RE THE JOINT AND SEVERAL PROVISIONAL LIQUIDATORS OF VICTORY CITY INTERNATIONAL HOLDINGS LTD

HCMP 611/2021

[2021] HKCFI 1370

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 611 OF 2021

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REASONS FOR DECISION

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The Application

1.  I have before me an originating summons issued by Patrick Cowley and Lui Yee Man (of KPMG Hong Kong) and Charles Thresh and Mike Morrison (of KPMG Bermuda) for recognition and assistance of their appointment as provisional liquidators appointed in Bermuda on the winding up of the Company on 23 April 2021.  The application is of itself quite straightforward.  However, the background to it tends to support and illustrate concerns that I have expressed in a number of recent decisions about the potential misuse of soft-touch provisional liquidation in the place of incorporation of companies listed in Hong Kong carrying on business primarily in the Mainland.  I will, therefore, set out the background to the application, which I grant, in some detail before commenting on the misuse of soft-touch provisional liquidation.

Background

2.  The Company was incorporated in Bermuda and is listed on the Main Board of The Stock Exchange of Hong Kong Limited (“SEHK”) (stock code 539). The Company has its principal place of business in Hong Kong at Unit D, 3^rd Floor, Winfield Industrial Building, 3 Kin Kwan Street, Tuen Mun, New Territories.

3.  The Company is a holding company carrying on textiles and garment businesses through its subsidiaries and associated companies (the “Group”). The Group is comprised of the Company as the holding company, with a number of subsidiaries incorporated in the British Virgin Islands (“BVI”), Hong Kong and Macau, as well as a number of wholly foreign owned entities in the Mainland.

4.  On 14 December 2020, Victory City Company Limited (the “Borrower”) failed to make repayment of a Loan pursuant to a facility given by HSBC.

5.  On 11 February 2021, the Company presented a petition to the Supreme Court of Bermuda (“Company’s Petition”) for:

(1)  the Company to be wound up by the Bermudian Court; and

(2)  the appointment of Mr Lai Ying Lun and Mr Osman Mohammed Arab (both of RSM Corporate Advisory (Hong Kong) Limited and Edward Alexander Niles Whittaker (of R&H Services Limited) (collectively the “Initial PLs”) as the joint provisional liquidators of the Company for restructuring purposes and for the continuation of the then management of the Company during such process with RSM taking on an oversight role.

6.  The Company’s Petition was also followed by an ex parte Summons taken out by the Company on 11 February 2021 for an order to appoint the Initial PLs as joint provisional liquidators of the Company for restructuring purposes.

7.  Having considered the Company’s Petition and ex parte Summons, the Supreme Court of Bermuda made the following orders on 12 February 2021:

(1)  appointing the Initial PLs as joint provisional liquidators of the Company for restructuring purposes (the “Initial PLs Order”); and

(2)  to issue a Letter of Request directed to this Court for inter alia recognising the Initial PLs’ appointment pursuant to the Initial PLs Order.

8.  Despite the Bermudian Court having issued a Letter of Request pursuant to the Initial PLs Order, the Initial PLs had not applied to this Court for recognition of their appointment by the time of their resignation on 23 April 2021.

9.  On 11 April 2021, HSBC presented a winding up petition to the Supreme Court of Bermuda in the same action, that was later amended on 19 April 2021 (“HSBC’s Petition”). HSBC’s Petition requested the Bermudian Court to make an order inter alia that:

(1)  the Company be wound up in accordance with the laws of Bermuda;

(2)  Lui Yee Man, Charles Thresh, Mike Morrison and Patrick Cowley, i.e. the Applicants in these Hong Kong proceedings, be appointed as joint provisional liquidators of the Company; and

(3)  the Applicants be authorised to obtain the recognition of their appointment and to make applications to the courts of any other jurisdiction jurisdictions for that purpose.

10.  As evident from the HSBC’s Petition and the 1^st affirmation of Pang, Linda Mei Chun, HSBC took out its petition in the capacity as creditor of the Company, who acted as agent being instructed by a total of 12 majority lenders, including HSBC itself (collectively the “Majority Lenders”).

11.  HSBC became a creditor of the Company in the following circumstances.  Where I refer to the Majority Lenders’ conduct below, these are generally references to the conduct carried out by the Majority Lenders collectively through HSBC as agent.

12.  As I have explained, the Company is a holding company, with a number of subsidiaries incorporated in various jurisdictions including, the BVI, Hong Kong, Macau, and the Mainland.  One of its Hong Kong-incorporated subsidiaries is the Borrower.  On 12 December 2017, a dual currency facility agreement (the “Facility Agreement”) was entered into between the Borrower, the Company (and other parties) as a guarantor, HSBC as agent, and certain Majority Lenders in respect of a loan in the sums of (the “Loan”) HK$2,226,000,000 under a Tranche A Facility and US$48,000,000 under a Tranche B Facility.  On 8 February 2018, pursuant to an Additional Lender Accession Agreement, an additional Majority Lender became a party to the Facility Agreement as Lender, and the Loan was also increased to HK$2,526,000,000 under a Tranche A Facility, and US$48,000,000 under a Tranche B Facility.  By way of two Transfer Certificates dated 31 January 2019 and 15 November 2019, further Majority Lenders became parties to the Facility Agreement as Lender.

13.  Pursuant to the above, the Majority Lenders believe that they represent the largest creditor group of the Company, representing approximately HK$2.2 billion out of HK$3.5 billion which the Initial PLs have advised to be the total indebtedness of the Company.

14.  On 28 December 2020 and 19 January 2021, the Majority Lenders notified the Borrower and the Guarantors that events of default had occurred, and declared that the Loan, together with the accrued interest, and all other amounts accrued or outstanding were immediately due and payable. On 20 January 2021, the Majority Lenders issued a demand letter against the Guarantors demanding immediate payment of the outstanding debt.  As of 2 February 2021, the outstanding debt was in the sum of US$282,095,525.63, pursuant to which the Majority Lenders served a statutory demand upon inter alia the Company (the “Statutory Demand”) on 2 February 2021.

15.  While the Bermudian Court made the Initial PLs Order pursuant to the Company’s Petition on 12 February 2021, the Company did not put the Majority Lenders on notice of any proceedings in the Bermudian Court action.  It was only through sight of the Company’s SEHK announcement on 16 February 2021, that the existence of the Initial PLs Order was discovered.  The Company’s Petition and the Initial PLs Order therefore came as a surprise to the Majority Lenders.

16.  The Company continued to seek an informal standstill without responding to any of the Majority Lenders’ requests for consideration in return for the standstill, and without taking any steps to elucidate a restructuring plan or satisfactorily deal with the outstanding information requisitions from the Majority Lenders.

17.  Once the Majority Lenders became aware of the Initial PLs Order, they sought access to information required to enable them to manage their exposure under the Facility Agreement and to understanding the basis upon the Company’s Petition was made.  Despite numerous requests made through correspondence and a meeting between the Initial PLs and the Majority Lenders, neither the Initial PLs nor the Company provided information related to the basis upon the Company’s Petition was made, any financial information or any detail of a restructuring plan.

18.  The Majority Lenders followed up with the Initial PLs for responses to the outstanding requests by various emails from 19 March to 1 April 2021, to no avail.  The Majority Lenders also wrote to the Company and the Initial PLs seeking an explanation for the suspension of trading of the Company’s shares on 22 March 2021, but have not received any response.

19.  Against this backdrop, the Majority Lenders were of the view that they had not been provided with any meaningful explanation as to the financial position of the Company and the grounds upon which the Company’s Petition was made, nor with any credible explanation as to why a restructuring was considered appropriate or achievable.  It was also unclear to what extent the Initial PLs have been able to obtain information from the Company.

20.  The Majority Lenders’ concern was also coupled with other matters that have arisen within the ambit of the Company’s affairs since the Initial PLs Order:

(a)  Deloitte’s resignation. On 17 February 2021, the Majority Lenders were informed by the then auditors of the Company, Deloitte, of their resignation with effect from 26 March 2021.  From their letter of resignation, Deloitte stated inter alia that:

(i)  they obtained evidence of RMB 946 million outstanding bank borrowings of two Mainland subsidiaries of the Company, which were substantially unrecorded in the previously issued consolidated financial statements;

(ii)  the Company had not demonstrated any meaningful progress made with respect to (a) quantifying the amount of unrecorded bank borrowings of the two Mainland subsidiaries; (b) making enquiries to ascertain whether there may be any other unrecorded liabilities; and (c) engaging a forensic accounting firm to perform an independent investigation; and

(iii)  as the Company had not implemented a timely and robust response to the above matter, Deloitte had no alternative but to tender their resignation.

(b)  Government enquiry. Deloitte’s resignation was followed by an enquiry initiated by the Financial Reporting Council of Hong Kong SAR on 23 March 2021.  The enquiry was in relation to the financial statements of the Company for the year ending 31 March 2020 and for the six months ended 30 September 2020 and an investigation into the audit of the annual accounts.

(c)  The Company’s apparent lack of control over its PRC subsidiaries.  As is evident from their SEHK announcement on 22 February 2021, the Company disclosed that its Hong Kong management was only brought to its attention that its Mainland subsidiary entered into a RMB994.01 million credit facility on 11 December 2020, and that they were unable to obtain information regarding the credit facility from the chief accountant of its Mainland subsidiary who was on intermittent leave. While the credit facility is secured by certain assets held by the Company, this is in contradiction to other facilities granted by other creditors of the Company.

(d)  Asset disposal.  Several of the Company’s subsidiaries have embarked on asset disposal exercises which may adversely impact on the rights of creditors.

(e)  Suspension of the audit and trading.  The Company’s audit for the year ended March 2021 was suspended.  The Company’s shares were also suspended from trading with effect from 22 March 2021

21.  The Majority Lenders consider the above facts and matters cast serious doubts as to whether the Company’s appointment of the Initial PLs was a mere stalling tactic by the Company not least because, based on the presently available information, the Company has limited offshore assets and an apparent lack of control over its onshore assets, and the Initial JPLs did not apply in Hong Kong for recognition of their appointment.  In light of the opaque manner the Company and its Initial PLs conducted their purported restructuring and their affairs in general, the Majority Lenders filed HSBC’s Petition to rectify the situation.

Misuse of soft-touch provisional liquidation

22.  As I mentioned at the outset of this decision in a number of recent cases I have expressed concern about the use of soft-touch provisional liquidation commenced in the place of incorporation.  Those concerns largely arise from the circumstances (1) in which soft-touch provisional liquidations come to be commenced and the way in which they are dealt with suggesting that the companies that use them are more concerned with the interests of the owners with whom the board is aligned than the creditors and (2) the involvement of professionals who are not ensuring that creditors’ interests are being properly protected.  The evidence filed by Mr Cowley suggests that this was such a case until HSBC intervened.  The most recent decision in the series to which I have alluded is Re China Bozza Development Limited [1]in which I express my concerns in some detail.  Others include Re Lamtex Holdings Limited [2] and Re Ping An Securities Group (Holdings) Limited [3].

23.  This case and the three to which I have just referred have things in common.  In all four cases soft-touch provisional liquidators were appointed on the application of the company.  In three cases the companies are now in liquidation: the present Company, Lamtex and Ping An. Another feature is that they all involve the same insolvency practitioners: RSM.  All four cases seem to exhibit a failure to the part of RSM and, at least in China Bozza’s case but probably the others, the legal advisers Conyers Dill & Pearman and Michael Li, to understand the proper scope of the use of soft-touch provisional liquidation at least viewed from the perspective of Hong Kong law and practice.  The readers of this decision will not be surprised to hear that I will in future approach any applications for recognition and assistance which exhibit the characteristics I have described with the greatest circumspection.