RE CHINA GREENFRESH GROUP CO LTD (“the Company”)

HCCW 83/2020

[2021] HKCFI 1182

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 83 OF 2020

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D E C I S I O N

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1.  I have before me a petition issued by Mr Wang Fengming seeking an order to wind up the Company on the grounds of insolvency. The Company is incorporated in the Cayman Islands and its shares are listed on the Main Board of the Hong Kong Stock Exchange. The Petitioner issued a statutory demand in December 2019 demanding payment of what the Petitioner says is a debt owed to him by the Company.

2.  The debt is described in [5] and [6] of the Petition which I quote:

“5. The Company is indebted to your Petitioner HK$10,011,945 being the sum of the outstanding principal amount of HK$10,000,000 and the interests accrued from 12 August 2019 to 28 November 2019 due to your Petitioner (‘the Debt’) pursuant to the Bond Certificate No. K201908-05 issued on 12 August 2019 (‘the Bond’).

6. Your Petitioner is the registered holder of the Bond.  The principal amount of the Bond is HK$10,000,000 and the maturity date of the Bond is 12 November 2019 (‘the Maturity Date’).  The Bond bears interest from and including the date of issue of the Bond to and including the Maturity Date at the rate of 0.4% per annum, payable on the Maturity Date.”

3.  It will immediately be noted that despite the arrangement being described as involving issuance of a bond, what the Petitioner contends he agreed was simply to lend HK$10 million to the Company for a three-month period at an annualised interest rate of 0.4%.

4.  The evidence filed by the Company in opposition to the petition disputes the debt.  The Company says that the bond certificate and associated documentation including a subscription agreement were not authentic by which it means had not been knowingly executed by a duly authorised officer of the Company and further that it was believed the signatures on the documents and the seal that appear to be applied were forgeries.  The position of the Company, however, by the time the petition came on for argument today before me had changed, mainly as a result of its case being streamlined so that the Company’s position is this.

5.  It does not seek dismissal of the petition, it accepts that it is insolvent.  There are four other petitions that have been issued against this Company; wrongly for reasons explained in my decision in Re China Greenfresh Group Co Ltd [1]. The Company acknowledges that unless it is able to formulate a scheme for the restructuring of its debt which achieves the support of the necessary proportion of unsecured creditors, it will be wound up.  There is, therefore, no utility in seeking to have any one of the petitions dismissed on the grounds that the Company is able to demonstrate a bona fide defence on substantial grounds to the debt relied on by the relevant petition.

6.  The position of Mr Ho on behalf of the Company today was that the Company sought a three-month adjournment in order to progress a restructuring.  This is a proposal to which the Petitioner is not prepared to agree arguing, with some justification, that there is not a sufficiently developed proposal for creditors to consider to justify an adjournment.

7.  The submissions of Mr Ho, however, apart from seeking to persuade the Court that it is the interest of creditors that the petition be adjourned, also raise an objection to the petition on the grounds that it fails to satisfy the second of the core requirements which the Court requires to be satisfied before it will wind up a company incorporated in a foreign jurisdiction.

8.  I have explained how that the second core requirement is now understood, in [23]–[29] of my decision in Re China Huiyuan Juice Group Limited [2]:

“23. After this Petition was heard the Court of Appeal handed down its judgment in Shangdong Chenming Paper Holdings Ltd v Arjowiggins HKK 2 Ltd [3]. This was an unusual case. The Company is incorporated in the Mainland and has listings both in Shenzhen and Hong Kong. It is solvent. It refused to pay an arbitration award, which the Defendant was given leave to enforce in Hong Kong as a judgment. The Company refused to pay the judgment. The Defendant threatened to issue a petition to wind-up the Company on the grounds of insolvency. The Company issued an application for a declaration that the Defendant would not be able to demonstrate that the three core requirements could be satisfied and, therefore, it should be enjoined from presenting a petition. It was not in dispute that both the first and third core requirements were satisfied. The Company argued that its only connection with Hong Kong was its listing and that no benefit would be derived by the Defendant if a winding-up order were to be made and thus the second core requirement could not be satisfied. The Court of Appeal agreed with my decision that a benefit to the Defendant would result from a winding-up order by virtue, and I summarise, of the pressure that a liquidation in Hong Kong, or the prospect of such a liquidation, would put on the Company to settle the debt. This effect largely arose from the fact that the Company was clearly solvent and wished to access Hong Kong’s capital and debt markets. The only reason for not paying was recalcitrance. It will be appreciated that the facts were unusual and, hopefully, are not likely to arise again. The relevance of the Court of Appeal’s decision is the following statement in the judgment, which was given by Barma JA, about the second core requirement. Barma JA says this at [27]:

‘Moreover to insist on this requirement being met is clearly sensible, in that there would seldom be circumstances in which it would be justified to set in motion the court’s winding-up machinery where to do so could provide no reasonable prospect of benefit of any kind to the petitioner. That said, the overarching nature of the enquiry, the purpose of which is to ascertain whether it would be appropriate to put into motion the winding-up machinery in respect of a particular overseas company, would, I think, allow for some flexibility as to the nature or extent of the likely benefit to the petitioner that should be shown in order to satisfy the second core requirement, as long as the benefit can be said to be a real possibility, rather than a merely theoretical one.’

24. I think it is accurate to say that the second core requirement had, until the Shangdong Chenming Paper case, given rise to less controversy than the first core requirement. However, the significant increase in the number of winding-up petitions in respect of listed offshore holding companies of Mainland business groups makes the second core requirement of much greater significance. The reason for this is as follows. It is common for these business groups to be structured in a similar form to that in the present case, namely, a listed holding company incorporated in one of the offshore jurisdictions, which has a wholly owned subsidiary incorporated in another offshore jurisdiction, which in turns has a wholly owned subsidiary incorporated in the Mainland, which has underneath it a web of Mainland incorporated subsidiaries that hold the group’s assets and conduct its business. Commonly these business groups, if they run into financial problems, come before the Hong Kong court in one of two ways. First, as a consequence of a creditor’s petition of the sort brought in the present case. Secondly, as a consequence of the group taking the initiative to restructure its debt and applying to the court of the place of incorporation for the appointment of soft-touch provisional liquidators, who then seek recognition and assistance in Hong Kong in order to facilitate rehabilitation and circumvent the difficulties caused by the Hong Kong Court of Appeal’s decision in Legend International Resorts Ltd [4]. I note in passing that since the High Court has reopened at the beginning of May of this year corporate insolvencies involving Mainland business groups listed in Hong Kong using offshore companies have generated the majority of the corporate insolvency matters coming before me.

25. In practice the application of the three core requirements has not until the handing down of the decision in Shangdong Chenming Paper (which predates the current spate of cases by some years) been the source of controversy. It is now well established that the listing of a company in Hong Kong is sufficient to satisfy the first core requirement and commonly there is more than one creditor subject to the jurisdiction of the Hong Kong court, which is sufficient to satisfy the third core requirement. Little attention has been paid to the second core requirement. In restructuring cases I have not yet had a company seek to have a petition dismissed on the grounds that the second core requirement cannot be satisfied. Normally the company is only concerned to persuade the court to adjourn a petition in order to allow it to progress a restructuring. I apprehend that this is largely because the company is insolvent and if it cannot successfully restructure it will have to be wound-up. There is little point in focusing on the second core requirement because this can always be circumvented by presenting a petition in the place of incorporation. A company’s object is to obtain time to restructure and commonly it will not be particularly concerned about having a petition hanging over it while it attempts to do so. However, in a number of cases during the last few months one of the grounds that has been advanced for not making a winding-up order in cases in which it has not proved possible to persuade the petitioner to agree to an adjournment, is that it is not in the interests of creditors as a whole to make a winding-up order because, for reasons I consider in [34]–[44], the creditors will derive no benefit and any possibility of a restructuring and a return to creditors will be lost. This takes me back to Barma JA’s decision in Shangdong Chenming Paper.

26. As the passage I have quoted in [23] makes clear, in determining whether or not the second core requirement is satisfied the court will take a pragmatic approach. It will not be necessary for a petitioner to identify with great precision what the benefit will be or quantify with exactness the value of the benefit. But the petitioner must be able to point to a discernible and real benefit. Hypothetical benefits that potentially arise in all cases will be insufficient to satisfy the second core requirement. An example of such a hypothetical benefit would be the investigation of the affairs of a company by a liquidator, which might, but then again might not, identify a claim against officers of the company or locate an asset unidentified at the time of presentation of the petition, which would increase the assets available for distribution amongst creditors. In my view, it is clear from Barma JA’s judgment that these possible benefits would be too theoretical to satisfy the second core requirement. This analysis is, however, arguably called into question by an earlier Court of Appeal decision, which is not referred to in Shangdong Chenming, namely, Re Allied Weli Development Limited [5].

27. In Allied Weli the Court of Appeal dealt with an appeal from a winding-up order made by me over a company, which was incorporated in the British Virgin Islands. The company appealed my decision on the grounds that the petitioner had not satisfied either the first or second core requirement. The Court of Appeal dismissed the appeal. In addressing the second requirement Cheung JA says this at [6.9] to [6.11].

‘6.9 Mr Ng argued that the second core requirement of benefit to the petitioner creditor is absent. In my view the investigation is tied up with the issue of benefit to the Petitioner. The test is whether there is a reasonable prospect of benefit. As the Court of Final Appeal had made clear in the Yung Kee case that :

“24. In our view the question in the case of a creditor’s petition is whether there is a sufficient connection between the company and this jurisdiction to justify the court in ordering a company to be wound up despite the fact that it is incorporated elsewhere; and that in deciding that question the fact that there is a reasonable prospect that the petitioner will derive a sufficient benefit from the making of a winding‑up order, whether by the distribution of its assets or otherwise, will always be necessary and will often be sufficient.” (emphasis added)

6.10 Earlier the Court held that:

 “22.     ...it is sufficient that the petitioner will derive significant benefit from a winding-up order in the local jurisdiction even though the company is incorporated elsewhere.”

6.11 In my view where there is proper basis to investigate, then one can safely say that the second core requirement of benefit to the petitioner creditor can also be satisfied.’

     28.  The language used by Cheung JA in [6.11] suggests that it will be sufficient to satisfy the second core requirement for a petitioner to demonstrate that there is something to investigate.  If that is how the judgment is to be read it would seem to be inconsistent with the judgment of Barma JA, whose judgment in Shangdong Chenming I read as requiring a real possibility of benefit to be demonstrated, which in the context of investigation I think must be taken to require a petitioner to show a possible financial benefit to creditors of such an investigation such as the facilitation of a particular claim, which is capable of increasing the value of the insolvent company’s estate available for distribution to unsecured creditors.  However, it seems to me that to read Cheung JA as suggesting something less stringent than Barma JA would be incorrect.  In [6.12] Cheung JA makes it clear that the grounds for investigation had not be gone into by me in the judgment because the point had not been argued.  It seems to me that Cheung JA’s judgment should not be read as a thorough exploration of the parameters of the second core requirement, but rather a robust rejection of an issue raised for the first time on appeal.

     29.     In conclusion, it seems to me that it is necessary for a petitioner to demonstrate by evidence that there is a real possibility of a tangible benefit to creditors. The relevant facts and matters, which the evidence is adduced to prove should be set out in the petition and if it is not the petition is demurrable.”

What is said by Mr Ho is that the Petitioner has failed to identify any material benefit to creditors in having the Company wound up in Hong Kong.  If the Company is wound up, its listed status will have no value and its only asset is a British Virgin Islands’ company which for reasons also explained in China Huiyuan Juice Group Limited in [36]–[43] is difficult to realise.

9.  Mr Ho argued that any liquidator appointed by the Hong Kong court over this Cayman incorporated company will not be able to obtain control and, therefore, will not be able to access such assets as the Company may be the ultimate beneficial owner of in the Mainland.  It is not sufficient to merely suggest that it would be useful for liquidators to be able to investigate in Hong Kong whether there is anything which can be realised here for the benefit of creditors or to investigate the reason for the Company’s collapse.  If that was how the second core requirement were to be understood, it would be no criteria at all as it would almost always be satisfied.  I would add that the directors of the Company are all resident in the Mainland and, therefore, in practice this Court cannot exercise in personam the same jurisdiction over them.

10.  It seems to me that Mr Ho is correct in this regard and Ms He on behalf of the Petitioner very fairly accepted that the Petitioner was not able to point to any concrete benefit to be obtained by creditors if at this stage a liquidator were to be appointed over the Company. This being the case it follows that the more sensible course to have been adopted by the Petitioner would be to petition to wind the Company up in the Cayman Islands.  As I have already noted that there are four other petitions outstanding against this Company and indeed the way in which this Company and its parlous financial position has been dealt with both by the Company itself and its creditors is far from satisfactory.  As I explained in my recent decision in HCCW 187/2020 which relates to this Company, it is entirely unsatisfactory that solicitors are routinely issuing petitions against companies without checking first to see if there is already an extant petition, and with an apparent indifference to the proper practice where there are multiple creditors who have reached the stage where they believe it is necessary for a company to be liquidated.

11.  One unsatisfactory consequence of creditors not receiving the correct advice, namely to appear on the first petition as a supporting creditor, is that the creditors have not combined their efforts, thus reducing their legal costs and ensuring that the case advanced to justify a winding up is as strong as possible.  For example, in this case the Petitioner is an individual.  One of the other petitions has been issued by Citibank, N.A., who one would have thought was a sufficiently sophisticated creditor receiving sufficiently sophisticated legal advice that they would not have been allowed to issue inappropriately a petition to wind up the Company which was already subject to a petition.  What should have happened is for Citibank’s solicitors to liaise with the 1^st Petitioner.  If they had done so, given their greater to resources and I would have hoped sophistication, it may have been that either the second core requirement would have been dealt with more satisfactorily or a petition would have been issued in the Cayman Islands.

12.  The Company has sought a three-month adjournment, I will, however adjourn the petition until 29 April 2021.  This will be the occasion on which I will hear the petition in HCCW 213/2020 issued by Citibank, N.A.  I will also have listed HCCW 187/2020 in order that I can ensure some sensible case management of these various proceedings.

13.  The present Petitioner has characterised himself as a retail investor.  I think it may be helpful to say something about the character of the Petitioner and issues which seems to me on their face to fairly readily arise in relation to the debt.  One of the reasons I will do so is because this is not the first case in which I have been faced with petitions to wind up listed companies operating Mainland business groups where the Petitioner is an individual Mainland creditor characterising himself or herself as a bondholder.  The most recent examples are my decisions in Re Lamtex Holdings Limited [6] and Re Ping An Securities Group (Holdings) Limited [7].

14.  In the present case, the Petitioner lives in a public housing estate in Tseung Kwan O.  However, the petition and the supporting evidence would have me believe that the Petitioner had HK$10 million which he thought it was wise to invest in a third line listed company for three months in return for interest of 0.4% per annum.  If the Petitioner had looked at the annual report for the Company for the year ending 2018, he would have seen that the Company only had cash in bank of a little over HK$1 million.  In beggars belief that the Petitioner was making a genuine investment of the form described in [5] and [6] of the Petition which I quoted of the outset of this decision.

15.  An informed reading of the evidence points to what was probably the more likely arrangement that was entered into.  Despite the Company disputing the authenticity of the documents that were executed, it is not in dispute that a sum of money in RMB was paid to a Mainland subsidiary of the Company.  It would appear that the source of this money was the Petitioner’s son who lives in the Mainland.  It would further appear from the evidence that it was the Petitioner’s son who was introduced by a broker called Sheldon Tse to the possibility of “an investment” in the Company.

16.  It seems to me to be a fairly compelling inference that what was going on was as follows.  The Company was in dire need of money.  Given its parlous financial position borrowing, if it was possible at all, from a bank would have involved paying very high interest rate and issuing a conventional series of bonds was simply not practicable.  The Company became aware that short term finance might be obtainable by arranging with Mainland residents who wished to transfer RMB out of the Mainland and receive HKD in Hong Kong to make advances of the sort which allegedly constitute the debt in the present case.  It will be appreciated that such arrangements will almost certainly be in breach of Mainland foreign exchange controls.  Presumably this explains the ridiculously low rate of interest the Petitioner says he agreed to accept.  I think it is reasonable to assume that the intermediary was to receive some payment for setting up the “loan” and he would have been indifferent to whether or not the lender ultimately received repayment of the sum advanced.

17.  In the circumstances, it seems to me that it is arguable that the Petitioner is not in any event a creditor of the Company.  It may be that the Petitioner’s son has a claim for recovery of the RMB advanced to the Mainland subsidiary.  That, of course, would not in itself make the Petitioner a creditor entitled to present a petition against the Company and obtain a winding up order.  Although, given the way this matter transpired it is not necessary for me to determine the issue, I would if I had had to determine it, have concluded that the Company had a bona fide defence on substantial grounds to the Petitioner’s claim as formulated in the petition.

18.  I would also make these more general observations.  As I have noted in various other decisions, I and colleagues spend a considerable amount of time at present, dealing with applications relating to Mainland businesses listed on the Hong Kong Stock Exchange.  I believe that approximately 30 petitions have been issued in Hong Kong and there are various other petitions which had been issued in offshore jurisdictions which have given rise to applications to recognise soft-touch provisional liquidators, which I describe in various of the decisions that I have handed down during the course of the last six months.  There are many unsatisfactory features in the cases coming before the court.  These include both ignorance and indifference on the part of directors to their obligations when they become aware a company cannot pay its debts as they fall due, and generally appalling corporate governance.  Cases such as the present suggest that directors of public companies, which they must know either to be insolvent or fast approaching insolvency, are routinely borrowing money from small investors, which they know they are unlikely to be able to repay.  The absence of any express sanction for trading whilst insolvent in Hong Kong makes this a relatively safe, albeit unethical, practice particularly if, as in the present case, all the directors reside in the Mainland.  There would appear to be no regulation or oversight of the practice of issuing what are called bonds to retail investors either hoping to obtain residency rights in Hong Kong (in itself I understand this to be a legitimate arrangement; see my decision in Re National Arts Entertainment and Culture Group Limited [8]) or as a means to evade Mainland foreign exchange control.

19.  There is also the frankly amateurish way many Hong Kong lawyers are dealing with these kind of matters.  It is ridiculous that this Company should have five winding up petitions issued against it.  Hopefully this will cease as a result of my decision in HCCW 187/2020 and the Official Receiver’s circular No. 1/2021 dated 24 March 2021.  As I have already indicated for practical reasons, I will adjourn the Petition to 29 April 2021 and reserve the costs.