direction to the HKSE to suspend all trading in the Company’s shares on the basis that “false, incomplete or misleading information” had been published in the Company’s financial statements.  As I have noted, in fact the Company shares were already suspended at that date.  On 30 January 2019 the SFC issued restriction notices pursuant to sections 204 and 205 of the Securities and Futures Ordinance to freeze the brokerage accounts of certain unspecified individuals and a company on the basis that those individuals had engaged in market misconduct through the disclosure of false or misleading information.  There is a basis for deducing that the relevant individuals were Mr Zhang and Mr Deng, and that the company involved was their corporate vehicle Bull’s-Eye.

25.  On 14 February 2019, the Company’s principal place of business in Hong Kong was moved to a co-working space in the New Territories.  Later in the same month the Company’s company secretary resigned and was not replaced.  In March 2019, a financial products company commenced proceedings against Mr Zhang Mr Deng and 3 subsidiaries of the Company seeking to recover US$62.8 million on the basis of their guarantees of the Company’s debt to pay this amount following repurchase of part of the Notes.

26.  When the current petition was presented on 11 April 2019, it was not announced to the HKSE by the executive directors.

27.  Since the SFC actions in late 2018 and early 2019, executives of the Company have taken steps to dissipate its assets.  Particular reference is made to the registration of the share charge over a Mainland subsidiary of the Company in favour of third parties on 13 March 2019, which transactions were not approved by the Company’s board.

Company’s Response and Haw Par’s further reply to it

28.  In Mr Choong’s 2^nd affirmation, he emphasised that he had no personal agenda or aim for financial gain (except his director’s remuneration) in becoming involved as a non-executive director and assuming the role as the Chairman of the Resumption Committee, and he acknowledged that he had a difficult and challenging role.  I accept that.  I do not doubt his motives, and he is indeed in a very difficult and challenging position.

29.  He gave further details about the timeline since his formal appointment as an INED to the Company.  Essentially he says that, after he was appointed on 12 June 2019, he took the initiative to meet with potential financial advisers to provide an overview of the operations of the Company and its subsidiaries.  This was in recognition that the affairs of the Company needed to be urgently placed under review and scrutiny if the prospect of a possible delisting were to be averted.  He also spoke with legal advisers, met with the Board, and formed the Resumption Committee, continuing to be in constant contact with professional advisers.

30.  On 3 July 2019, Mr Choong met representatives of GT to be given an update on the status of their investigation.  He says that since February 2017, when the scope of the investigation was broadened beyond the EY concerns and to take in issues raised in the reports published by Emerson, GT had made “considerable progress”.  This included in July 2018 to take the investigation to the next stage requiring production of selected documents and interviews and digital forensic investigations with relevant personnel.

31.  A progress report was prepared in late September 2018, which stated (amongst other things) that GT had performed “walk-through tests” in 5 areas, 3 of which had been completed but 2 of which remained uncompleted whilst GT awaited further documents to be provided by the Company.  The report also stated that GT had conducted digital forensic investigations, but this large-scale investigation had been only 35% completed by September 2018.  But, even at that date many months after appointment, GT had yet to interview certain relevant personnel, to analyse the sales, receivables and bank data to identify suspicious transactions, and to send out verification letters to 3^rd parties to verify the accuracy and authenticity of relevant transactions.  Some completed investigations as regards the various allegations were referenced in the progress report.

32.  Further, and importantly, at the meeting with Mr Choong it was acknowledged by GT that the complex nature of the complaints which need to be investigated had not been able to be completed without the full assistance of the Company and its subsidiaries to date.

33.  I also note that in response to enquiries with GT as to whether their investigations may be able to address the concerns raised by the SFC, GT stated that it was not possible to answer that question.  This is not particularly reassuring.

34.  Mr Choong indicated that he was seeking to ascertain from the Board why the outstanding issues remained unanswered, by requesting certain documentation and issuing letters to former directors.  He was not able to confirm that all relevant information regarding GT’s investigation had been considered.

35.  In his 3^rd affirmation, Mr Choong addressed how the Resumption Committee intends to ensure proper corporate governance of the Company going forward, and also provided an update as to the allegations of past misconduct.

36.  He had performed a “desk review of the management accounts” of the two main operating subsidiaries in Mainland China, from which it seemed clear to him that the subsidiaries are operating and are profitable.

37.  As to the allegation relating to the recent share charge, Mr Choong states that his enquiries with the Company revealed that the sale of the counterparty to the cross charge arrangement, a former indirect subsidiary of the Company, was on commercial terms and that the cross charge arrangement was a commercial transaction at arm’s length.  I note, however, that in addition to some documents showing certain fund movements, Mr Choong has relied upon the evidence of Mr Deng in this respect.

38.  As to the activities of the Resumption Committee, it has engaged FTI as an independent monitoring accountant.  The work of FTI is in 3 stages, estimated to be completed by November 2019.  FTI’s engagement seems to me to require them to start work all over again, from meeting with Company management to understand the corporate structure, operation and financial status in detail; to provide preliminary comments; to draft a report as to a future workplan; to analyse in detail the financial data and projected cash flow of the Company; to make various site visits; to provide credible restructuring plans; to provide sufficient communication to interested parties and stakeholders; and if necessary to negotiate with creditors and to reach debt repayment extension agreements, or debt restructuring, and to implement the same.

39.  FTI will only be able independently to confirm the Company’s indebtedness within 6 to 8 weeks.  Mr Choong has himself identified certain potential areas of enquiry, which observations he has shared with FTI.  Further, FTI’s engagement is to recommend independent, competent and professional persons to act as directors of the Compay’s Mainland subsidiaries, in part to monitor affairs and chase down documents and for arranging interviews necessary for completion of the GT investigation and to report to FTI, the Resumption Committee and the management at the Company level.

40.  FTI has produced a first progress report.  In a long disclaimer, the report understandably identifies it has been compiled within a very short time, and may be based on information which has not been able to be independently verified by FTI and may be subject to change.  It is also based on assumptions, where FTI has not conducted an audit of the accuracy of information provided to it, and which assumptions may prove to be incorrect, particularly as regards an industry which has been and is likely to continue to be subject to fluctuations, market movements and uncertainty.

41.  The report refers to the engagement letter of 12 July 2019, and the 3 stage process, the second of which relate to the three-month period “after the winding up petition is adjourned” at today’s hearing.  That three-month period would end mid-October, whereas the delisting process is likely to be in early August (unless somehow otherwise delayed or interrupted, of which there is no current indication).  The overall workplan identified runs to mid-November 2019.

42.  The preliminary view of FTI (based on materials and information supplied to it) is that the Company and its Group are profitable, albeit on the low side in line with industry performance

43.  As to the GT investigation, the main cause of the slow progress since mid-2018 seems to be explained by Mr Choong as arising largely from (a) the resignation of a former INED, and the lack of an appropriately finance and accounting qualified replacement INED, and (b) difficulties with obtaining documents to subsidiaries which had been disposed of by the Company.  Some attempt at explaining the delay in replacing an INED with sufficient professional accounting experience is offered, but I confess I do not find it terribly convincing.

44.  As to the need to progress the GT investigation, Mr Choong intends to arrange interviews with key relevant personnel in the subsidiaries to ascertain more details as to the difficulties confronted and to ensure they are fully addressed.  This seems to me to be a statement of hope and intention, rather than actual real progress.  I am not sure the materials are supportive of Mr Choong’s suggestion that the delay in the completion of the GT investigation is the result of poor coordination.  Rather, it seems to me to be the result of either active obstruction, or at least insufficient proactivity, on the part of the management of the Company and its subsidiaries.

45.  Whilst it may be correct that GT could provide a report within 3 months of the provision of all necessary documents, I do not think any great confidence can be placed on GT obtaining those necessary documents within a relatively short period of time.  I do not share the confidence expressed by Mr Choong, arising from what he refers to as the forward-looking reforms put in place complemented with the preliminary findings of FTI.

46.  Lastly, Mr Choong identifies that there has been an initial offer, on 12 July 2019, by a company called Guizhou Hanyi Asset Management Company to Haw Par for the purchase of its 10.03% shareholding in the Company at the price of HK$0.27 per share (totalling a little over HK$194.8 million).  That price is said to evidence the confidence in the long-term development of the business of the Company, made with a view to maintaining its listing status, and on a 50% discount to the closing price before the trading of shares was suspended.  Mr Choong asserts his understanding (based on information supplied from some public documents and by Mr Deng) that the offeror is not connected with the Company, Mr Zhang or Mr Deng.

47.  In conclusion, Mr Choong says that as a non-executive director given the specific circumstances before him, he has done all that a professional accountant in his role should and ought to have reasonably done.

48.  In reply to Mr Choong’s 2^nd and 3^rd affirmations, Mr Tarn has filed his 2^nd affidavit.  Understandably, the first point he makes is that the Company and its legal team have been well aware of the precise detail of the Substitution Summons and the PL Summons for at least 2 months, so that it is regrettable that the Company has left it until the last hour of the last day to appear and file evidence in opposition.  He also points out that nothing in Mr Choong’s affirmations indicate any attempt has been made by the Company and its directors to communicate with the HKSE in relation to the upcoming de-listing of the Company.  Therefore, he says that, as matters stand, the inevitable de-listing of the Company will take place by 1 August 2019.

49.  As to the GT investigation, Mr Tarn confirms that neither GT nor the Company had once approached him for any interviews or responded substantively to any of his emails seeking updates since at least 3 October 2017.  The only contact from Mr Tong of GT took place in January 2019, when Mr Tong estimated that the forensic investigation was still only less than 50% completed and that the status had been stagnant since mid-2018.  By reference to those dates at least, this does not seem to be particularly at odds with what Mr Choong says.

50.  Mr Tarn also points out that if the root cause of the delay of GT’s investigations is attributed to the lack of cooperation by directors of the Company, the situation is unlikely to be resolved within a short period of time.  As stated already, I agree.

51.  As to the potential offer to purchase Haw Par’s shares, referred to by Mr Choong, Mr Tarn says that this came as a surprise revelation to Haw Par.  The company referred to as the offeror has never approached Haw Par to make the alleged initial offer, and Mr Tarn does not even recall seeing the name of the offeror let alone seeing the alleged offer letter prior to being served with Mr Choong’s 3^rd affirmation to which it was exhibited.

52.  Despite some contact with the person identified as the contact person for the alleged offeror, Mr Tarn has not been provided with much more information.  In response to his questions as to why an automotive company might be interested in buying shares in a pharmaceutical company that is about to be deemed de-listed, and as to any proof that funds are available in Hong Kong to make good on the offer, the only answer provided in an email – handed up to me today – was that the offeror was seeking to recast its business, a site visit to the offeror company is welcome, and that many domestic banks provide outbound guarantees and the process is not complicated.

53.  As to the recent cross charge arrangement, Mr Tarn maintains that it is not ordinary, and rather is suspicious, for a publicly listed company to put up its subsidiary’s assets to secure a 3^rd party company’s debts, not least given the sensitive timing when the charge was registered less than one month after the SFC restriction notices were issued in February 2019 to freeze the brokerage accounts of the chairman and CEO of the Company and their corporate vehicle Bull’s-Eye.  I see real force in this point.

54.  Mr Tarn also identifies that Haw Par has secured the support of a substantial creditor of the Company, being Driven Innovation Ltd.  The indebtedness of the Company to Driven Innovation Ltd arises out of its failure to redeem the outstanding principal amount of certain convertible bonds in the amount of HK$310 million.

Applicable Principles - Substitution

55.  The application made by the Substitution Summons is pursuant to Rule 33 of the Companies (Winding-up) Rules.  Materially for present purposes, the rule identifies that for the Court to exercise its discretion to substitute the petitioner, the person seeking to be substituted must satisfy the court that he (a) is a contributory, (b) would have the right to present a petition; and (c) is desirous of prosecuting the petition.

56.  For a contributory to have a right to present a petition, the requirements of section 179(1)(a) of the Ordnance must be satisfied, namely that the contributory has held his shares for at least 6 months during the 18 months before the commencement of the winding up.

57.  If the criteria are satisfied, the Court has a broad discretion to permit substitution, though it is clear that the discretionary jurisdiction to order substitution would clearly not be exercised in favour of a would-be petitioner who would not be able successfully to invoke the jurisdiction to make a winding up order, or where the grounds for winding up are plainly unsustainable or would amount to an abuse of the Court.

58.  Being a contributory as a minority shareholder is no bar to an application to be substituted as petitioner.  Nor is it an answer to an application for substitution that a contributory has no tangible interest in the company being wound up on just and equitable grounds.  It is sufficient for the contributory to demonstrate the need for an investigation into the affairs of the company, as that is itself a sufficient advantage to justify the making of a winding up order.

Applicable Principles – Appointment of Provisional Liquidators

59.  Under section 193 of the Ordinance, the Court has the power to appoint provisional liquidators at any time after the presentation of a winding up petition.  The application may be made by a contributory such as Haw Par.

60.  The power to appoint a provisional liquidator is a broad and general one.  Provided the jurisdictional conditions in section 193 are met, the section imposes no limitations upon the criteria to be adopted in considering the application.  As a result, there is a well-settled two-stage approach.  The Court needs to be satisfied that first it is likely that a winding up order will be made on the hearing of the petition (“threshold requirement”), and second that in the circumstances of the case it would be right that a provisional liquidator be appointed (“discretionary requirement”).

61.  The discretionary requirement is closely associated with the functions of a liquidator which are themselves two-fold being first the administration of the insolvent estate, and second investigation.  Hence, the discretionary element may be satisfied if it is demonstrated to the satisfaction of the court that there is a need to safeguard against the risk of dissipation of the company’s assets or if there is a need for independent investigation.

62.  An example of the latter might be where there are real questions as to the integrity of the company’s management and as to the quality of its accounting and record-keeping function.  The investigations might include investigations of those who have been managing the company with a view to considering bringing claims against them, or to report concerns about their fitness for management.

63.  Whether a provisional liquidator should be appointed in all the circumstances has to be decided on the basis of commercial realities, the degree of urgency and need established by the petitioner, and the balance of convenience according to the circumstances.

64.  Specifically, where what is sought is a winding up order on the grounds that there has been contravention of regulations and winding up is in the public interest, the solvency or viability of the business of the company is not of itself significant, the principal concern may be the interests of the investing public and the integrity of the market, and the appropriate sanction where there has been fraud in the promotion of the company will normally be liquidation of the company.

65.  Mr Ross Li, appearing together with Mr Lai Chun Ho, Counsel for Bull’s-Eye, draws attention to the fact that the winding up procedure does not exist for the purpose of keeping boards of directors in order, or indeed of preventing them from misapplying the funds of the company.  Whilst it may be that in cases where directors have complete control of the company and are impossible to control, that might make it just and equitable for a company to be wound up, now that minority actions are more common, that might not be so necessary.

66.  For the Company, Mr William Wong SC, leading Mr Kevin Lau, makes the same or overlapping submissions.  But he also emphasises the distinction between misconduct simpliciter and management of a company’s affairs, the crucial point being that a derivative action is the proper remedy for the former.  He refers me to Re Chime Corp Ltd [2004] 3 HKLRD 922, Waddington Limited v Chan Chun Hoo Thomas (2008) 11 HKCFAR 370 and The Bank of East Asia (Nominees) Ltd v Chan Helen Yuk Ching (unreported, HCCW 291/2011, 11 April 2014).

67.  But these three cases seem to me to focus on the distinction between unfair prejudice proceedings on the one hand and derivative actions on the other.  I accept that there is such a distinction, and in distinguishing between the two, one should look at the nature of the complaint together with the relief sought.

68.  But that does not seem to me necessarily to deal completely with the position if the petition intended is one seeking winding up on just and equitable grounds.

69.  In that respect, Mr Wong refers me to Re Woven Rugs Ltd [2008] BCC 903, in which the Judge accepted an argument that having regard to the nature of the petitioners’ complaints as set out in the petition, the petitioners had an alternative remedy under which their complaints, which amounted in substance to unfair prejudice, could be investigated and if made out the court would be likely to order the petitioners’ shares purchased by the respondents.  Accordingly, at least in so far as it sought the winding up of the company, the petition was struck out.

70.  This morning, Mr Wong drew my specific attention to passages in French on ‘Applications to Wind Up Companies’ (3^rd Ed) at §§4.88-4.89, which make the points that if an application for the appointment of a provisional liquidator is made which is not supported by the company, the applicant must show circumstances justifying the appointment.  But, as it is an interim remedy, it is granted by the Court before the facts of the case have been determined, and it is one of the most intrusive interim remedies in the Court’s armoury.  In many, if not most, cases its effect will be to stop the company trading, and cause the company’s employees to lose their jobs.

71.  Therefore, the need to make the appointment must ‘overtop’ its serious consequences, and any appointment requires the most anxious consideration by the Court.  As with granting an interim injunction, the basic or overriding principle is that the Court should take whichever course seems likely to cause the least irremediable prejudice to one party or the other.

72.  The same text at §4.92 also makes the point that it is an unusual and drastic step to appoint a provisional liquidator of a solvent company.

How to deal with the applications

73.  There is clearly some degree of overlap in the questions which might be considered on each of the Substitution Summons and the PL Summons.  However, it seems to me that as a matter of structure of setting out my decision, they can broadly be dealt with in that order.  Hence, though I may not cover all points on each summons under the particular heading, reference can be made to points covered under the other heading, and I have taken into account all points raised in the context of both the Substitution Summons and the PL Summons before deciding the outcome of either one of them.

Whether Substitution

74.  On behalf of the applicant, Mr Tim Kentish, Solicitor Advocate, submits that this is a clear case where the criteria for substitution of petitioner are made out.

75.  The original petitioner consents, by the Dismissal Summons, to withdraw the amended petition or allow it to be dismissed. Haw Par is a 10% shareholder, having held its shares since 2005, with the right to present a petition.  Haw Par is desirous of prosecuting the petition on the grounds set out in its draft re-amended petition, where (it is said) the circumstances cry out for investigation.  The Court has jurisdiction to wind up the Company as a foreign company because of its significant connection to Hong Kong.

76.  On behalf of Bull’s-Eye, Mr Li submits that substitution would be inappropriate where there is no prima facie case for winding up, and where here there is no reason why the Court should grant leave to Haw Par to substitute as the petitioner so as to pursue a groundless winding up application.  He also relies on the recent buy-out offer as showing an alternative remedy.

77.  I do not think the grounds for winding up which Haw Par is desirous of pursuing are plainly unsustainable or would amount to an abuse of the Court.  I reject the submission that it is plain and obvious that none of the complaints made by Haw Par could, as a matter of law, have given rise to the remedy of a winding up.  It settled law that it is sufficient for the contributory to demonstrate the need for an investigation into the affairs of the company, as that is itself a sufficient advantage to justify the making of a winding up order.

78.  That seems to me to be to the answer to Mr Wong’s submission that there are compelling reasons to confine Haw Par to the derivative action remedy which might be obtained in, as he put it, an HCA action making a derivative claim.

79.  Nor do I accept Mr Wong’s submission in relation to an HCMP action being the more realistic remedy.  Mr Wong accepts that the Court will grant a winding up order rather than relief under section 168A where there is good reason to do so, though I accept that the petitioner must be able to point to particular matters he is concerned might make a winding up order the appropriate or only practical relief.  But, in this case, I think that Haw Par has identified in the draft re-amended petition the facts and matters which might lead to that conclusion.

80.  I do not think the last minute initial buy-out offer takes the matter much further.  Its timing, and that it was produced by the Company (where there is no indication on the offer letter that it was copied to the Company, and there is no explanation in evidence as to how or why the Company might have been provided with it), and that Haw Par had not itself previously heard of the suggested offer or the offeror before seeing the exhibit to Mr Choong’s 3^rd affirmation, are all matters which themselves raise healthy suspicion about the validity or value of the offer. In any event, its terms are clear that the offer will be nullified if the Company is de-listed (which seems at least likely on the evidence), and there is even a reservation of the right to withdraw the offer at any time (that is, without reason).

81.  I am satisfied of the Company’s significant connection to Hong Kong.  It is listed on the HKSE and registered as a foreign company under the Companies Ordinance, audited by Hong Kong auditors and maintains an office or place of business in Hong Kong.  It is also under investigation by the SFC, and there are clearly Hong Kong-based creditors.

82.  I take into account the recent support of Haw Par from Driven Innovation Ltd, a creditor of the Company in a significant sum which apparently has not been paid and is overdue.

83.  By reference to settled authority, therefore, I am satisfied the circumstances might justify the winding up of the company in Hong Kong, thereby putting in motion the full machinery of winding up in respect of it, notwithstanding its incorporation elsewhere.

84.  I am entirely satisfied that this is an appropriate case for the exercise of my discretion in favour of the order sought by Haw Par for substituting it as the petitioner on the terms of the draft re-amended petition annexed to the Substitution Summons.

Whether Provisional Liquidators

85.  Unlike in many other cases, there is in this case significant argument as to the threshold requirement.

86.  Mr Kentish submits that it is appropriate to keep the amended petition alive so as to avoid the disadvantage which would arise if Haw Par is required to present a fresh petition, and that it is just and equitable for the Company to be wound up for various reasons.

87.  First, he refers to unauthorised registration on 13 March 2019 of share charges over a PRC subsidiary of the Company in favour of third parties, which indicates a serious risk that the assets may not continue to be available to the Company.

88.  Second, he refers to real questions as to the integrity of the Company’s executive management in light of (a) their failure to provide any meaningful response to the serious allegations of fraud and falsification of revenue and assets contained in the short seller reports, (b) their failure to take necessary steps to preserve the Company’s listing status, leading to the likelihood of delisting in August this year, (c) their failure to make appropriate disclosures to the HKSE regarding the issue of a petition against the Company, and (d) the breakdown of any functioning communication at board level of the Company.

89.  Third, he refers to the fact that the SFC had directed the suspension of trading of the Company’s shares on suspicion that documents issued by the Company contained false, incomplete and misleading information.  The SFC had also apparently issued restrictive notices relating to Mr Zhang, Mr Deng and Bull’s-Eye, on suspicion of serious market misconduct in the affairs of the Company, including misappropriation of Company assets via Bull’s-Eye.

90.  Fourth, he refers to the moving of the Company’s office in Hong Kong to a co-sharing office space, indicating a winding or closing down of business.

91.  Bull’s-Eye’s objections in Mr Deng’s evidence are primarily two-fold.  First, it is said that there is no proper basis for suggesting insolvency, as the debt underpinning the amended petition has been settled.  Second, the allegations of misappropriation underpinning the restriction notices issued by the SFC are strongly denied.

92.  I agree with Mr Kentish that the first objection is misconceived.  The fact that the relevant debt was settled by Bull’s-Eye only tends to reiterate the fact that the Company was not able to settle the debt itself.  The size of the debt is not huge in context, and that even that relatively small amount could not be paid by the Company is telling (and also casts doubt on assertions elsewhere of solvency).  On what I am told, the debt has simply been shifted to Bull’s-Eye and recorded as a debt now due to it.  I therefore reject Mr Wong’s submission on behalf of the Company itself that the Company has discharged its debts; the evidence is to the contrary.

93.  Nor does it seem to me to matter in the context of this case that no other creditor has yet stepped forward to press for winding up (though I have noted the position of Driven Innovation Ltd).

94.  I also agree that Bull’s-Eye has failed to provide any substantive answer or evidence in response to the serious issues raised by Haw Par in its evidence weeks ago.  It has not offered any real answer to the substantial allegations of fraud and falsification, or the serious risk of dissipation of assets.

95.  I do not think the remarkably slow progress in investigation following the identification by EY in September 2016 of the possible irregularities, even with the engagement of GT in November 2016 can properly or reliably support the submission that the areas of concern have been under investigation by an independent professional.

96.  Prior to hearing from Mr Choong about his contact with GT, it was difficult to avoid the inference that whatever investigation was intended has at least not proved successful, and has probably been severely and deliberately impeded.  Mr Tarn says the partner of GT to whom he spoke identified difficulty in getting at the materials he needed.  GT now says the same through Mr Choong.

97.  Indeed, from Mr Choong’s contact with GT, it still seems clear that either the GT investigation was deliberately obstructed, or that no sufficient steps were taken by the Company and its management to provide it with the materials which would allow the investigation realistically to be pursued to its conclusion in any sensible timeframe.

98.  Instead, in his submissions Mr Li has sought to place reliance on the passage of time since the alleged misfeasance occurred, and Haw Par’s knowledge of it.  Mr Li refers to the matters surrounding the Notes in 2015 and 2016, and points out that while the Notes are said to be the subject of complaint, Haw Par took no steps at that time to wind up the Company. He also points to the fact that the short seller reports were published in around September 2016, and again Haw Par took no steps at that time to wind up the Company.

99.  Hence, Mr Li submits that Haw Par should be debarred from pursuing these complaints as a result of its own laches.

100.  Mr Li also submits that there is no allegation, let alone evidence in support, that the wrongdoers are in control because all of Haw Par’s complaints are directed against Mr Zhang and Mr Deng only.  There is no allegation of collusion between those 2 individuals and other directors of the Company, so it cannot be said that the Company is controlled by the alleged wrongdoers.

101.  Reference is also made to the appointment on 12 June 2019 of the new independent non-executive director, Mr Choong, who has substantial experience in corporate advisory services and is a former partner at Deloitte and Touche Corporate Finance Limited.  Mr Choong will also chair the Resumption Committee (newly set up) and the Audit Committee of the Company.  With the benefit of the passage of time since the last hearing, reliance is also placed on the activity conducted by Mr Choong in that period.

102.  Mr Li further submits that winding up is a remedy of last resort and would not be appropriate where there are alternative remedies available to the complainant.  But here, he says, there are clear alternatives to Haw Par: first, it could make an unfair prejudice application and seek a buyout order; secondly, it can commence a derivative action on behalf of the Company against the alleged wrongdoers.

103.  Lastly, Mr Li submits there is no necessity to appoint provisional liquidators, and care must be taken not to permit such an intrusive remedy or drastic step to overtop the potential serious consequences of such an appointment.  He refers to the existence of 3 INEDs, whom he says would be in a position to take action, but two of them were already there and they do not seem to have taken any action.  He emphasizes the allegations of past wrongdoings have been under investigation by GT, so the appointment of provisional liquidators would serve no purpose, but there have clearly been significant difficulties in that investigation (see above) despite the time allowed for it.  He says the charge over the PRC subsidiary does not give rise to any risk of dissipation, but anyway the INEDs could be asked to look into the position or request broadening the scope of GT’s investigation for them to do so, but against the history this does not seem very reassuring.

104.  In summary, Mr Li invites me to adopt a forward-looking and constructive approach, and to decide on the existing evidence what is best for the Company and its shareholders as a whole.  Where the Company has set up a Resumption Committee – very late in the day, I would point out – and has appointed a financial adviser to seek to resume trading of its shares, Mr Li says it cannot be in the interest of the shareholders as a whole to appoint provisional liquidators.

105.  In the light of the further evidence filed by Mr Choong, Mr Li invites me to focus on two points.  First, he says that it is settled law that the Court will dismiss a winding up petition if the company has implemented effective reforms, with sufficient undertakings for the company, and that has now taken place.  Secondly, he points to the availability of an alternative remedy in the light of the offer to buy out Haw Par’s entire 10.03% shareholding, and submits that Haw Par would be acting unreasonably in insisting on seeking winding up relief, so that it is all the more clear that there is no good reason to pursue the present winding up, and so there could not be a good prima facie case for winding up.

106.  For his part, Mr Wong submits that it is not clear how Haw Par can overcome the Company’s submissions as to the need expressly to plead matters which identify a good reason to grant relief other than under section 168A, or why a buyout relief or an on market sale of the Company’s shares would not have been sufficient to address Haw Par’s concerns.  But having regard to the pleading in the draft re-amended petition, I disagree.  I do not accept that the clear goal is to exit, and in any event against the kind of allegations that are made, there are potentially far greater aspects relating to other and public shareholders and market confidence which might justify the grant of winding up relief.

107.  As to the Woven Rugs case, it might be noted that on the facts of that case the respondents had already made an open offer to the petitioners to purchase their shares at a fair value to be determined by an independent expert having access to all the books and accounts of the companies, and access for the parties, for the purposes of making representations to the valuer.  In this case, we are clearly not in the same territory.

108.  But Mr Wong may be on stronger ground when he points to the wide discretion to refuse winding up relief, and that it will more readily be used against a contributory than an unpaid creditor.

109.  Before looking at discretionary matters generally, I would note that I also accept that special considerations may apply in a case concerning the proposed just and equitable winding up of a publicly listed company.  The dispersed shareholding of a publicly listed company tends to remove that company from the classic equitable considerations based on personal relationships between shareholders.  Further, the Court will have to take account of the interests of the public and independent shareholders.

110.  It is that latter point which seems to me to be of importance.  Just because the SFC has not yet taken action to wind up the company by a public interest petition does not mean that a contributory cannot satisfy the Court that circumstances exist which might justify winding up.  If the Court takes that view, I would not regard that as somehow pre-empting (as Mr Wong put it) the judgment of the SFC.

111.  In light of the more recent evidence, Mr Wong says the fundamental question is about the immediate future of the Company.  He submits that the evidence now before the Court strongly suggests that the Company’s business is viable, its listing status can and should be saved, and past wrongdoings (if any) will be investigated and rectified.

112.  Mr Wong points to the appointment of FTI, the full cooperation of the Company with FTI and the proposed investigation timetable, the apparent profitability of the Company, the agreement with the Resumption Committee for independent professionals to act as directors of the Company’s Mainland subsidiaries, and the continuing GT investigation.

113.  Whilst maintaining the submission that the Substitution Summons is not viable as a matter of law, Mr Wong also submits that even if substitution is allowed the PL Summons should be refused where, in contrast to the usual situation where wrongdoers are in control of the company and resist independent scrutiny, in this case independent investigations are underway so that adding a further layer of PLs would not assist.  He also points to the serious jeopardy to ongoing resumption efforts if PLs are to be appointed, but I am not sure that necessarily follows in the absence of any real evidence that resumption of trading is somehow a possibility to which the HKSE might agree, where stringent prerequisite conditions have been set.

114.  There are significant grounds for concern about the Company, and its operation and management over recent historical periods.  Whilst the Company and its subsidiaries are said to be solvent, I do not lose sight of the fact that the solvency asserted is in a context where there are credible allegations of the falsification of financial statements for many years.

115.  Indeed, the FTI initial report contains the lengthy disclaimer, elements of which I have already touched on above.  No criticism of FTI is intended, as it is entirely understandable that such a broad disclaimer appears on material produced by them against a very tight timetable, and practically in almost total reliance upon (and therefore as a conduit of) material and information provided by the existing management of the Company.  By the disclaimer, FTI is properly asserting that its opinions and tentative conclusions are only as reliable as the information with which it has been provided, in circumstances where it has largely been unable to verify that material as reliable.

116.  Mr Kentish also asks the telling question about where the Company’s and its subsidiaries’ cash is, and who remains in control of the bank accounts.  He understandably says that an obligation to report movement of money only after the event, as he put it “after the horse has bolted”, provides little comfort.

117.  I accept that the Company has finally put in place some arrangements for the proper investigation of the situation and some professional and forward-looking steps aimed at resumption of the listing.  But this has not yet gone far, because of the very late reaction to the petition and Haw Par’s applications.

118.  Further, what is fundamentally missing from the evidence is any suggestion that there has been contact with the HKSE, or that there is any realistic or viable plan to meet the stringent conditions which must be met before resumption of trading could ever take place.  Those conditions include a requirement for the production of many years audited accounts; the completion of the GT investigation and its report; the way in which the Company proposes to deal with the consequences of that report; and how the Company proposes that it might satisfy the SFC that the SFC should revoke the statutory suspension of trading in the Company’s shares.

119.  I acknowledge the point made by Mr Wong that I must be careful not to assume that the Company will in fact be de-listed on 1 August 2019, where there is a review application procedure, and a decision at the end of that procedure may itself be subject to judicial review.  But it seems to me that there is actually no evidence to suggest any realistic or reasonable possibility at present that the Chairman of the HKSE will not make a decision on or soon after 1 August 2019 that the Company should be de-listed.  Nor is there any evidence to suggest any realistic or reasonable possibility that any review procedure would lead to a different decision.  None of the pre-conditions can realistically be met by early August, or even within a few months.  Further, as any judicial review would be limited to the decision-making process, I do not think it would be right to assume any realistic possibility at this stage that there might be some defect in that decision-making process.

120.  I accept that where the prior management, in the form of Mr Zhang and Mr Deng, has given undertakings not to vote at the Company board level, and where steps are apparently being taken to put professional directors into the subsidiary companies, the ongoing risk of dissipation of assets is at least reduced.  No particular challenge has been made to Mr Choong’s independence and professionalism, which I accept.  He is, however, but one of the INEDs, and the effectiveness of the other INEDs is significantly in doubt against the history.

121.  I need to address the question of the late buyout offer produced by the Company in its evidence.  Mr Wong makes the submission that Haw Par as substituted petitioner would be bringing the proceedings as a contributory, not as a creditor.  He identifies that a creditor is either paid out or obtains a winding up order, and there is no other remedy available.  On the other hand, a contributory has another remedy in the form of a buyout, by agreement or on a compulsory basis, and that the contributory’s real claim is to financial damages by reference to the proper value of its shares.

122.  I am prepared to accept that if the buyout offer is a reasonable and genuine offer, the winding up of a solvent company may not be in the interests of any of its members, resulting as it might in the sale of assets at breakup value without regard to goodwill and know-how.  But, I do not think I am in any position to decide whether or not it is a reasonable offer as to amount, and I have expressed my doubts as to its real practical value at this stage of the various considerations.  If a buyout offer is said to constitute the alternative which makes the pursuit of a winding up order inappropriate or abusive, I think it has to be more than a hypothetical or theoretical remedy.

123.  I do not think the evidence in this case identifies that the existing offer is better than hypothesis or theory, or that any compulsory buyout order would in fact achieve a practical alternative.  An empty buyout order is not, to my mind, an alternative remedy at all; at least, it is not one as should result in the practical striking out at this stage of the petition and the remedies which might flow from it.

124.  That the Resumption Committee has taken over some supervision of the Company’s affairs will only be really effective if there is full cooperation from the existing management, or any replacement management installed.  The former does not seem to me to be likely, and the latter will take some time.

125.  I am not convinced that the previous dealings will be addressed in any short period of time by the GT investigation or by FTI’s own enquiries.  Indeed, even on Mr Choong’s evidence, there must be significant doubt as to the ability to obtain the relevant information and documents within a short period.

126.  Ultimately, what seems to me to be the determinative point on the PL Summons is whether PLs would be in a better position, would be able to do more, than FTI – both (a) as a matter of the exercise of powers, and (b) as a matter of practicality.  Mr Wong and Mr Li in essence agree to this being determinative, because they both submit that the PLs would unlikely to be able to do any better than FTI, and so the highly intrusive and Draconian remedy of the appointment of PLs could never be justified.

127.  Mr Wong reminds me that there is at present no mutual understanding in place for the recognition of orders appointing provisional liquidators between the Mainland and Hong Kong.  Therefore, any Hong Kong order appointing PLs would not be recognised in the Mainland.  But the way in which the PLs would exercise their powers would be as controllers of the Company, and as directing mind of the shareholders of the subsidiaries down the corporate tree.  That would not require Mainland recognition of their appointment by order of this Court, but only the exercise of their powers as the directing mind of the shareholder of subsidiaries.

128.  I accept the practical reality that PLs might not achieve greater cooperation from some management, including prior management and those loyal to Mr Zhang and Mr Deng, than would FTI.  But I am persuaded that with the powers conferred on PLs by any order appointing them, they would overall likely have greater power and so greater practical ability to investigate and take over management and to take all necessary steps ultimately in the best interests of the Company.

129.  I also take into account that the FTI work has not yet progressed very far, and (as I said above) effectively requires it to start the investigation all over again.  If PLs were to be appointed at this stage, there is unlikely to be any great duplication of work.

130.  Exercising my discretion, and balancing all the circumstances on the basis of the commercial realities, the degree of urgency and need established by Haw Par, and the balance of convenience according to the overall circumstances, I grant the application for the appointment of PLs.

131.  The terms of the potential appointment have been provided in draft, and two rounds of comments and amendments have been supplied on behalf of the Official Receiver.  Mr Kentish is content to adopt the draft as re-amended to take in those proposed matters.  I am similarly content to make an order in the terms of the final draft provided to me.

Costs

132.  Haw Par having succeeded on the Substitution Summons, against the opposition of Bull’s-Eye and the Company, it seems to me that Haw Par is entitled to be paid its costs of that summons.  I, therefore, order the costs to be paid jointly and severally by Bull’s-Eye and the Company. In making that order, I have taken into account the rather late arrival of the Company in these proceedings, but that does not seem to me to make it necessary or appropriate somehow to seek to split the costs payable to Haw Par by those two parties who opposed the application.

133.  As to the costs of the PL Summons, I make a similar order that the unsuccessful opponents Bull’s-Eye and the Company are jointly and severally liable to pay Haw Par’s costs.

134.  I do not think this is a case in which it would be appropriate to perform a summary assessment of those costs, so they will be taxed, if not agreed.

135.  I order the costs of the Official Receiver to be paid out of the estate of the Company, in a sum which I summarily assess at HK$52,600.

Interim stay

136.  Mr Wong made the submission that if I should be persuaded, as I have been, that Haw Par should be substituted as petitioner and that there should be PLs, then he would ask for an interim stay of the order making appointment of PLs pending an application for leave to appeal from that order.

137.  In view of the time taken already to bring this matter to a conclusion on the two main outstanding summonses, I am only prepared to grant an interim stay of 7 days.  If no application for leave to appeal is made within 7 days, the interim stay will be removed without further order.  If an application for leave to appeal is made, I will hear it at 2:30pm on Friday, 26 July 2019, and the interim stay will continue until the determination of that application.

Dismissal Summons

138.  I have acceded to the Substitution Summons, and it seems entirely appropriate to grant an order in the consent terms reflected in the Dismissal Summons.

Re-Amended Petition

139.  Having permitted Haw Par to be substituted as petitioner, I grant leave for the re-amendment of the petition and the terms attached to the Substitution Summons.

140.  The amended petition was due to be heard before the Master, but was ordered by me to come before me today.  Now that there is a re-amended petition, and knowing that it is opposed, I shall adjourn the re-amended petition to a hearing before the Companies Judge on a date to be fixed.  Directions for the further progress of that petition can be given on that occasion, or any subsequent occasion felt appropriate.

Postscript

141.  I would like to express my appreciation to all advocates involved in this matter.  The proper presentation of skeleton arguments has enabled an efficiently conducted hearing of the various summonses this morning, and facilitated my ability to give a reasoned decision this afternoon.