AI GLOBAL INVESTMENT SPC v. RARE EARTH MAGNESIUM TECHNOLOGY GROUP HOLDINGS LTD

HCCW 81/2021

[2022] HKCFI 1317

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP)  PROCEEDINGS NO 81 OF 2021

________________________

________________________

________________________

________________________

DECISION

________________________

APPLICATIONS

1.  This is the hearing of the petition to wind up Rare Earth Magnesium Technology Group Holdings Limited (“the Company”)  which was presented on 22 February 2021 (“the Petition”).

2.  The Company first applied for an adjournment of the hearing of the Petition on the ground that the Company has a restructuring scheme of arrangement (the “Scheme”).  The meeting of the Scheme creditors was  scheduled to take place on 1 March 2022.

3.  Secondly, the Company seeks to dismiss the Petition on the basis that this Court should not exercise its discretion to wind up the Company. It was submitted that Petitioner fails to satisfy the second core requirement, namely, if a winding up order is made, there must be a reasonable possibility of benefit to those applying for the winding up order.

4.  Thirdly, the Company, by a summons dated 13 August 2021, applied for a validation order under section 182 of the Companies (Winding Up and Miscellaneous Provisions)  Ordinance, Cap.32 (“the Ordinance”). The application is that notwithstanding the presentation of the Petition, all transfers in the shares of the Company since the presentation of the Petition shall not be void by virtue of section 182 of the Ordinance in the event of an order for the winding-up of the Company being made on the Petition.

5.  Mr Ho for the Company clarified that the transfers in the shares should be restricted to paid-up shares of the Company. Mr Maurellet SC for the Petitioner has no objection to the application. As such, I made an order in terms of the Summons save and except that it should be limited to all paid-up shares of the Company.

THE PETITION

Adjournment

6.  It is undisputed that the Petitioner is a creditor of the Company and is owed a debt of US$20,707,777.78 from the Company pursuant to a subscription agreement dated 7 August 2017 (“the Debt”). Mr Maurellet SC is correct that the Petitioner, as of right, is entitled to a winding up order.

7.  However, I take into account of the material fact that on 16 July 2020, the Bermudian Court (as the Company is incorporated in Bermuda)  granted an order appointing Joint and Several Provisional Liquidators of the Company (“JPLs”)  on a soft touch basis to assist in and facilitate the Company’s debt restructuring. Mr Justice Harris granted an order on 25 August 2020 to recognise the provisional liquidation of the Company and the appointment of JPLs for restructuring purposes.

8.  Mr Ho for the Company informed this Court that the Scheme meeting would be held on 1 March 2022 which was about one week from the date of the hearing of the Petition. This Court was further told that other than the Petitioner, no creditor has confirmed opposition to the Scheme, while many have provided written support.

9.  The legal principles governing the adjournment or dismissal of a petition on restructuring grounds are well established. In China Huiyuan [2021] 1 HKLRD 255, Harris J. at §§50 and 51 correctly said:

“50. As the New Zealand Court of Appeal has recently observed ‘Insolvency law is a mix of principle and pragmatism. The [insolvency legislation] is to be used in a practical way. It does not require liquidation when that will not serve any useful purpose’. The way in which the courts assess applications by financially distressed companies that seek adjournments of petitions reflects this.

“When the court considers the possibility of benefit resulting from an order, the normal starting point is to consider any possible benefit to the petitioner, whether it be a debtor or a creditor. In many cases, showing benefit to the petitioner will be sufficient to persuade the court to make the order…I do not see why a consideration of benefit should be restricted to the possibility of benefit to the petitioner; benefit to others should also be relevant. Conversely, disadvantages or unfairness to others may also be relevant. After all, the court is exercising a discretion and is surely required to consider the effect of the proposed order on all relevant persons. In such a case, as is normal, the court will consider the effect of making the order and the effect of not making the order and will then consider what to do, having regard to all relevant considerations, including the legitimate aspirations of all potentially affected persons.” (Emphasis added.)

I accept that as a general proposition, in the absence of good discretionary grounds to the contrary, an applicant for winding up who has proved its debt and has proved insolvency ought to achieve a winding up order. However,… the discretion can be exercised in favour of granting a stay where the refusal of a stay would be likely to work a substantial injustice.” (Emphasis added.)

51. I summarise how this balancing exercise is to be approached when, as in the present case, creditors take differing views about what is in their best interests in Re Chase On Development Ltd:

“In cases in which a company is clearly insolvent and a petitioner’s debt is not in dispute an important consideration, when a court is being asked to adjourn a petition by a Company in order to allow it to attempt to restructure its debt, are the views of its unsecured creditors.

If the creditors are taking differing views the Court will normally take into account all the circumstances including the following considerations:

(a)  A qualitative assessment of the number of creditors for and against a winding-up order. It is not just a matter of counting the number of creditors in favour and those against or the proportion of the value of the debt they hold.

(b)  The reasons proferred by the supporting and opposing creditors.

(c)  The feasibility of the proposed restructuring.”

10.  The Court assesses the feasibility of a restructuring by reference to three criteria:

(1)  whether there is funding for the proposed restructuring;

(2)  whether there is a restructuring plan; and

(3)  whether the restructuring plan has a timetable.

See Re China Saite Group Co Ltd [2021] HKCFI 2889; Re Founder Information (Hong Kong)  Ltd [2021] HKCFI 311; [2021] HKCLC 145.

11.  In the present case, Mr Maurellet SC submitted that the restructuring must be approved by a majority in number representing at least 75% in value of the class of creditors present and voting in person or by proxy. There is no documentary evidence to demonstrate that the Company has obtained support from the creditors as alleged. It is unforeseeable that the Scheme would receive the statutory majority in value for the Court’s sanction. The Petitioner is minded to vote against the Scheme and its position (representing 20.44% of the total debts)  is significant. It is thus difficult to see how the Company has discharged its burden to show that there is a very real prospect of success for its restructuring.

12.  However, I am of the view that it is not prudent for this Court to speculate the outcome of the Scheme meeting to be held on 1 March 2022. A material consideration is that Harris J. had already given directions for a scheme meeting to be held. If the Company fails to achieve the statutory majority, then, as Mr Ho rightly agreed, that will be the end of the restructuring and subject to the issue of jurisdiction to be discussed below, the Company would be wound up. On the other hand, if the Company obtains the statutory majority, then whether to sanction the scheme or not is matter for Harris J.

13.  According to the Company’s evidence, the sanction hearing for the Scheme will take place on 27 May 2022 and 79.1% of the Company’s creditors in terms of debt value and 90% of the Company’s creditors in number have previously expressed support of the Scheme.

14.  I also take into consideration that the Scheme meeting was only a few days away. I am of the view that this Court should leave it for the creditors’ democracy to operate, rather than to prejudge the issue on a hypothetical basis.

15.  Further, a short period of adjournment is unlikely to cause prejudice to the Petitioner.

16.  Importantly, it is essential to bear in mind that the Court must have regard to the best interest of all unsecured creditors in an insolvent liquidation scenario. The Court should do it very best to facilitate corporate rehabilitation and promote corporate rescue if that can provide a better return to all unsecured creditors.

17.  On the unique circumstances of the present case, I am of the view that judicial discretion should be exercised in favour of a short adjournment.

Jurisdiction Issue

18.  Mr Ho for the Company submitted that the Petition should be dismissed as the Petitioner fails to satisfy the second core requirement. Under section 327 of the Ordinance, the Court has jurisdiction to wind up an unregistered company. However, the Court would not exercise its discretion to do so unless three core requirements are satisfied (Silver Starlight Ltd v China CITIC Bank Corporation Ltd, Tianjin Branch [2021] HKCA 1248 at §15 per G Lam JA).

19.  There is no dispute that the Court’s approach to the second core requirement is to consider the practical benefits of a winding-up order. The Company’s primary submission is that there is no reasonable possibility that a winding-up order will benefit the Petitioner, such that the second core requirement for winding up a non-Hong Kong company is not satisfied.

20.  Mr Maurellet SC for the Petitioner submitted that there is a real prospect of the Company being able to recover substantial receivables from its subsidiaries, and in particular from its Hong Kong subsidiaries, the assets of which can be realized by a Hong Kong court-appointed liquidator for the purpose of satisfying the Debt owing to the Company.

21.  Mr Ho for the Company submitted that such recovery is only theoretical. The evidence is that the receivables will be worthless if the Company is wound up for the following reasons:

(1)  Upon a winding-up, the Company’s restructuring and business will collapse, while the Company’s indirect Mainland subsidiaries would be worth little.

(2)  The Subsidiary Debtors themselves are either insolvent themselves or have no readily realizable assets.

(3)  The value of all the subsidiary debtors hinges on the value of the shareholding in two Mainland subsidiaries, and the value is likely to be minimal.

(4)  The Petitioner’s attempt to rely on the face value of the Company’s consolidated accounts to demonstrate that the receivables are valuable is a red herring. The accounts were not prepared on the basis of the Group’s liquidation and thus would not make provisions for bad debts.

22.  I am of the view that, on the evidence, the Petitioner has satisfied the second core requirement. The Court approaches this issue with pragmatic considerations and common sense. First, even in the Company’s own scheme document which adopts a liquidation analysis on the assumption that the Company would commence insolvent liquidation on or about 31 December 2020 and that related individual unsecured assets will be sold in a forced sale process, in relation to one particular Hong Kong subsidiary, namely, HK New Material (as defined in the Scheme Document), it is stated that it carries “an estimated recoverable value in the range of 15.7% to 40.2% is estimated to be declared to the unsecured creditors which include HK New Materials. The distributable amount to HK New Materials is estimated to fall in the range of HK$71.8m to HK$182.8m.”

23.  Hence, even on the Company’s own liquidation analysis, there would be benefits to creditors. Mr Ho for the Company submitted that the above liquidation analysis was made on the basis of a few assumptions which turn out to be incorrect. First, the liquidation did not commence on or about 31 December 2020. Secondly, the liquidation of assets is to be completed within twelve months of the commencement of the liquidation. Thirdly, it is assumed that fair and sufficient cooperation will be provided by management of each entity to support the winding up exercise conducted by the insolvency practitioners. Fourthly, the estimates are based on the information currently available to the JPLs as at 31 December 2020 and such a view may change if further and updated information becomes available to the JPLs in the future.

24.  Mr Ho submitted that as the liquidation did not commence and hence not completed within 12 months, the assets available for distribution might further deteriorate and hence the recovery would be lowered. However, there is no evidence from the Company to that effect. Whilst it may be common sense that the longer it takes to liquidate a company, normally, the lower will be the realization value. However, this is not necessarily so. Some assets, land, for example, may increase in value over time. No evidence has been presented to the Court on the impact of the non-completion of the liquidation within the twelve-month period. There is no evidence that there is the want of fair and sufficient cooperation from the management of each entity to support the winding up exercise. Further, there is no update on any change of circumstances which may affect the liquidation analysis. At the Scheme meeting, creditors would be asked to vote based on, inter alia, the liquidation analysis. The Company has not circulated any updated statement to the effect that upon liquidation, the return to its creditors will be nil.

25.  The liquidation analysis is the best available evidence to be tabled for the creditors’ consideration at the Scheme meeting. In the absence of other evidence, it is not right for this Court to come its own conclusion that there will be nil return to creditors if a winding-up order is made. I do not think that this Court can safely come to that conclusion.

26.  I also take notice that Xinjiang Tengxiang (as defined in the Scheme Document)  is a PRC based operating entity that currently owns and operates a production plant in Hami City, Xinjiang, PRC, which is one of the two key operating production bases of the Company. The assets of HK New Materials are the 100% shares held in Xinjiang Tengxiang and intercompany debts due primarily from Xinjiang Tengxiang. As such, the assets realization of HK New Materials is highly dependent on the realization of the assets of Xinjiang Tengxiang which comprise the following:

(1)  Property, plant and equipment in relation to the Xinjiang production base: HK$701.9 million

(2)  Rights-of-use of the leasehold land and buildings: HK$5.6 million

(3)  Inventories: HK$280 million

(4)  Trade receivables due from customers: HK$98.3 million

(5)  Prepayments and other receivables: HK$230.5 million

(6)  Cash at bank: HK$11.9 million

27.  Further, the Company’s own evidence, as set out in §9 of the Affirmation of Chi Sile is that:

“Despite enjoying strong growth and profitability in the past, the Group’s financial position deteriorated in 2020 due to COVID-19. The Company’s management accounts as at 30 June 2021 (“Management Accounts”)  are at B4/7/580 of the hearing bundles for the adjourned hearing of the Petition (the “Hearing Bundles”). According to the Management Accounts:-

(a)  The Company has net assets of HK$1,621,505,000; and

(b)  The Company has net current liabilities of HK$130,495,000.”

28.  Mr Maurellet SC also submitted that the Company has four Hong Kong subsidiaries, namely, China Rare Earth Magnesium Technology Holdings Limited (“CREMT”), Hong Kong New Materials Industry Investments Limited (“HK New Materials”), Mg-Tech (International)  Investments Limited (“Mg-Tech”); and MG International Investment (HK)  Limited, which is going through the process of deregistration and indirectly holds a subsidiary in the BVI, Sure Global Limited (“Sure Sino”).

29.  The Company holds substantial assets by way of receivables from the above subsidiaries:

(1)  CREMT, HK New Materials and Mg-Tech (“HK Subsidiaries”)  directly owe the Company a total of HK$692,925,675. A sum of HK$692,926,000 is booked as part of the Company’s current assets by way of “amount due from subsidiaries” in the consolidated financial statements of the Company for the year ended 31 December 2020.

(2)  Sino Sure owes the Company a sum of HK$1,752,000,023. A sum of HK$1,752,000,000 is booked as part of the Company’s non-current assets by way of “investment in subsidiaries” in the consolidated financial statements of the Company for the year ended 31 December 2020.

30.  The said sums are booked in the Company’s internal assets list.

31.  I agree that the recovery or realization of such receivables constitutes a reasonable benefit to the Company’s creditors. The fact that some of the subsidiaries are balance-sheet insolvent does not and cannot mean that the receivables cannot be meaningfully recovered. The balance sheet insolvency of some of the subsidiaries must reflect the amount of debts presently due to the Company. Liquidators once appointed would be in a position to collect such receivables.

32.  Mr Maurellet SC also pointed out that CREMT has net assets of HK$89,633,222.23 and HK New Materials has net assets of HK$18,663,3340.31.

33.  Mr Ho for the Company submitted that the assets of these HK Subsidiaries are private equity investments in Mainland Subsidiaries in relation to which a Hong Kong liquidator is not able to take action. However, I agree with Mr Maurellet SC that the Company’s liquidator would be able to enforce the Company’s debts against them and wind up the HK Subsidiaries (or even sell off the HK Subsidiaries)  in order to recover its assets. I am of the firm view that it is not right to proceed on the assumption that liquidators appointed by the Court would definitely realize a nil value from the receivables. In fact, the Court should proceed on the basis that the management of the Company’s subsidiaries will render meaningful assistance to the Company in relation to the recovery of receivables.

34.  In fact, Mr Ho for the Company is cautious when he submitted that “the Company’s indirect Mainland subsidiaries would be worth little”, “the value of all the Subsidiary Debtors hinges on the value of the shareholding in two Mainland subsidiaries, and the value is likely to be minimal.” It is not the function of the Court to speculate on the rate of recovery.

35.  Mr Maurellet SC also relied on the proposition that a real possibility of benefit can arise from the leverage created by the prospect of a winding up petition, or the appointment of a liquidator and the steps a liquidator may take to recover assets even if such steps are problematic. (Shandong Chenming Paper Holdings Ltd v Arjowiggins HKK 2 Ltd [2020] HKCA 670, [2020] HKCLC 1133). This is particularly so when there is no significant issue with Company’s ability to continue as a going concern. The Company’s shares are trading in the Hong Kong Stock Exchange. There are no public announcements that the Company has any immediate issue of going concern or any public announcement of profit warning.

36.  I am not entirely sure that this is a real benefit. I am told that whether such pre-liquidation leverage is sufficient to satisfy the second core requirement is now pending appeal to the Court of Final Appeal. Whilst this Court is bound by the Court of Appeal’s decision, the Court of Final Appeal’s decision on this leverage point will be illuminating.

37.  Importantly, I accept Mr Ho’s submission that on the facts of the present case, the Company will clearly be wound up unless there is a viable restructuring. The utility of any leverage has to be seen through this lens. Mr Ho is correct that the present proceedings demonstrate that the so-called leverage has not generated any benefit to the Petitioner as the Company is insolvent. The Petitioner’s reliance on the letter dated 2 June 2021 does not assist its case. The letter merely states that the Company was inviting suggestions from all creditors to formulate a restructuring plan for all creditors. The presentation of the Petition so far has not yield any positive benefit to the Petitioner in terms of commercial negotiations.

DISPOSITION 

38.  For all the reasons stated above, I refuse to dismiss the Petition but instead grant a short adjournment of the Petition to see if the Company can be rescue by a scheme of arrangement.

39.  I also make a costs order nisi that the Petitioner is entitled to the costs of and occasioned by the applications for dismissal and adjournment of the Petition and the Company is to pay the same on party to party basis, to be taxed if not agreed with a certificate for two counsel.

40.  Finally, I thank Mr Maurellet SC and Ms Mak for the Petitioner and Mr Ho for the Company for their very helpful assistance to this Court.