RE WAH NAM GROUP LTD

HCCW 166/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 166 OF 2000

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D E C I S I O N

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The application

1. I have before me a summons taken out by the joint and several liquidators of Wah Nam Group Ltd. ("the Company") on 18 May 2002 under section 200(3) of the Companies Ordinance, Cap. 32 for directions on the following questions:

"In circumstances where the liquidators have entered into a Restructuring Agreement dated 18 January 2002 ("the Restructuring Agreement") which contemplates a scheme of arrangement between the Company and its members, whereby, in exchange for consideration for their co-operation, the existing shareholders of the Company will exchange their shares in the Company for shares in a new company (formed for the purpose of obtaining a listing on the Hong Kong Stock Exchange pursuant to the Introduction Procedure under the Exchange's Listing Rules)

(a) whether, on the facts of this case, the Court can sanction the scheme between the Company and its members without the need for any meeting of creditors to obtain agreement by a majority in number, representing three-fourths in value of the creditors present and voting, to such scheme ("the first question");

(b) assuming (a) is answered in the affirmative, whether the liquidators are entitled to endeavour to complete the transactions contemplated in the Restructuring Agreement (I) despite the opposition or anticipated opposition of the recently appointed Committee of Inspection; and (II) without the need to convene a general meeting of creditors ("the second question")."

2. The reference to a meeting of creditors in the first question is to a meeting summoned by the court under section 166(1) of Cap. 32. The general meeting referred to in the second question is a meeting held pursuant to section 200 of Cap. 32.

3. There is urgency in this application because the Company has been placed in the third stage of the procedure for de-listing of its shares on the Hong Kong Stock Exchange since 20 July 2001. The listing of the shares would have been cancelled if a resumption proposal had not been submitted to the Stock Exchange by 20 January 2002. Two days before this deadline, the liquidators entered into the Restructuring Agreement with an investor, Leading Highway Ltd. ("the Investor") which set out the economic terms of a restructuring proposal ("the Proposal") and this was submitted to the Stock Exchange. On 1 February 2002, the Stock Exchange notified the financial adviser to the liquidators that it had granted an extension of the period for de-listing of the shares of the Company until 31 August 2002 ("the long stop date") prior to which the implementation of the resumption proposal must be completed. By a further letter to the liquidators dated 24 April 2002, the Stock Exchange informed them that the new listing application should proceed on the basis of the Proposal which was submitted on 18 January 2002 and "not any other proposal", and that the long stop date should remain 31 August 2002 and "would not be extended under any circumstances". These matters were again confirmed in a letter of the Stock Exchange to the liquidators dated 24 May 2002, in which it was stated that if the resumption proposal does not proceed in accordance with the current timetable, the listing of the Company's shares would be cancelled.

4. The present summons seeking directions, the supporting affidavit with a full set of the exhibits (which are substantial) were served by the liquidators on a group of creditors that the liquidators consider might vote against the Proposal. I shall refer to them as the "dissenting creditors". They are HCK China Investments Ltd. and Investment Austasia Ltd. (collectively, "the petitioning creditors"; they are the creditors who presented a petition to wind up the Company and on whose petition the winding-up order was made), and six others being Mr Terence Ho, Mr Samson Chen and four companies controlled by them separately or jointly. The dissenting creditors have filed evidence in this application and they have appeared at the hearing and made submissions. The petitioning creditors were represented by Mr Anthony Chan and the other six creditors were represented by Mr William Giles of Messrs Horvath & Giles.

5. Also present at the hearing was a solicitor of Messrs David Lo & Partners who acted for a creditor or several creditors associated with Mr William Chan Pak To. These creditors did not file evidence and the solicitor made no submissions at the hearing.

6. In addition, all other creditors whose addresses were known to the liquidators were served with the summons and the supporting affidavit without the exhibits. None of them have appeared at the hearing. I understand that the creditors listed as such in the statement of affairs whose addresses were not known to the liquidators represented about 0.05 to 0.06% of the total liabilities of the Company.

The history

7. Trading of the shares of the Company was suspended on 20 July 2000. Six days later, it was ordered to be wound up by the court on the ground that it was unable to pay its debts. On 27 January 2001, the liquidators were appointed under a regulating order pursuant to section 227A of Cap. 32, by which time the Company had entered the second stage of the de-listing procedure. For the facts leading to the making of a regulating order, I refer to the Reasons for Decision I gave on 19 March 2002, paragraphs 5 to 9.

8. During May to July 2001, the liquidators prepared and distributed an information package to investors to invite proposals for restructuring so as to realise the listed status of the Company and other core assets of the group, being the investments of Wah Nam Infrastructure Investments Ltd. ("WNII"), a wholly owned subsidiary of the Company, in three joint ventures which own toll roads and toll bridges in China. Between May and August 2001, a total of seven proposals were received, including that submitted by the Investor. The liquidators came to the view that the proposal of the Investor was the best in terms of the structure and consideration being offered and on 4 September 2001, they entered into an Escrow and Exclusivity Agreement ("the Exclusivity Agreement") with the Investor which provided for a period of time for the Investor to conduct due diligence on the joint ventures in China. The exclusivity period with the Investor, which was extended, expired on 29 November 2001, but the liquidators continued their discussions with the Investor.

9. In November and December 2001, correspondence was exchanged between the dissenting creditors and the liquidators on the price offered by the Investor for the listed status and WNII's investment in the joint ventures. In particular, there was disagreement as to the valuation obtained by the liquidators of WNII's 60% interest in the joint venture known as the Hangzhou Huanan Engineering Development Co. Ltd. ("HHED"). This led to a summons issued by the petitioning creditors on 11 February 2002 for the appointment of a committee of inspection for the Company. On 13 March 2002, I made an order that a committee of inspection be appointed and that it is to be made up of six members, four of them are representatives of the dissenting creditors.

10. Because of the disagreement over the valuation, in December 2001, the liquidators obtained a second valuation from another firm of surveyors on WNII's interest in HHED, as well its interests in the other two joint ventures in Shanxi. In January 2002, a late proposal was received by the liquidators from yet another investor. This was rejected by the liquidators as they were not satisfied that the structure of this late proposal was of a type likely to be acceptable to the Stock Exchange and they entered into the Restructuring Agreement with the Investor on 18 January 2002. There followed the extension given by the Stock Exchange on the terms that I have mentioned earlier.

11. After the committee of inspection was appointed, the liquidators had provided its members with a detailed report which set out, inter alia, the process of selecting the Proposal of the Investor and the key provisions of the Proposal. The committee had held six meetings, some of considerable length, from March to June 2002.

12. At the third meeting, the committee was asked by the liquidators to pass resolutions to approve the liquidators (1) seeking to complete the Restructuring Agreement, (2) not applying to the court to convene a creditors' meeting under section 166, and (3) applying to the court for directions that the scheme of arrangement in the Proposal may be sanctioned without a creditors' meeting. At the fourth meeting, two members voted in favour of all three resolutions. The other four members (representing the dissenting creditors) indicated that they were unable to decide on (1) as they were unable to come to a view that the Proposal was the best for the creditors; they were of the view a creditors' meeting under section 166 should be held, contrary to (2); and they considered (3) to be academic because of their views on (1) and (2).

13. At the fifth meeting on 8 May 2002, the petitioning creditors tabled their written reasons as to why they could not support the Proposal. After lengthy discussions, the members of the committee unanimously resolved to support the decision of the liquidators to apply to the court for directions whether it is necessary to convene a creditors' meeting under section 166 in relation to the Proposal. They further resolved to continue to work with the liquidators with a view to obtaining the support of each member of the committee to accept the Proposal.

14. On 13 May 2002, the other dissenting creditors, Mr Samson Chen and Mr Terence Ho, provided their reasons in writing to the liquidators why they were unable to support the Proposal.

15. On 14 June 2002, the Stock Exchange informed the co-sponsors of the Proposal that the listing committee has approved in principle the listing of the shares of the new company by way of introduction, subject to various conditions set out in that letter.

16. The liquidators are concerned that if a meeting of creditors is to be convened under section 166 to consider the Proposal, the dissenting creditors would in practice be able to prevent approval of the Proposal as they control 22.85% in value of the claims against the Company, notwithstanding that they hold less than 25% in value of the undisputed claims, as it is reasonable to expect that some creditors may not attend the meeting or lodge proxies in respect of the meeting. Further, even if the dissenting creditors should eventually support the Proposal, in view of the statutory majority requirements in section 166(2), there remains a concern that a creditors' scheme could still be voted down by a majority in number even though that majority would represent a small proportion of the creditors by way of value. This is because the inter-company creditors and the dissenting creditors together represent only 12 out of 99 creditors.

The Company

17. The Company was incorporated in Hong Kong with an authorised share capital of 5,000,000,000 ordinary shares of HK$0.10 each, of which 2,138,218,630 were in issue at the date of the winding-up order. It was an investment holding company and the principal operating asset of the Company and its subsidiaries is the three joint ventures held by WNII. As mentioned earlier, these joint ventures are principally engaged in the management and operation of a number of toll roads and bridges in China.

18. According to the statement of affairs, as at the date of the winding-up order, the Company had unencumbered assets of HK$261,253,519.41 and liabilities of HK$219,504,411.97. The liquidators have prepared an analysis of the assets and liabilities based on their investigations. Despite the statement of affairs has recorded surplus assets, the liquidators' investigations show that the liabilities in fact far exceeded the realisable assets. According to the liquidators' estimates, the financial position of the Company on a "high case" basis and a "low case" basis may be presented as follows:

19. On the basis of the above estimates, the shareholders could have no expectation of receiving any return in the liquidation.

20. On the liquidators' analysis, the principal assets of the Company that may be realised in the winding-up consist of the following:

(1) the Company's shareholding in WNII which holds interests in the three joint ventures;

(2) the listed status of the shares of the Company; and

(3) HK$32.55 million which the Company paid into court with accrued interest in High Court Action No. 12439 of 1999, pursuant to an order for interim payment made on 17 December 1999.

21. By the Restructuring Agreement, the liquidators have sought to realise two out of the three principal assets of the Company.

The Restructuring Agreement

22. Before I go to the Restructuring Agreement, it is pertinent to note that in the earlier restructuring proposal submitted by the Investor as annexed to the Exclusivity Agreement, apart from a proposed scheme of arrangement for the shareholders of the Company, provision was made for a scheme of compromise or arrangement with the creditors of the Company along these lines.

23. It was proposed that a scheme was to be entered into between the Company and all its creditors (who are all unsecured) to restructure the outstanding debts of the Company on these terms: the creditors would receive a cash payment of HK$14 million; 32,073,279 shares in the company to be incorporated by the Investor ("Listco") would be issued to the creditors ("the Creditors shares"); the Investor would grant a put option to the creditors for selling the Creditors shares at HK$0.05 per Creditor share to the Investor within two weeks after the completion; and all other subsidiaries of the Company, with the exception of WNII, would be transferred to the liquidators or their nominees at a nominal consideration, the shares of which would be held on trust for the creditors. The cash payment, the Listco shares and the put option, and the transfer of all the other subsidiaries save for WNII would represent the final settlement to all the outstanding debts of the creditors.

24. It was provided that completion of the above restructuring proposal would be subject to a number of conditions precedent, including the sanction by the court of the shareholders scheme and the creditors scheme.

25. I should also mention that in the Exclusivity Agreement, it was expressly stated that the liquidators had not accepted the above restructuring proposal and that nothing in the agreement would constitute an offer capable of becoming a contract by acceptance.

26. I turn to the Restructuring Agreement. The material provisions, for the purpose of this application, may be summarized as follows:

(1) The Company is to apply to the court for an order convening a meeting of the shareholders and, "if in the opinion of the liquidators it is so required", a meeting of the creditors, to consider a scheme of arrangement under section 166 under which:

(i) all the shares of the Company will be acquired by Listco on terms that the shareholders of the Company will receive one Listco share of HK$0.10, credited as fully paid, for every 50 shares of the Company held by the shareholder; and

(ii) in consideration of the assistance provided by the Company and the liquidators in facilitating a listing of the Listco shares by way of introduction under the Listing Rules and the transfer of WNII's interests in the three joint ventures, the Company will use its reasonable endeavours to complete the Restructuring Agreement on terms that:

(a) the Investor will procure payment of the total cash consideration (made up of HK$14 million and the price for the transfer of the joint ventures in the sum of HK$34 million) to the escrow agent who is to pay the same to the liquidators; and

(b) the liquidators will receive for the benefit of the creditors 32,073,279 Listco shares to be allotted with a put option pursuant to which the liquidators may within ten business days of the closing date sell all or part of these shares to the Investor at HK$0.05 per Listco share.

(2) The Investor shall procure that Listco shall on the effective date (the date on which the scheme in (1) becomes effective) pay to the escrow agent HK$34 million, to be paid by the escrow agent to the liquidators for the account of WNII, in consideration of the Company procuring WNII to transfer all the interests in the three joint ventures held by WNII, to a wholly-owned subsidiary of Listco.

27. Under the Proposal in the Restructuring Agreement, the creditors of the Company are not required to compromise their claims against the Company, unlike the earlier restructuring proposal. It is envisaged that after the Proposal is completed, the creditors will have a rateable claim to the proceeds from the implementation and will be entitled to a rateable claim with respect to the recoveries of any other assets of the Company.

28. The other matter to note is that unlike the earlier restructuring proposal, only the interests of WNII in the joint ventures will be sold, for HK$34 million. The liquidators will retain control of WNII. WNII will use the cash it receives from Listco to discharge its own debts and liabilities and according to the liquidators' investigation and estimate, the debts and liabilities of WNII are approximately HK$21,654,000. On that basis, the sale of WNII's interests in the joint ventures will provide HK$12,346,000 for the creditors of the Company.

29. To recapitulate, under the Proposal in the Restructuring Agreement, the following consideration will be paid to the liquidators for the benefit of the creditors:

(1) cash in the sum of HK$14 million;

(2) HK$34 million for the realisation of WNII's interests in the joint ventures less WNII's liabilities, providing a surplus of approximately HK$12.35 million;

(3) 32,073,279 Listco shares with a par value of HK$0.10; and

(4) a put option to sell the Listco shares within ten business days of closing at HK$0.05 per share (at an aggregate price of HK$1,603,664).

30. The shareholders will only receive 42,764,373 Listco shares with par value of HK$0.10. They will not receive any cash or put option.

Section 166

31. Section 166 of Cap. 32 provides, inter alia, as follows:

"(1) Where a compromise or arrangement is proposed between a company and its creditors or any class of them, or between the company and its members or any class of them, the court may, on the application in a summary way of the company or of any creditor or member of the company, or, in the case of a company being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members of the company or class of members, as the case may be, to be summoned in such manner as the court directs.

(2) If a majority in number representing three-fourths in value of the creditors or class of creditors, or members or class of members, as the case may be, present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditors or the class of creditors, or on the members or class of members, as the case may be, and also on the company or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company."

32. For the above provision to be invoked in this instance, there must be a compromise or arrangement proposed between the Company and its creditors. What then is a compromise or arrangement for the purpose of section 166? There is no comprehensive definition of this in the Ordinance or in the decided cases. Mr Anthony Chan has referred me to various dicta in a number of cases which I consider to be helpful.

33. On the meaning of "compromise", it was stated that this presupposes some dispute as to the rights of the claimant or difficulty in enforcing them (Mercantile Investment and General Trust Co. v. International Co. of Mexico [1893] 1 Ch. 484n., per Fry LJ). In contrast, the meaning of "arrangement" is not limited to something analogous to compromise (Re Guardian Assurance Co. [1917] 1 Ch. 431 at 448, per Lord Cozens-Hardy MR) and it has been "treated as being one of very wide import" (Re Savoy Hotel Ltd. [1981] 3 All ER 646 at 652, per Nourse J).

34. As for the meaning of "arrangement", this implies some element of accommodation or "give and take" between the parties, so it would be inappropriate to describe a scheme as an arrangement whereby it is proposed that members of a company should abandon their rights without any compensating advantage (Re N.F.U. Development Trust Ltd. [1972] 1 WLR 1548 at 1555, per Brightman J)

35. Hence, so long as the scheme involves an agreement modifying rights, it may be regarded as an arrangement, even though there is no compromise in the sense that the creditors have agreed to accept a lesser sum in full and final settlement of their claims against the Company.

The liquidators' argument

36. Mr Bunting, SC, who appeared for the liquidators, contended that there is no need to convene a court meeting under section 166 to obtain the approval of the creditors for the disposal of two of the principal assets of the Company, as by virtue of their powers as liquidators pursuant to sections 199(2)(a) and (h) of Cap. 32, the liquidators are entitled to realise value from the joint ventures and the listed status of the Company for the benefit of the creditors. It was submitted that the disposal of WNII' s interests in the joint ventures at HK$34 million is a separate transaction from the realisation of the listed status of the Company.

37. It is recognised by the liquidators that it is necessary for a court meeting to be convened for the shareholders to vote on the scheme, in view of Re Albatronics (Far East) Co. Ltd. [2001] 3 HKC 223. What the shareholders are being asked to do is to transfer their shares, which are not assets of the Company, to Listco. Despite the shares are in themselves worthless, the shareholders are entitled to some token consideration or "sweetener" to induce them to dispose of their property in the shares to facilitate the listing of the Listco shares (Re Rhine Holdings Ltd. [2000] 3 HKC 543; Re Yaohan Hong Kong Corp. Ltd. [2000] 3 HKC 554 and the Court of Appeal decision at [2001] HKLRD 363). Thus, the consideration given to the shareholders is merely a cost to the Company of realising the listed status of the Company, since without the agreement of the shareholders to transfer their own shares the disposal of the listed status cannot take place.

38. It was submitted that the scheme does not involve any alteration of the creditors' rights and claims against the Company in the liquidation, so long as the proportion of the value derived from realisation of the listed status to be received by the shareholders can properly be regarded as a cost of realisation of the asset, as opposed to a gift where the proportion to be received by the shareholders far exceeded what can properly be regarded as token consideration. If it were the latter situation, a gift to the shareholders would have modified the rights and claims of the creditors in the liquidation and it would have been necessary to hold a meeting for creditors under section 166 to obtain their approval to the scheme.

39. In comparing the proportion of the consideration to be received by the creditors for the listed status (they are to receive cash of HK$14 million and shares in the Listco with a put option, through which their shares in Listco can all be turned into cash) with the proportion of the consideration to be received by the shareholders (who would only receive shares in Listco), the liquidators have used this method of valuation described below.

40. The value of the Listco shares is highly speculative at this stage, their true value can only be ascertained after a significant history in the trading of these shares has been developed. There are difficulties in comparing the exact percentages of the values to be received by the creditors and shareholders, as it involves comparing the value of cash to be received by the creditors, which is certain, with the value of the Listco shares, which is speculative. Thus, any comparison of values will only be indicative.

41. It is recognised that for the purpose of making an indicative comparison of values apportioned to creditors and shareholders, the usual basis for a valuation of the shares of the new company would be the "net tangible asset value" (see Re Rhine Holdings Ltd., supra. at 545I, 548C; Re Albatronics (Far East) Co. Ltd., HCMP No. 894 of 2002, 5 June 2002, paragraphs 13 and 14). This is consistent with the requirement of the Stock Exchange in that it requires a statement of "net tangible asset backing" for securities for which listing is sought (see the Listing Rules of the Stock Exchange, appendix 1 Part A paragraph 21). However, in this particular situation, the liquidators do not think it appropriate to use the above basis of valuation. Instead, they would use the "net asset value" of Listco as a basis of valuation of its shares. The reason for this is that the interests in the joint ventures to be acquired by Listco are treated for accounting purposes as "intangible assets", pursuant to Statement 2.219 - statement of standard accounting practice intangible assets, issued January 2001, paragraphs 8 and 9. As the interests in the joint ventures are to be treated as intangible rather than tangible assets, Listco will have negative net tangible assets and a negative net tangible asset value per share before conversion of the convertible unsecured loan notes of the Investor ("the CULs") and a negligible net tangible asset value of HK$0.003 per share after conversion in full of all the CULs. The liquidators do not consider it appropriate to treat the Listco shares as having a nil or negligible value.

42. On the basis that the shares of Listco are valued on the "net asset value" of Listco, and that the aggregate fair market value of Listco's interest in the joint ventures is shown as an asset, the net asset value per share would be HK$0.035, before the conversion of the CULs and HK$0.053, after the conversion of the CULs. The liquidators consider it appropriate to use the net asset value before conversion of the CULs, as the Investor has not indicated that it intends to convert the CULs and it is not known when, if ever, conversion might occur.

43. On the above basis, the consideration payable to the shareholders is comparable to the consideration payable to the creditors as follows:

	Consideration	Amount (HK$)	% of consideration
Payable to the creditors	Cash	14,000,000
Value of Listco shares		1,603,664
(assuming exercise of put option)		_________
Total payable to creditors		15,603,664	91.25 %
Payable to shareholders	Value of Listco shares	1,496,241	8.75 %
Total consideration		17,099,905	100%

44. It was submitted that the value of the consideration apportioned to the shareholders being 8.75% is within the range of consideration that would qualify as token consideration.

45. The liquidators's valuation of the Listco shares and their indicative comparison of the values apportioned to the creditors and shareholders are not accepted by the dissenting creditors. Mr Giles contended that the net asset value of Listco should be adjusted by adding the expenses and value paid for the listed status (i.e. the cash payment to the creditors of HK$14 million) as an intangible asset so that the net asset value per Listco share would be HK$0.0632. On that basis, the percentage of the consideration apportioned to the shareholders would be 14.43% and that could not qualify as token consideration. Mr Giles has also put forward two alternative bases for valuing the Listco shares, one is by taking the par value of HK$0.10 per share, the other is by taking the value of HK$0.05 per share which is the value attributed to the creditors' Listco shares in exercising the put option.

46. The liquidators do not regard it appropriate to treat the listed status of Listco with the acquisition cost of HK$14 million as an intangible asset. This is because an intangible asset should only be recognized if it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise and the cost of the asset can be measured reliably (see Statement 2.129 - statement of standard accounting practice intangible assets, paragraph 19). It is also a requirement that the book value of an intangible asset must be amortised over its economic life. As it is not probable that future economic benefits that are attributable to the asset will flow to Listco and there is no basis on which its value could sensibly be amortised over its economic life, the acquisition cost of the listed status should not be regarded as an intangible asset. The liquidators also do not agree that the par value or the put option value should be used as the value of the Listco shares for this exercise.

47. For the reasons given below, I do not think it necessary to resolve the question whose method of valuing the Listco shares should be adopted. Likewise, I do not think it relevant to the question I am to decide, namely, the first question in the summons, whether the dissenting creditors' misgivings as to the valuation of the interests in the joint ventures (that the value for WNII's interest in HHED is too low and WNII's interests in the two joint ventures in Shanxi are assessed at nil value) are justified. I would consider the first question on the assumption that the valuation of the Listco shares by the liquidators is appropriate and that the value of the consideration for realising the listed status apportioned to the shareholders would be 8.75%.

The first question

48. The purpose of section 166 is to provide for a mechanism whereby a scheme of compromise or arrangement, in which the rights of creditors or shareholders are to be modified or altered, can be made binding on all who are so affected without the separate agreement of each of them. To achieve this result, if the statutory majority in section 166(2) in the meeting or meetings convened by the court is achieved, and if the scheme is sanctioned by the court, it becomes binding on all creditors or shareholders or classes, notwithstanding a dissenting minority.

49. I reject the submission of Mr Bunting that if it should be ruled that it is necessary to convene a section 166 meeting in this instance, then any disposition by the liquidator of the assets of a company would have required such a meeting. As I have mentioned, whether such a meeting would be required would depend on whether there is any modification of the rights of creditors or shareholders so that it would be necessary to seek their approval to the scheme.

50. In the liquidation of the Company, the legal rights of the creditors (who are all unsecured) are to participate in the assets of the Company according to the statutory provisions for distribution of assets on insolvency. On the liquidators' analysis of the assets and liabilities of the Company, the shareholders cannot possibly expect to receive any return in the liquidation, unless the listed status of the Company, which is a corporate asset, can be realised.

51. The Investor has agreed to acquire the listed status of the Company at a total consideration. How that consideration is proposed to be apportioned between the shareholders and the creditors has apparently been premised on the judicial guidance of what would be a fair and reasonable apportionment in the cases referred to earlier. It is clear that what goes to the shareholders would not go to the creditors and what goes to the creditors would not go to the shareholders. Insofar as the shareholders are not expected to receive any return in the liquidation, any consideration made to them for the exchange of their shares in the Company would have been a concession on the part of the creditors, irrespective of whether this is just token consideration or something more. What the liquidators would regard as the "cost" in the realisation of the listed status in respect of the consideration to be apportioned to the shareholders may not be so regarded by the creditors. Besides, even if a cost is to be paid, the amount of the cost to be paid is clearly a matter of give and take affecting the rights of the creditors. I would consider this a modification of the legal rights of the creditors, as there is alteration of the statutory order for the application of assets no matter how one looks at it. On the first question, I rule that it is necessary to convene a meeting of the creditors under section 166.

52. It is unnecessary for me to speculate why the scheme in the Proposal has been devised in this manner, in contrast to the earlier restructuring proposal in the Exclusivity Agreement in which there was a separate scheme for creditors that would require the sanction of the court. I would echo the comments of Le Pichon J (as she then was) in Re Yaohan Hong Kong Corp. Ltd., supra. at 560H, wherein she stated that the scheme, if properly structured, should have included rather than excluded the creditors as a class as, after all, it is a corporate asset that is being realised. Further, if there was more than one way of structuring the scheme, "it remains incumbent on the liquidators to opt for that which advances and protects the creditors' interests and entitlement."

The second question

53. The second question in the summons is premised on the basis that the first question is answered in favour of the liquidators. As I have not answered this in favour of the liquidators, the second question does not arise. Nevertheless, I propose to deal with it briefly as I have heard arguments on this.

54. As I understand it, the nub of the second question is in the second part of the question, namely, whether a general meeting of creditors should be held. The court is not asked to give its approval for the liquidators to implement the transactions in the Restructuring Agreement despite the opposition or the anticipated opposition of the committee of inspection.

55. It was submitted by Mr Bunting that a general meeting of creditors under section 200 should not be convened for these reasons. The dissenting creditors are represented on the committee of inspection and their views on the Proposal have been ascertained in the various meetings of the committee. They have provided their reasons in writing why they are unable to support the Proposal of the Investor and filed evidence in this application. Further, they have made submissions by counsel in this hearing why they do not consider the Proposal the best deal for the creditors in the circumstances, notwithstanding that the listed status with a value of HK$14 million might be lost to the creditors if the Proposal is not implemented by 31 August 2002. As the views of these dissenting creditors are already known, there would be no point in summoning a general meeting to ascertain their views.

56. As for the remaining creditors, 64.46% of the undisputed debts relates to inter-company liabilities. It is unnecessary to ascertain the views of the subsidiaries, as they are controlled by the liquidators. 4.04% of the undisputed debts relates to the debts of two creditors represented on the committee of inspection and they have voted in favour of the Proposal at the fourth meeting of the committee. The creditors whose views are unknown only accounted for less than 8% of the undisputed debts.

57. As for the holding of a general meeting for the creditors to vote on the Proposal, it was submitted by Mr Bunting that the dissenting creditors have not requisitioned for such a meeting under section 200(2). Further, as the liquidators will vote on behalf of the subsidiaries in favour of the Proposal, there would be a clear majority in favour of implementing the Restructuring Agreement, even assuming all the other creditors would vote against it.

58. In taking an opposite stance to the liquidators on the second question, neither Mr Chan nor Mr Giles has disputed that the views of a sufficiently large proportion of creditors have been ascertained or that a clear majority will vote in favour of the Restructuring Agreement. What was submitted is that the liquidators should not exercise their votes on behalf of the subsidiaries and they should abstain from voting, because the liquidators have an interest in promoting the Proposal in that their costs and expenses in implementing the transactions in the Restructuring Agreement would be paid for by the Investor, capped at the limit of HK$8 million.

59. The liquidators are not disqualified in voting for the subsidiaries, even though they may have a special interest in promoting the Restructuring Agreement. Assuming that it is not necessary for a court meeting of the creditors to be held under section 166 to approve the scheme, and the statutory majority is achieved at the court meeting of the shareholders, it would be necessary for the court to consider whether to sanction the scheme. Insofar as it may be appropriate to take into consideration any resolution passed at a general meeting of creditors, the court may "discount or disregard altogether the votes of those who, though entitled to vote at a meeting as a member of the class concerned, have such personal or special interests in supporting the proposals that their views cannot be regarded as fairly representative of the class in question" (Re UDL Holdings Ltd. [2002] 1 HKC 172 at 185B). For this reason, I am of the view that a general meeting of creditors should be held for the Proposal to be put to the vote of the creditors, even though the resolution is likely to be carried by the majority votes of the liquidators on behalf of the subsidiaries.

Costs of the application

60. I make an order nisi that the liquidators' costs of this application as well as the costs of the dissenting creditors are to be costs in the liquidation, to be taxed and paid out of the assets of the Company, as I think it proper for the liquidators to seek directions in this summons.