Re Linfa Industrial Co. Ltd.

HCCW 1047/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.1047 OF 1999

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R E A S O N S

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1. There are four petitions before me. The companies sought to be wound up are Wah Lee Resources Company Limited, Supreme Million Limited, Linfa Industrial Company Limited and Wah Lee Trading Company Limited (collectively "the Companies"). The Companies are wholly owned operating subsidiaries of Wah Lee Resources Holdings Limited ("Holdings"), a company incorporated in Bermuda. A winding-up petition has also been filed in Bermuda to wind up the holding company. Each of the petitions before me was presented by ABSA Asia Limited ("the petitioner") and supported by Standard Chartered Bank ("SCB"). The petition to wind up Holdings was presented by SCB.

2. The debts upon which the petitions are based are not disputed. At the first hearing on 8 February 2000, the Companies sought an adjournment of eight weeks for the purpose of presenting restructuring proposals. They were given a 13 day adjournment. During this period, there were various developments which may be summarized as follows. No further progress was made with any of the potential investors. After the Chinese New Year holidays, Mr Yeung Kwok Fan ("Mr Yeung") who, together with his wife, through a nominee company hold 69% of Holdings, was approached by Sun Hung Kai International Limited requesting that shares be placed to them because they had investors. Mr Yeung discussed this with Pacific Challenge on 15 February 2000 and a self-rescue plan for Holdings was devised.

3. The plan involved a top-up placing of up to 20% of the existing issued shares to a new investor. The scheme of placement is that the major shareholder of Holdings, namely Mr Yeung's nominee company Lucky Bingo Investment Limited would sell its existing shares in Holdings to new investors. Lucky Bingo would also undertake to subscribe for a sufficient number of shares at the same price. The original proposed subscription price of HK$0.15 per share was increased to HK$0.20 per share.

4. According to the announcement made by Holdings on 18 February 2000, the net proceeds will amount to approximately $56 million. Of this amount, Holdings intends to use approximately $37 million to repay bank borrowings and other loans of the group and to use the balance of approximately $19 million as general working capital. It was envisaged that all lenders would agree to the proposed restructuring and that the winding-up petitions presented by SCB against Holdings and by the petitioner against the Companies would be withdrawn. Under the proposal, unsecured creditors would receive 15% of the outstanding indebtedness within three business days upon completion of the placement, a further 15% would be payable within six months after the first 15% payment and the balance would be converted into a four year redeemable convertible bond, carrying an interest rate of 2% per annum and a conversion price of HK$0.30 per share upon maturity.

5. The placement has been approved by the Stock Exchange of Hong Kong Limited and is scheduled to be completed on or before 24 February 2000. The group's financial advisor Pacific Challenge has taken the view that it would be premature to convene a bank creditors' meeting before completion of the share placements. Pacific Challenge's intention is to convene a meeting of the bank creditors for 25 or 26 February. Since it is my understanding that the placement is fully underwritten, I have some difficulty in following the reasoning put forward by Pacific Challenge. Be that as it may, the self-rescue proposal makes it plain that as regards the second tranche of 15% payment, the Companies have to raise additional funding. In other words, they have no funds with which to make the second tranche payments. Finally, the value of the four year bond would depend on the performance of the group after the restructuring. In this connection, counsel for the Companies sought additional time in order to formulate the business plan. He applied for a two week adjournment.

6. The adjournment was opposed by the petitioner who does not find the self-rescue plan acceptable. It is unnecessary for present purposes to go into the detailed reasons given by the petitioner.

7. According to Mr Yeung, he discussed the self-rescue plan with SCB, Dao Heng Bank, Hong Kong Bank and Po Sang Bank on or about 16 February. He stated that :

"Basically, the banks indicated that the said proposal is a good one and the group is going in the right direction and they would give consideration and further discussion regarding the said proposal. The banks also requested us to prepare a business plan for them to make an assessment."

However, there is a letter from Deacons, Graham & James, the solicitors for SCB, confirming that as at 19 February 2000, their client had not received any proposal or plan (whether in writing or otherwise) for the rescue of the group which is acceptable to it. It further underlined the fact that SCB is the largest single creditor whose support for any rescue proposal is essential as it can effectively veto any proposal which includes a scheme of arrangement.

8. Although counsel for the Companies sought to downplay Deacons' letter, the message is clear. SCB's rejection of the plan was not qualified in any way and plainly was not dependant on the acceptability or otherwise of any supporting business plan. It is not a fair reading of that letter to suggest that SCB's position would be different upon seeing the business plan which has yet to be formulated.

9. The position comes to this : no creditor has appeared to oppose the petitions. Two banks, namely KBC Bank and Po Sang Bank, representing approximately 12% of the total indebtedness, support the adjournment. The petitioner who holds approximately 9% of the overall indebtedness and SCB which holds over 25% of the overall indebtedness seek a winding-up order. Even if I were wrong about the stance of SCB, the opposition of the petitioner is sufficient to render the self-rescue plan a dead letter. It will be noted that that proposal does not involve any section 166 scheme of arrangement. Rather, it envisages the "withdrawal" of the petitions and the agreement of all the lenders to the proposal.

10. Given the very clear stance of the petitioner, any further adjournment will achieve nothing save to increase costs. On the evidence, it appears to be wishful thinking on the part of the Companies that the petitioner and SCB would somehow change their stance upon seeing the business plan which (as noted above) has not yet been formulated.

11. For these reasons, the Companies' application for an adjournment was refused and winding-up orders made.