BANK OF TAIWAN, HONG KONG BRANCH v. ZHAOHENG HYDROPOWER (HONG KONG) LTD

HCCW 37/2021

[2021] HKCFI 1434

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 37 OF 2021

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R E A S O N S   F O R   J U D G M E N T

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1.  At the hearing of the petition on 17 May 2021, this Court made a usual winding up order against Zhaoheng Hydropower (Hong Kong) Limited (“Company”) on the grounds that the Company is unable to pay the debts owed to the petitioner and the 8 supporting creditors, and there is no evidence to demonstrate that the Company has formulated any concrete proposal to restructure its debts, or that any such proposal will have the support of the requisite majorities of the creditors. These are the detailed reasons for my judgment.

2.  The Company was incorporated in Hong Kong in October 2007.  It is part of a group of companies which engages in generation and supply of hydropower in the Mainland (“Group”). The Company is at the apex of the Group in that:

(1)  the Company through its wholly owned subsidiary established in the Mainland, Shenzhen Zhaoheng Hydropower Co Ltd, holds and controls the indirect subsidiaries in the Mainland;

(2)  there are 70 companies within the Group which, in turn, own or operate more than 100 hydropower stations throughout the Mainland; and

(3)  the Group is the largest small-to-medium sized hydropower operator in the Mainland.  The majority of its sales are made to power grid companies including State Grid Corporation of China and China Southern Power Grid.

3.  The Petitioner, Bank of Taiwan Hong Kong Branch, is one of the 9 syndicate lenders (collectively “Lenders”) under a Facility Agreement dated 20 April 2017[1] whereby the Lenders lent a total of USD128,000,000 to the Company (“Loan”).  The 8 supporting creditors who have filed notices of intention to appear in the petition are the other Lenders under the Facility Agreement. 

4.  As at the date of the petition, the amount due and owing to P was USD13,500,000.

5.  The Company defaulted in repaying the 4^th instalment of USD12,090,000 due on 23 October 2020, which constituted an event of default under clause 22.1 of the Facility Agreement.  By letter dated 6 November 2020 to the Company, White & Case on behalf of Morgan Stanley (qua facility agent and security agent under the Facility Agreement) referred to the event of default, and declared that the remaining balance of the Loan (together with all accrued interest) became immediately payable.  In the same letter, the Company was demanded to repay US$80,749,172.28, being the amount then outstanding.  Of this amount, the Petitioner has a separate and independent right to enforce the Company’s obligation to pay the sum of USD8,516,514.26 by virtue of clause 2.2(b).  The demand was not answered.

6.  By a statutory demand dated 18 November 2020 (“SD”) and served on the Company on the same day, Morgan Stanley on behalf of the Lenders demanded the Company to repay USD80,922,963.37, being the outstanding amount due under the Facility Agreement.  Of this amount, the Petitioner has a separate and independent right to the sum of USD8,534,843.79 by virtue of clause 2.2(b).

7.  Taking into account the Company’s subsequent payments of interest, default interest and partial settlement of the Loan by way of set off, as at 31 December 2020, the outstanding principal was USD80,047,794.45.  Of this amount, the Petitioner has a separate and independent right to the sum of USD8,442,540.82 by virtue of clause 2.2(b).

8.  Mr James Man, counsel for the Petitioner and the supporting creditors, submits that the Court should make an immediate winding up order against the Company for the following reasons:-

(1)  The Company has not put forward any valid ground to dispute the debt owed to the Petitioner and the supporting creditors.  The suggestion in Xu’s Affirmation filed on behalf of the Company (“Xu Aff”) (§49(c)) that the debt could only be claimed and demanded by Morgan Stanley as facility agent is wrong, as clause 2.2(b) of the Facility Agreement provides that each syndicate lender shall be entitled to enforce its independent and separate debt under the Loan.

(2)  The Company is unable to pay its debts within the meaning of s 177(1)(d) and s 178 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (“CWUO”) in that:-

(a)  Contrary to the suggestion in Xu Aff §§49(a)-(b), the SD was issued in the names of the Lenders (which include the Petitioner) and, as such, is not defective.  The Company has failed to comply with the SD and is deemed to be insolvent by virtue of s 178 of CWUO.

(b)  The Petitioner relies on s 178(1)(c)[2] of the CWUO, which concerns the present capacity of a company to pay its debts.  If a debt presently payable is not paid because of lack of means, that will normally suffice to prove that the company is unable to pay its debts.  That will be so even if, on an assessment of all the assets and liabilities of the company, there is a surplus of assets over liabilities (Byblos Bank S.A.L. v Nazar Kamil Al-Khudhairy (1986) 2 BCC 99549 at 99562 per Nicholls LJ (as he then was)).  The Court is entitled to draw the inference of inability to pay from persistent failure to pay a debt that is indisputably due (Mann v Goldstein [1968] 1 WLR 1091, 1096C-D, per Ungoed-Thomas J; Re ePLAZA Ltd, HCCW 1122/2002, 23 July 2003, §34, per Kwan J (as she then was)). 

(c)  The Loan has since 6 November 2020 been due from the Company to the Lenders.  The Company has not demonstrated that it has the financial means to repay the Loan or, indeed, any debts which are due.  To the contrary, the Company acknowledges (Xu Aff §§33-35) that the cashflow position of the Group is strained and it is unable to remit funds from the Mainland to Hong Kong.  The Company could only offer to repay the outstanding principal of the Loan on the final repayment date which is 18 months away (Xu Aff §45).

9.  Ms Rosa Lee, counsel for the Company, does not dispute that the remaining balance of the Loan is due and payable and that the Company does not have the requisite funds to repay the same.  Nevertheless, she opposes the petition on the following grounds:

(1)  As at 31 December 2020, the Company is “balance sheet solvent”.

(2)  The Group relies heavily on re-financing of loans to operate owing to its peculiar credit environment and the long capital or fixed cost recovery period for hydropower project.  The Group owed both onshore and offshore loans, and a majority of the Group companies are guarantors or provide inter-company loans to support the operation of the other. Given the cross-default clauses in the onshore and offshore loan agreements, the winding up of the Company would have “far-reaching impact on the Group entities and may even led to the cessation of the Group’s business (which would otherwise likely persevere)”. 

(3)  As security for the Loan, the Company has executed a share charge and confirmatory deed relating to the share charge in 2017 and 2020.  Morgan Stanley has not enforced any of the securities to settle the Loan.

(4)  The Company has offered to repay interest on the Loan and all outstanding balance of the Loan on the final repayment date, which is 18 months away (“Repayment Proposal”).  There were further negotiations on the conditions for the Repayment Proposal, which may impact upon the Group’s ability to meet its onshore repayment obligations (and, therefore, require the approval of the onshore creditors), the Group is still considering the feasibility of these conditions and exploring other restructuring or financing plans.

(5)  The Group has been negotiating with potential buyers for an asset sale or a sale of the Group so as to repay the Loan, and the Group needs some time to carry out the necessary due diligence, negotiate with buyers and complete such sale or disposal.  An unidentified “SOE” is interested in the Groups’ business and is currently working on the valuation of the deal.  It is expected to come up with an offer “within the next couple of months”.

(6)  The Group has been negotiating with various unidentified investors and exploring potential listing options including potential listing as an Infrastructure Public Fund in the Mainland.  The Group has received very positive feedback from China Securities Co, Ltd on a potential listing and should be able to submit its application for listing.

(7)  Reliance is placed on Re China Huiyuan Juice Group [2021] 1 HKLRD 255 where Harris J emphasised that the Court must take a pragmatic approach in assessing whether an adjournment of the petition might be in the best interests of the creditors, and in practice, the Court is making a decision which “commonly will be more commercial than legal”.  It is said that similar to Huiyuan, the entire business of the Group is located in the Mainland and, therefore, it is unlikely that offshore creditors such as the Petitioner would be able to benefit from a winding up of the Company in Hong Kong.  The Court should adjourn the petition to allow the Company time to attempt to restructure its debts and rehabilitate its business in the Mainland, which would likely maximise the return to the offshore creditors. 

10.  Ms Lee seeks an adjournment of the petition for “at least five weeks” with directions for the Company to report its progress on the Group’s restructuring and refinancing efforts and its negotiations with the onshore and offshore creditors.

11.  The starting point is that the Petitioner whose debt is not in dispute is entitled ex debito justitiae to an order for the compulsory winding up of the Company.  The burden is on the Company to demonstrate that there are good grounds for the Court not to make a winding up order against the Company.  None has been shown by the Company. 

12.  First, it is indisputable that the Company is insolvent given that it has failed to satisfy the SD within the time limited to do so.  The assertion that the Company is “balance sheet insolvent” does not assist the Company as the Petitioner and the supporting creditors are entitled to be paid once the remaining balance of the Loan has fallen due.  In any event, it is well established that “inability to pay debts” by itself is sufficient for the Court to make a winding up order against the Company under s 177(1)(d) of CWUO.

13.  Second, it is well established that where, as here, the Company is insolvent and unable to pay its debts, it is the creditors who have real interest in the Company, and they can decide whether it is in their interest to have the Company being wound up.  It is not for the Company to assert otherwise even if there are valid grounds in support of the assertion (which is not the case here). 

14.  Third, the assertion that the Company has provided security for the Loan is a cause for concern as such security is not stated in the petition.  However, as Mr Man points out, the security was in fact provided by an associated company, not the Company.  When pressed by this Court, Ms Lee accepts that she has mis-stated the point in her skeleton. 

15.  Fourth, the so-called Repayment Proposal is at best an intention to make an offer to settle the Loan.  It is not even an offer which can be accepted by the Petitioner and the supporting creditors.  In any event, Mr Man confirms that the Petitioner and the supporting creditors do not accept the Repayment Proposal. 

16.  Fifth, on the basis of the Company’s evidence, it is clear that neither the Company nor the Group has entered into any binding agreement to sell their assets for the purpose of raising funds to repay the Loan. The same goes to the so-called application for listing, which has not even been submitted.  There is no proper basis for the Company to ask for an adjournment of the petition for 5 weeks as it will only have the effect of delaying the entitlement of the Petitioner (and the supporting creditors) to seek an immediate winding up order but without any corresponding benefit of receiving any payment from the Company.   

17.  Sixth, it is clear from Xu Aff that the Company has not put forward any restructuring proposal with a view to arrange or compromise its indebtedness including the outstanding principal owed to the Lenders.  All that has been said is that the Group has been considering some options to settle its indebtedness with onshore and offshore creditors which is plainly insufficient for the purpose of opposing the petition.  More importantly, the Company has not adduced any evidence to show that any restructuring proposal, if put forward, will have the support of the requisite majorities of the creditors of the Company.  That being the position, even if the Company will be able to come up with a scheme to restructure its indebtedness in a few weeks’ time, in the absence of the support of the Petitioner and the supporting creditors, such scheme cannot be implemented by the Company.

18.  Lastly, Ms Lee’s reliance on Huiyuan is misplaced.  The case concerns a non-Hong Kong company and, therefore, the petitioner has to demonstrate that the 3 “core requirements” for the Court’s exercise of its jurisdiction to wind up the company under s 327 of CWUO are satisfied.  The discussion on the likely benefit of a winding up order against the company was in the context of the Court’s consideration of the second core requirement.  Such principle has no application to the Company as it is a Hong Kong company.  In any event, as Mr Man points out, in Huiyuan, all onshore creditors of the company support an adjournment of the petition, whereas in the present case, no creditor supports an adjournment of the petition.

19.  For the above reasons, it is appropriate for the Court to make an order to wind up the Company.