RE DANGDAI INTERNATIONAL INVESTMENTS LTD (Company No. F26577)

HCCW 65/2023

[2023] HKCFI 1347

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP)  PROCEEDINGS NO 65 OF 2023

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REASONS FOR JUDGMENT

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1.  At the hearing of the petition presented by The Bank of New York Mellon, London Branch (“Petitioner”)  against Dangdai International Investments Ltd (當代國際投資有限公司)  (“Company”), I made a usual winding order against the Company. These are the reasons for my judgment.

2.  The Company was incorporated in the British Virgin Islands on 31 May 2017.  It has since 4 September 2019 been registered as a non-Hong Kong company under Part 16 of the Companies Ordinance (Cap. 622).  The principal place of business of the Company is at The Hong Kong Club Building in Hong Kong. 

3.  The Company is a wholly owned subsidiary of Dangdai International Group Co., Ltd (“Dangdai International”), a company incorporated in Hong Kong which, in turn, is a wholly owned subsidiary of Wuhan Dangdai Science & Technology Industries (Group)  Company Ltd (武漢當代科技產業集團股份有限公司)  (“Wuhan Dangdai”).

4.  Wuhan Dangdai is a company established in the Mainland, which is described as one of the largest privately-owned diversified enterprises in Hubei Province with core business segments in pharmaceutical, real estate, cultural and tourism industry[1]. The Company carries on its business through subsidiaries incorporated in different jurisdictions (together “Group”).

5.  The Company is the issuer of the following notes, which were or are listed on The Stock Exchange of Hong Kong Limited (“SEHK”)  (collectively “Listed Notes”)[2]:

(1)  The US$200,000,000 9.25% Senior Notes due 2022 issued by the Company (stock code 40923)  (“Subject Notes”), which were delisted on 15 November 2022;

(2)  The US$343,893,000 10.5% Guaranteed Senior Notes due 2023 (ISIN: XS2078359432)  (stock code 40121); and

(3)  The US$200,000,000 9.0% Guaranteed Senior Notes due 2023 (ISIN: XS2453127172)  (stock code 5027).

6.  The Subject Notes were constituted by the Indenture dated 16 November 2021 made between, inter alios, the Company (as issuer), the Petitioner (as trustee of the Subject Notes for itself and the holders of the Subject Notes)  and Wuhan Dangdai (as parent guarantor).  The Subject Notes were guaranteed by Wuhan Dangdai on a senior basis.

7.  On 16 May 2022, an interest instalment under the Subject Notes fell due but the Company failed to pay the same.  On 16 June 2022, the Company published an announcement on SEHK confirming that it failed to pay the interest fallen due within the 30-day grace period, which constituted an event of default under the Subject Notes[3].

8.  On 27 June 2022, the Petitioner wrote to the Company and Wuhan Dangdai noting the event of default and demanding, inter alia, indemnification pursuant to the Subject Notes and the Indenture.

9.  On 16 September 2022, the Petitioner delivered a Notice of Acceleration to the Company and Wuhan Dangdai declaring that the Subject Notes were due and payable and demanded immediate payment of (1)  US$200,000,000, being the outstanding principal; and (2)  US$15,570,833.33 as accrued interest as at the date of the Notice.

10.  In breach of their obligations under the Indenture and the Subject Notes, neither the Company nor Wuhan Dangdai pay the amount demanded by the Petitioner.  On 7 October 2022, the Petitioner’s solicitors served a statutory demand (“SD”)  on the Company demanding payment of US$216,864,227.43 (“Debt”), being the amount due and payable as at the date of the SD.  Following the Company’s failure to comply with the SD, the Petition was presented against the Company on 8 February 2023. 

11.  Although the Company is a non-Hong Kong company, it is not in dispute that the matters pleaded in the Petition are sufficient to satisfy the 3 core requirements for the court to exercise its discretionary jurisdiction to wind up the Company[4]. 

12.  Ms Eva Sit SC (leading Mr Michael Lok), counsel for the Petitioner, submits that the court should make an immediate winding-up order against the Company for the following reasons:

(1)  The Petitioner has standing to present the Petition[5];

(2)  The Company does not dispute the Debt and confirms that it has since mid-2022 been unable to pay its debts[6].   

(3)  The only ground of opposition and for seeking a 3-month adjournment is to enable the Company to implement a restructuring[7].

(4)  However, the Company fails to show the 3-month adjournment could result in any feasible restructuring of the Debt which will be beneficial to the Petitioner or the unsecured creditors generally, given (a)  the Company has acknowledged its inability to pay debts and has appointed advisers to negotiate with creditors since June 2022; (b)  it was not until 12 April 2023 that the Company disclosed to the Petitioner a draft non-binding term sheet (“Term Sheet”); and (c)  the Term Sheet does not include what the Company says to be the key requests of the holders of the Listed Notes[8] as it does not offer any cash prepayment component.  Instead, the Term Sheet states that “New Notes” will be issued by the Company in exchange for the Listed Notes but the key terms such as maturity date and interest remain “to be agreed” pending further analysis on the Group’s cashflow forecasts.   

13.  So far as locus is concerned, Ms Sit submits that:

(1)  Under the Indenture, the Petitioner (as trustee)  clearly has standing to present the Petition (see section 6.03)[9].

(2)  Indeed, Li 2^nd §10 recognises that “the Petitioner may … pursue enforcement actions” even in the absence of a request of “Holders”, pursuant to section 6.03 of the Indenture.  The Company has not sought to explain how the lack of a requisite request (even it is the case)  can affect the Petitioner’s standing in pursuing these proceedings.

(3)  Accordingly, the Petitioner is entitled ex debito justitiae to an order for the compulsory winding up of the Company.  It is for the Company to demonstrate that there are good grounds for the court not to make a winding up order (Re Jiayuan International Group Limited [2023] HKCFI 1254, §12).

14.  At the hearing, Mr Jose Maurellet SC (leading Mr Tom Ng), counsel for the Company, does not dispute that the Petitioner has locus to present the Petition.   

15.  As regards insolvency, Ms Sit points to the Company’s evidence which confirms that the Company and the Group are insolvent in that:

(1)  The Company is liable to pay approximately US$780 million, being the outstanding principal and interest due under the Listed Notes (“Offshore Debts”)[10];

(2)  The Company acknowledges it has no business and no funds as all the proceeds raised under the Listed Notes were remitted to the other entities in the Group[11];

(3)  The Company also admits that it has since mid-2022 been in default of its repayment obligations due to liquidity issues, and it is unable to pay the amounts outstanding under the Listed Notes[12]; and

(4)  The Group’s overall indebtedness is approximately RMB71,600 million, of which RMB66,500 million are onshore debts (“Onshore Debts”).[13]  The Group also needs to implement a restructuring in respect of its Onshore Debts.

16.  Mr Maurellet does not take issue with the above matters but submits that the court should grant a short adjournment of 3 months in view of the following matters:

(1)  The Company has been actively discussing with the creditors to secure their support for a restructuring of the Offshore Debts.  In response to the notice sent by the Company to all creditors on 6 April 2023, 6 creditors to whom an aggregate outstanding principal of US$235 million was owed have signed letters indicating their opposition to the Petition and their agreement not to take step any enforcement action in respect of the Listed Notes[14]. These creditors include China Cinda (HK)  Asset Management Co Ltd (US$27.65 million), China Everbright Bank Co., Ltd, Hong Kong Branch (US$10 million), CMBCC Special Opportunities Funds SP8 (US$0.5 million), Dangdai International (US$195.34 million), Lux Aeterna Global Fund SPC – Lux Aeterna Asia Credit Opportunities SP (US$1.375 million)  and Mr Tung Fung Yuen Victor (US$0.25 million)  (collectively “6 Creditors”). 

(2)  By contrast, the Petitioner commenced these proceedings on the instructions of 42.9% of the outstanding principal under the Subject Notes (i.e. US$85.8 million), which represents only 11.9% of the Offshore Debts. 

(3)  The Group has been discussing with the creditors of the Onshore Debts.  An onshore creditors’ committee was constituted in May 2022, which agreed that it would support the Group’s restructuring effort and would maintain the existing credit lines pending implementation of a holistic restructuring solution[15].  The restructuring is supervised by the government authorities in Wuhan, which have been regularly apprised of the progress of the restructuring[16].

(4)  The Group has identified 10 potential investors which are in the process of conducting pre-investment due diligence and if materialised, would result in injection of fresh funds.  The Group has been looking to dispose its subsidiaries and repay the debts at the subsidiary level.  On 3 February 2023, the Group has entered into a share transfer agreement with a third party for sale of its 14.98% shareholding in 武漢三特索通道集團股份有限公司(“Wuhan Sante”), a subsidiary whose shares are listed on the Shenzhen Stock Exchange, for RMB432.3 million.  The Group intends to apply the funds raised towards its restructuring.

(5)  Both onshore and offshore creditors oppose an immediate winding up of the Company.  There is no immediate benefit to the creditors if the Company is wound up given that it is just the issuer of the Listed Notes and does not have any asset of its own other than a claim for the US$740 million advanced to Wuhan Dangdai and/or the companies within the Group.   

(6)  The Group expects to complete its restructuring by the end of this year which, if successful, would result in payment to the Company and the same can be applied to pay the Offshore Debts through a restructuring.  There is thus a real likelihood that the return to the creditors will be maximised. 

(7)  There is a useful purpose in adjourning the Petition in that (a)  the Group can continue the negotiations with the potential investors; (b)  the Company’s financial advisor, Deloitte, can come up with analyses on the returns to the creditors in a liquidation scenario as opposed to a restructuring; (c)  the Company can continue to discuss with the creditors of the Offshore Debts and gather more support in respect of a restructuring. 

17.  Ms Sit submits that the burden is on the company to demonstrate to the court that “a concrete restructuring proposal or a scheme of arrangement has been prepared and put forward to the creditors for their consideration, and such proposal or scheme has the support of the requisite majorities of creditors”, and “it is not enough for the company to point to certain commercial discussions with some creditors or make a general assertion that it has been actively pursuing a restructuring proposal” (Re Jiayuan, §12).  The Company’s evidence has plainly failed to demonstrate any proper ground for the court to grant the adjournment sought.

18.  First, the Company has not adduced any evidence to show that there is any concrete proposal which has the support of the requisite majorities of creditors:

(1)  Although the Term Sheet is said to “involve the [Offshore Debts]”, it lacks both precision and credibility.   

(2)  No creditor has appeared in these proceedings to oppose the Petition or support the adjournment sought by the Company.

(3)  Despite the prolonged period of negotiations, the Company is only able to obtain letters signed by the 6 Creditors.  However, the debt owed to Dangdai International should be discounted and its view should not be given the same weight as independent creditors and, in the absence of any cogent reasons underlying their view, should not be taken into account by the Court when assessing support (Re Trinity (Management Services)  Ltd [2021] HKCFI 2207, §10). 

(4)  Thus, the Company has, at most, the support from independent creditors of US$39.75 million, which is less than 5% of the Offshore Debts.  This is far less than the 11.9% of the Offshore Debts which have instructed the Petitioner to seek an immediate winding up order against the Company.

(5)  The Term Sheet remains at a very preliminary stage – there is no liquidation analysis or cashflow forecasts provided; no suggestion of a restructuring support agreement being negotiated; nor any indicative timetable on the proposed restructuring or scheme.  The 3-month adjournment is not tied to any event and is wholly open-ended.  Indeed, Li 2^nd confirms that a liquidation analysis is only expected to be available in August 2023[17], and thus the restructuring is unlikely to be finalised within 2023.   

19.  Second, the absence of a concrete restructuring proposal with sufficient creditors’ support must be viewed against the fact that the Company has since June 2022 appointed advisers to work with Wuhan Dangdai and the offshore creditors of the Group to pursue a solution[18].  The lack of substantive progress to date casts serious doubt on the Company’s bare assertion of a credible, viable restructuring.   

20.  Third, there is a complete lack of visibility as to the financial state of the Company and of the Group and the details of the Group’s restructuring:

(1)  The only financial information of the Group made up to 30 June 2021 contained in the offering memorandum of the 9% Notes due 2023.  Other than this, there is no information on the Group’s assets or how they are held.  In respect of the disposal of Wuhan Sante, according to the announcement[19], there remains uncertainties (“不确定性“)  as to whether the transaction will be completed.

(2)  The lack of transparency makes it impossible for the Petitioner or other creditors to assess the viability of the restructuring. 

(3)  On the Company’s case, the restructuring of the Group depends on (a)  the disposal of the Group’s real estate, education and finance-related businesses; and (b)  finding investors for the pharmaceutical and health-related businesses to grow them in the hope of generating increased cashflow[20], all of which remain wholly uncertain.

(4)  The Company’s restructuring appears to contemplate a mere “rolling over” of the Listed Notes, pending the restructuring and reinvigoration of the Group’s onshore business so as to generate revenue in future from which the “rolled over” offshore liabilities would be paid.

21.  Fourth, contrary to the impression created by the Company[21] that the Offshore Debts will be repaid from the funds raised in the Group’s restructuring, and the onshore fundraising and restructuring process will be completed in the course of 2023:

(1)  Under the Term Sheet, (a)  item B8 only states that “the Group is considering a specified asset disposal undertaking pursuant to which a pre-agreed portion of the Net Consideration from any disposals from a specified list of offshore assets shall be applied to” redeem/buy-back the “New Notes”; and (b)  while item C1 refers to a consent fee, it can be seen from the Company’s notice dated 6 April 2023[22] that the consent fee of 0.1% of the principal amount on the Listed Notes is to be paid by 31 May 2023 (and only to those creditors who signed the support letters). 

(2)  In other words, there is in fact no promise of any payment to the creditors, and the consent fee is unlikely to be paid out of the proceeds of the onshore restructuring, but by the Company incurring further liabilities[23].

22.  For the reasons advanced by Ms Sit (which I agree)  and the matters stated in §§23-25 below, I do not think that the Company has demonstrated any good ground to displace the right of the Petitioner in seeking an immediate winding up order against the Company or that there is any useful purpose in the court granting the adjournment sought.

23.  I do not think that any weight should be given to the view expressed by the 6 Creditors given that:

(1)  None of them has entered appearance in the proceedings or filed any notice in opposition to the Petition. 

(2)  Dangdai International’s interest is different from the other creditors of the Offshore Debt as it is the parent company of the Company and a wholly subsidiary of Wuhan Dangdai (which is liable to pay the Offshore Debt).  In any event, it is not clear why Dangdai International should be regarded as a creditor as according to Li 2^nd §13, the US$195,340,000 principal amount of the Listed Notes were repurchased by the Group as part of the Group’s liability management strategy. It has not been explained why the Notes repurchased should be treated as a liability of the Company. It is also not clear whether Dangdai International (as a company within the Group)  has received any proceeds raised by the Company under the Listed Notes or that it owes any amount to the Company.  If Dangdai International owes any amount to the Company, such amount must be deducted from the amount said to be due to Dangdai International.

(3)  The other 5 creditors signed letters of support in consideration of the Company agreeing to pay a consent fee at 0.1% of the outstanding principal to them.  Their view is not and cannot be said to be representative of the view of the creditors of the Offshore Debts as a class. 

(4)  Indeed, it is difficult to see what restructuring the 6 Creditors purport to support as no restructuring proposal has been put forward by the Company.

24.  It is a mischaracterisation to say that both the onshore creditors and offshore creditors oppose an immediate winding up of the Company.  The onshore creditors are creditors of Wuhan Dangdai and its subsidiaries, they are not creditors of the Company.  I do not see why the court should take into account the view of the onshore creditors when considering whether the Company should be wound up. 

25.  This is a case where despite having been in default of payment under the Subject Notes for almost a year, the Company has not been able to come up with any concrete restructuring proposal to compromise the Offshore Debts or to restore its solvency.  In light of the Company’s case that (at best)  the restructuring process of the Group will only be completed by the end of 2023, it is clear that the proposed adjournment will not serve any useful purpose as the Company will not receive any new funds to pay the Offshore Debts until sometime next year, which is one of the key requests made by the creditors in giving their consent to any restructuring proposal.