RE CHINA PROPERTIES GROUP LTD

HCCW 67/2022

[2023] HKCFI 1500

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 67 OF 2022

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REASONS FOR JUDGMENT

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1.  There was before the court an Amended Winding Up Petition re-filed on 6 June 2022 (Petition was filed on 28 February 2022) (“Amended Petition”) presented by JIC Trust Co, Ltd (a Mainland company) against China Properties Group Ltd (“Company”). The Amended Petition was based on a debt of RMB 731,801,596.56 (“Debt”) arising out of a Consent Judgment granted by the Mainland Court.

2.  The Amended Petition was supported by Tibet Lingdaxin Investment Management Co Ltd (“LDX”), who appeared at the hearing yesterday. It was LDX’s case that the Company was indebted to it in the sum of RMB 3,182,816,027.86 pursuant to Guarantees executed by the Company in relation to 4 loans advanced by LDX to the Company’s subsidiaries (“LDX Loans”).

Issues

3.  These matters were fairly straightforward. The issues were :

(1)  Whether there should be another adjournment, for a short period of time, because there was, as the Company contended, a real prospect of imminent repayment of the Debt (and the indebtedness to LDX) in full; and

(2)  Whether there was a bona fide dispute of the Debt (and the indebtedness to LDX) based on an alleged substantial cross-claim against the Petitioner by one of the Company’s subsidiaries, 上海靜安協和 (“JAC”).

4.  By the time of the hearing, due to very recent development, issue (1) had “fallen away” according to Mr Lam SC, who appeared with Mr Lok and Ms Wong for the Company. However, the Company still sought to adjourn the hearing for 1 month. I shall have to explain the relevant matters in relation to issue (1) in order for the modified position of the Company to be understood.

5.  At the end of the hearing, I made an order to wind up the Company, and made a costs order that the costs of both the Petitioner and LDX of the Petition be paid out of the assets of the Company. These are my reasons for doing so.

Background

6.  The relevant facts were uncontroversial and can be succinctly stated as follows. The Company was an investment holding company which, together with its subsidiaries and affiliates (collectively, “Group”), were principally engaged in residential and commercial real estate development in the Mainland. For the present purpose, there were 2 relevant subsidiaries, namely, (a) JAC and (b) 重慶江灣 (“Riverside”).

7.  The Company indirectly owned a number of substantial real estate assets in major cities in the Mainland, including Shanghai and Chongqing. One of the Company’s key assets was its indirect 100% ownership of a development in Chongqing known as Chongqing Global Twin Towers (“Chongqing ICC”), which was under the ownership of Riverside.

8.  It was said by the Company that the Group also held various developments of very substantial value which were in the course of development and from which substantial realisation values could be derived. Evidence was adduced by the Company in respect of 3 such development projects with an alleged total Net Asset Value of about RMB14.8 billion[1].

9.  The shares of the Company were listed on the main board of the Stock Exchange of Hong Kong Ltd. Trading in the Company’s shares was suspended since 1 April 2021. On 4 November 2022, the Listing Committee decided to cancel its listing, which decision was upheld by the Listing Review Committee on 6 April 2023. The Company had filed an application for leave to apply for judicial review against such decision on 5 May 2023.

10.  According to its last published financial statements, the Group had substantial net current liabilities of RMB7.3b (as at 30 June 2022). It had 4 sets of external creditors, including the Petitioner (about RMB524m) and 15% US$ Senior Notes (about RMB1.55b) (“Notes”).

11.  The Company had defaulted on the Notes. On 28 November 2022, Receivers were appointed over numerous offshore subsidiaries of the Company, including subsidiaries which indirectly owned Chongqing ICC.

12.  The Debt arose out of an “entrusted” loan agreement (and supplement) between the Petitioner as lender and JAC as borrower dated 27 September 2017 for RMB1.2b. It was guaranteed by the Company pursuant to a guarantee dated 28 September 2017.

13.  The loan became due in 2019 (following defaults). It was not repaid, and Mainland proceedings were commenced as a consequence. This was followed by a settlement embodied in a Mainland Court Consent Judgment dated 3 April 2020 to which the Company was a party, and it confirmed that the Company was jointly and severally liable for the loan (“Consent Judgment”). Under the Consent Judgment, the Company agreed to repay the loan, accrued interest, accrued default interest, court fees and litigation expenses as well as late performance fee.

14.  There was an attempt by the Company to reopen the Consent Judgment on 7 November 2022 (nearly 9 months after the filing of the original Petition herein), which was as rejected by the Mainland Court on 22 December 2022. It was not disputed that the Debt was owed by the Company. The Company’s case on issue (2) was based on an alleged cross-claim of JAC against the Petitioner, which amounted to a potential set-off of the Debt, said the Company. The quantum of the Debt was uncontroversial. However, the evidence was that such quantum had ballooned to about RMB942m as of 30 April 2023.

15.  The entrusted loan was secured by Charges over 2 landed properties owned by JAC: (a) 南京西路永源浜北侧3及5号地块 (“Lots 3/5”) and (b) 南京西路2004号全栋商业房地产. I will come back to Lots 3/5 below. The enforcement of the Charge over it gave rise to JAC’s cross-claim against the Petitioner. However, the proceeds obtained by the Petitioner as a result of Mainland enforcement proceedings against the Charges had been taken into consideration in the computation of the Debt.

Adjournment

16.  The following principles, applicable to an application to adjourn a winding up petition to allow time for the company to pay an undisputed debt, had been cited to the court by Mr Lam :

(1)  Whilst a creditor whose debt is undisputed is entitled to a winding up order ex debito justitae, the court has a discretion to adjourn a petition if the company can provide convincing evidence that there is a reasonable prospect that the petition debt will be paid within a reasonable time;

(2)  Specifically, the company has to put forward a repayment proposal which is both precise and credible. It may, for instance, say that it will be able to pay its creditor in full in 12 weeks because it will within that period receive sufficient funds to do so and adduce evidence that this is probable.

See Re Trinity (Management Services) Ltd [2021] HKCFI 2207, [6]-[7], per Harris J

17.  Where a company seeks to rely on its refinancing efforts, such as a sale of its assets and properties, in seeking an adjournment, adequate information about the relevant sale has to be given. It was held in Re Tian Shan Development (Holding) Ltd [2022] HKCFI 3084, [24], per Linda Chan J, this includes, inter alia :

(1)  Details about the progress of negotiations or the intended sale;

(2)  Information about the terms of contracts of the sale;

(3)  Supporting document or information on how the assets in question are held, whether such assets are subject to any encumbrances, the amount of proceeds which may be realised from sale and whether such amount is sufficient to repay the debts owed to the petitioner and the supporting creditors.

18.  The company is also expected to adduce evidence showing how it would address its financial difficulties, thereby enabling its return to financial viability in at least the medium term. The company must be prepared to explain how it anticipates that its proposed refinancing would enable it to continue to operate a profitable business, or at least pay its debts as they fall due, after it pays off its creditors pressing for immediate payment: Re Lerthai Group Ltd [2021] HKCFI 207, [7]-[8], per Harris J.

19.  The Company’s case on issue (1) was premised on the auction of Chongqing ICC by the Mainland Court. Chongqing ICC was charged by Riverside as security for 2 of the LDX loans. The evidence was not entirely clear on whether the auction was the result of enforcement action taken by LDX. However, the evidence referred to the auction as a result of enforcement action by “local creditors”.

20.  The Company accepted that there were various liabilities and encumbrances attached to Chongqing ICC, including the sums payable to the offshore holders of the Notes. Further, it was uncontroversial that the Debt, being an unsecured debt at the ultimate holding company level, was subordinate to Riverside’s secured onshore debts, its intermediate holding company’s onshore debts and its intermediate holding company’s offshore debts, which were under the control of Receivers.

21.  There was a valuation of Chongqing ICC for the purpose of the auction, ie, RMB 7,049,274,514.78. The starting price of the auction was set at a little over RMB4.9b. On the Company’s own case, if Chongqing ICC was sold for less than RMB6.38b, the Debt would not be repaid. However, it was said that once the debts secured by Chongqing ICC were released, the Company would then be in a position to seek further loans and re-financing opportunities from other sources. Fairly, Mr Lam accepted that there was little evidence or detail to support such re-financing contention.

22.  The auction was scheduled to take place on 28 and 29 May 2023. No bid was received. The evidence was that where no bid was made, a second auction would be held within 1 month after the date of the first auction with a downward adjustment of the starting price at about RMB3.95b.

23.  This state of affairs had rendered almost irrelevant the disputes between the parties on (a) the likely sale price for Chongqing ICC and (b) whether any part of the sale proceeds would be left to pay the Debt given its low priority.

24.  The state of affaire must be viewed in light of the fact that the Petition was issued some 15 months ago. The hearing of the Petition had been adjourned a number of times, and during the 15 months the Company had put forward no less than 4 debt restructuring proposals. Those proposals had come to nothing.

25.  It was in these circumstances that Mr Lam had rightly submitted that the Company’s case on issue (1) had fallen away. Instead, he asked for an adjournment of 1 month to wait for the second auction to take place.

26.  The picture was a bleak one for the Company. The lack of a single bid was consistent with the widely reported depressed state of the Mainland property market. This court was not satisfied that there was a reasonable prospect of the Debt being paid within a reasonable time. Indeed, it might be said that the Company had had 15 months to pay the Debt, which was well beyond a reasonable time. There was no proper ground to adjourn this application any further.

Bona fide dispute (issue (2))

27.  The alleged dispute of the Debt was premised upon JAC’s action against the Petitioner over the sale of Lots 3/5. The writ was only issued on 7 November 2022, nearly 14 months after Lots 3/5 were sold on 18 September 2021. The action was accepted by the Hangzhou Court on 16 January 2023. Essentially, by its action JAC was seeking compensation from the Petitioner in the sum of about RMB899m with respect to the alleged undervalued auction sale of Lots 3/5 due to understated GFA permitted to be built on the land[2].

28.  There were two problems with the Company’s reliance on JAC’s action. First, Mr Lam had quite fairly accepted that in the absence of a direct claim by the Company against the Petitioner, JAC’s action might not be a valid ground to oppose the Amended Petition, given the absence of mutuality of the cross-claim: see Re Tang Yau Sing [2020] HKCFI 877, per Linda Chan J, [25]-[26], citing Le Pichon JA’s judgment in Wong Wai Lin Lana v Heung Wah Wing & Ors [2001] 3 HKC 649, [15], in which mutuality was described as an “essential ingredient”.

29.  In respect of the 2 authorities relied upon by Mr Lam, namely, (a) Qiyang Ltd and Ors v Mei Li New Energy Ltd and Ors, unrep, HCA 420/2011, 5 March 2013, at [23]-[24], per To J and (b) X v Y [2019] HKCFI 2880, [37] & [39], per DHCJ Maurellet SC, the first contained certain obiter dicta made in the course of declining summary judgment which, as Mr Lam rightly accepted, could be distinguished from the present case. I did not regard Qiyang Ltd as detracting from the above established principle.

30.  As regards X v Y, certain obita dicta were made in the course of an application to set aside the statutory demand by the debtor. The debtor alleged that he had a viable claim against a third party related to the creditor. The learned Judge suggested that it might be relevant to how the Bankruptcy Judge would deal with the petition. The short answer here was that this court was seized of the Amended Petition and I did not consider JAC’s action relevant.

31.  The second problem with the Company’s case on issue (2) was that the same complaint of understated GFA had been made by JAC in the course of the judicial auction of Lots 3/5. The complaint was rejected by the Mainland Court and JAC had exhausted the appeal avenue without success :

(1)  After the Mainland First Instance Court commissioned an appraisal report on Lots 3/5, which was made available to JAC, it raised objections to the report on 8 June 2021 alleging that the permissible GFA was too low and wrong;

(2)  The First Instance Court rejected JAC’s objections, and proceeded with the auction of Lots 3/5 on 18 September 2021;

(3)  JAC appealed the decision to the Appellate Court, which was dismissed on 24 November 2021;

(4)  On 28 January 2022, JAC invoked a procedure known as 执行监督 (supervision of execution) before the Supreme People’s Court to try to overturn the decision. JAC’s application was dismissed by the SPC on 7 July 2022.

32.  Further, it was undisputed that the acceptance of JAC’s action by the Hangzhou Court came after the refusal of the Shanghai Court to accept the action.

33.  There was no submission made by the Company on the prior rejection of JAC’s complaint by the Mainland Court, save the suggestion in its opening submissions that the Mainland Court was seized with JAC’s action and the hearing of the Amended Petition should be adjourned pending the resolution of the matter by the Mainland Court.

34.  In light of the legal obstacle and the fact that JAC’s complaint of understated GFA had previously been rejected by the Mainland Court, this court was not satisfied that there was any substantial ground to dispute the Debt.

35.  As regards the Company’s dispute over LDX’s debts, Mr Lam agreed that it was not necessary for this court to determine the issue.

36.  For these reasons, the winding up order was made.

Costs

37.  Mr Sit asked for the directors of the Company to be joined as respondents so that they could be asked to bear some of the costs of the Petition in light of the lack of merit in opposing the winding up of the Company (see Re Carnival Group International Holdings Ltd [2022] HKCFI 2668, per Linda Chan J, [30] and [2022] HKCFI 3097 (Decision on Costs)).

38.  I did not find the proposition attractive. The Company was clearly a very substantial property developer, albeit a highly geared one. It was apparently caught in expected turmoil of the Mainland property market. Viewed in such context, it was not entirely unreasonable for the Company to pin some hope on the impending auction of Chongqing ICC which was highly valuable.

39.  Further, Mr Lam had a valid procedural objection to the application, namely, he only had notice of it shortly before it was made. I agreed that the affected directors ought to be given proper notice of such application so that they might seek advice and marshal their opposition to the same.

40.  For these reasons, this court made the costs order stated in para 5 above.