YAO WEITANG v. CHINA CREATIVE GLOBAL HOLDINGS LTD

HCCW 427/2020

[2021] HKCFI 1565

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 427 OF 2020

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D E C I S I O N

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1.  I have a winding up petition issued by Yao Weitang before me seeking the liquidation of the Company which is incorporated in the Cayman Islands and listed on the Main Board of the Hong Kong Stock Exchange (“HKSE”). This is yet another petition concerning a poorly run financially challenged company listed in Hong Kong whose underlying business is in the Mainland.

2.  In this case the claim arises from one of the “bonds” about which I have had reason to comment in previous decisions.  The present bond is a free-standing loan denominated in Hong Kong dollars, made by the Petitioner.  Interest of 6% per annum on that Bond has not been paid.  On 23 October 2020 the Petitioner served a statutory demand.  It would appear that it was not responded to by the Company and as a consequence a petition was issued on 11 December 2020.

3.  This seems to have been met with a resounding silence until last weekend when a very short affirmation of one of the directors was produced, which was handed to me today along with a short skeleton argument. In short, and it would be difficult to say much of any length given the very limited information provided by the Company, the Company says that as a result of a boardroom dispute it has been unable to respond to the Petitioner’s claim. It proposes to introduce a scheme of arrangement although precisely what the Company envisages a debt restructuring would involve is not explained.  The Petitioner has not been told about these plans at all.

4.  I have made directions for the petition to be adjourned to a substantive hearing because there are issues relating to the ability of the Petitioner to satisfy the three core requirements.  It is not necessary for me to comment on that at this stage.  What I will deal with is the generally unsatisfactory way in which many of these petitions are being dealt with.

5.  As I have said on a number of occasions it is difficult to envisage a matter of much great significance to a company than the presentation of a winding up petition.  One would certainly expect a company listed on the HKSE to take the service of a statutory demand and certainly the service of a petition, extremely seriously.  This commonly does not appear to be the case.

6.  Rule 32 of the Winding Up Rules requires a company to file evidence in opposition to a petition within seven days of the filing of the affirmation verifying the petition.  This strict timetable is a matter which one would expect all companies to be told of by those they instruct, particularly in the case of listed companies, which are subject to additional regulation by virtue of their listed status.  One would also expect them to move with speed to prepare evidence in opposition if they wish to oppose a winding up.

7.  In future, all applications by companies listed on either board of the HKSE for extensions of time to file evidence should be listed before the Companies judge or such other judge as I direct.  Similarly, Masters should not grant even by agreement adjournments of winding up petitions against listed companies.  Any application to adjourn the progress of winding up proceedings should be dealt with by the Companies judge.

8.  As I have had course to explain in various judgments, the structure of Mainland business groups in Hong Kong makes effective liquidation difficult.  It is, therefore, necessary if the interests of unsecured creditors are to be properly protected for winding up proceedings to progress quickly and efficiently.  It is highly undesirable that the unhelpfully complex and often opaque structures that are adopted when Mainland businesses are listed should, in combination with what I suspect on occasion is simply the incompetence of management of these kind of companies, delay the progress of winding up proceedings and liquidations to the potential prejudice of unsecured creditors.

9.  As I explain in [11]–[16] of Re China Bozza Development Holdings Limited [1] once the directors of a company are aware that a company is insolvent they owe fiduciary duties to the unsecured creditors to manage the Company’s affairs so as to protect the unsecured creditors’ interests.  Cases such as the present strongly suggest that this is not happening.  A failure by a listed company which is likely to be insolvent whose assets are located in the Mainland, to respond promptly and properly to demands from creditors for payment and an explanation of how the company intends to manage its financial difficulties, combined with the problems posed for an effective liquidation by the normal group structure, which separates the listed company from the operating and asset owning subsidiaries in the Mainland, in my view will commonly justify the appointment of provisional liquidators in Hong Kong, because of a jeopardy to the optimum realisation of assets for the benefit of unsecured creditors.  If provisional liquidators are appointed on orthodox grounds it will then be possible for the provisional liquidators if they consider it is appropriate to apply for restructuring powers in accordance with the principle and practice explained in Re China Solar Energy Holdings Ltd (No 2) [2].

10.  Those advising both listed companies and their unsecured creditors should bear this in mind going forward.