RE FOUNDER INFORMATION (HONG KONG) LTD

HCCW 350/2020

[2021] HKCFI 311

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 350 OF 2020

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D E C I S I O N

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The Petition

1.  On 28 October 2020 The Bank of New York Mellon, as trustee in connection with a series of floating rate bonds issued by Kunzhi Limited (“Kunzhi”) totalling US$310,000,000 in value due 2020 guaranteed by Founder Information (Hong Kong) Limited (“Company”), issued a petition seeking the winding-up of the Company on the ground of insolvency relying on failure to make payment following a demand for the payment of the Bonds and the interest accrued on them (“Debt”) consequent on an event of default, namely, the failure to pay interest on the Bonds due on 21 February 2020.  The Company is ultimately owned by Peking University Founder Group Company Limited[1], which has been experiencing well-publicised financial difficulties.  It appears from the Petition, and this was not disputed before me, that the Company also has further liabilities arising from defaults by members of the PUF Group, which total approximately US$1.7 billion.

2.  There is no dispute that the Debt is payable.  Rule 32 of the Winding Up Rules requires a company that wishes to contest a winding-up petition to file evidence in opposition within seven days of the filing of the evidence verifying the petition.  The Company did not do so.  The Petition was listed for hearing before me today.  On 25 January 2021 the Company’s solicitors, Clifford Chance, wrote to my Clerk seeking leave to make an urgent application to file evidence in opposition out of time.  I directed that the summons be listed for hearing at the same time as the Petition.  On Friday 29 January 2021 Clifford Chance again wrote seeking leave to issue and have listed a summons for leave to file a further affirmation updating the Court on the matters dealt with in the first affirmation, which I explain later.

3.  The first summons was supported by an affirmation of Fung Man Yin Sammy and exhibited the unsworn affirmation of Fang Lai Tan.  The purpose of this evidence was to support an application for an adjournment.  Ms Fung says this in [5] and [6] of the affirmation:

“Our initial instruction to Messrs Clifford Chance was to not attend the hearing of the Winding-up Petition on 20 January 2021. Nevertheless, on 19 January 2021, after further internal consideration, we instructed Messrs Clifford Chance to attend the hearing and oppose the Winding-up Petition on the ground that there are ongoing communications with the Petitioner and bondholders about potential ways to deal with their claims including possible debt restructuring and repayment options.

The Company then started to urgently prepare its evidence in opposition to the Winding-up Petition and managed to do so today.  There is now produced and shown to me marked Exhibit ‘FMYS-1’ a true copy of the finalized Affirmation of Fang Lai Tan signed by Mr Fang in Beijing, China on 25 January 2021, together with the exhibits thereto which the Company intends to file in opposition.”

4.  Mr Fang explains in what is now his sworn affirmation (I granted leave to the Company to rely on the affirmations) that:

“8. As a final step of the restructuring plan, an onshore ‘white knight’ investor will be formally selected in or around February 2021, with an aim to complete the onshore restructuring process by 30 April 2021. The current onshore restructuring plan (and the agreement of the onshore investor stepping in) has been devised on the basis of the PUFG Group being intact, and is the result of many rounds of discussions and negotiations with the relevant stakeholders. If the Company is wound up, the daily operations of the subsidiaries of the Company will deteriorate quickly due to a lack of funds. The onshore investor may, as a result, refuse to step in as originally intended. Once the onshore investor decides not to acquire the Listco and the Operating Subsidiaries, it would completely rule out the possibility for bondholders and the onshore investors to seek settlement; considering that the Company itself does not have operating businesses, it would be difficult to recover debts and protect the core interests of bondholders through winding-up of the Company.

9. We have notified the bondholders (through the Petitioner as trustee) about the status and intended next steps in respect of the onshore restructuring plan. There is now produced and shown to me marked Exhibit ‘FLT-2’ a copy of the letter from the Company to the Petitioner dated 25 January 2021.

10. The major creditors of the Company, being affiliates of the PUFG Group, are also supportive of the holistic restructuring plan.  Moreover, the PRC Administrator has issued a letter of support which also confirms the status of the onshore restructuring plan.  There is now produced and shown to me marked Exhibit ‘FLT-3’ a copy of the letter of support issued by the PRC Administrator dated 25 January 2021.”

5.  In [13] Mr Fang contends that it would not be in the best interests of the bondholders for the Company to be put into immediate liquidation as it would destroy the value of the Company, although what that might be is not explained.

6.  Mr Fang’s second unsworn affirmation is exhibited to an affirmation of Tania Tse of Clifford Chance made today informing the court that investors have now been found to progress a restructuring:

“8. Very recently on 29 January 2021, the PRC Administrator finally and publicly announced the selection of the ‘white knight’ investors mentioned in paragraph 8 of Fang 1^st. The investor shall be the consortium of (i) Zhuhai Huafa Group Co., Ltd (on behalf of Zhuhai State-Owned Assets), (ii) Ping An Insurance (Group) Company of China, Ltd., and (iii) Shenzhen Tefa Group Co., Ltd. These are very reputable entities, and their investments will surely assist the PUFG Group (including the Company) in successfully restructuring its indebtedness. There is now shown and produced to me marked Exhibit ‘FLT-4’ a true copy of the announcement in respect of the investor dated 29 January 2021 (the ‘Announcement’).”

7.  Mr Michael Ng, who appeared for the Company sought a seven-day adjournment of the Petition in order to file further evidence providing more information about the proposed restructuring.  This is opposed by the Petitioner who seeks an immediate winding-up order.  I note that no creditor of the Company has filed notice to appear opposing the Petition and supporting an adjournment.

Relevant Principles

8.  The principles that guide the court in determining applications by a company seeking an adjournment in order to progress a restructuring of its debt are well established and most recently explained by me in Re Lerthai Group Limited [2].

“4. I have explained in a number of recent decisions how in broad terms the Court should approach applications to adjourn petitions. I say this in [6] of SMI Corporation Limited [3]:

‘6. It seems to me that, in the circumstances, there is no sensible reason for the Court not to wind up the Company. As I explain in my recent decision in Re Chase on Development Limited [4], an important consideration when the court is faced with an application by an insolvent company to adjourn a petition based on an undisputed debt is the views of the creditors, their reasons for supporting or opposing the petition and the feasibility of the proposed restructuring. Necessarily this will require evidence to be put before the court that allows the court to make an informed decision whether or not to agree an adjournment of a petition to allow a company to restructure debt. The evidence will need to be all the more compelling if a company is unable to find a creditor to oppose an immediate winding-up.’

5. I develop this further in Re China Huiyuan Juice Group Ltd [5]:

‘50. As the New Zealand Court of Appeal has recently observed “Insolvency law is a mix of principle and pragmatism. The [insolvency legislation] is to be used in a practical way. It does not require liquidation when that will not serve any useful purpose”[6]. The way in which the courts assess applications by financially distressed companies that seek adjournments of petitions reflects this.

“When the court considers the possibility of benefit resulting from an order, the normal starting point is to consider any possible benefit to the petitioner, whether it be a debtor or a creditor. In many cases, showing benefit to the petitioner will be sufficient to persuade the court to make the order… I do not see why a consideration of benefit should be restricted to the possibility of benefit to the petitioner; benefit to others should also be relevant. Conversely, disadvantages or unfairness to others may also be relevant. After all, the court is exercising a discretion and is surely required to consider the effect of the proposed order on all relevant persons. In such a case, as is normal, the court will consider the effect of making the order and the effect of not making the order and will then consider what to do, having regard to all relevant considerations, including the legitimate aspirations of all potentially affected persons.”[7] (emphasis added)

“I accept that as a general proposition, in the absence of good discretionary grounds to the contrary, an applicant for winding up who has proved its debt and has proved insolvency ought to achieve a winding up order. However, … the discretion can be exercised in favour of granting a stay where the refusal of a stay would be likely to work a substantial injustice.”[8] (emphasis added)

51. I summarise how this balancing exercise is to be approached when, as in the present case, creditors take differing views about what is in their best interests in Re Chase On Development Ltd [9]:

“In cases in which a company is clearly insolvent and a petitioner’s debt is not in dispute an important consideration, when a court it being asked to adjourn a petition by a Company in order to allow it to attempt to restructure its debt, are the views of its unsecured creditors.

If the creditors are taking different views the Court will normally take into account all the circumstances including the following considerations:

(a) A qualitative assessment of the number of creditors for and against a winding-up order. It is not just a matter of counting the number of creditors in favour and those against or the proportion of the value of the debt they hold.

(b) The reasons proferred by the supporting and opposing creditors.

(c) The feasibility of the proposed restructuring.”

In practice the court is making a decision which commonly will be more commercial than legal.  In most situations the court takes the view that a party is best placed to assess what is in its best financial interests, but the nature of the insolvency process involving, as it frequently does, multiple creditors inevitably throws up situations where there are genuine differing views.  This may be explained by varying degrees of knowledge amongst the body of creditors about a company, its commercial prospects or the insolvency process.  In these circumstances the court has to decide, which view it considers preferable at the time the decision has to be made. Snowden J provides an example in his judgment in Re Maud (No 2) [10] of how the court approaches this task in the analogous situation of personal bankruptcy:

“Taking all these factors into account, I am not currently satisfied that the interests of Mr. Maud’s creditors would be served by making him bankrupt immediately. Whilst there is no certainty, there does now seem to be some prospect of an imminent end-game to the Spanish insolvency which might bring a benefit to Mr. Maud and his creditors if he continues to be able to play a role in Spain. In contrast, there seems to be no real likelihood of any obvious, still less immediate, benefit to his creditors if a bankruptcy order is made now, and I have not been given any specific reason why a formal investigation of Mr. Maud’s past dealings needs to be undertaken immediately.

The majority in number and value of Mr. Maud’s creditors are also in favour of a further adjournment, and whilst I recognise that the creditors who have advocated or supported an adjournment may have other interests to serve, I cannot say that I find their approach unreasonable or irrational. I also have in mind that the only voice that I actually heard in favour of the making of such an order, that of Edgeworth, also comes from a party that is vigorously pursuing its own commercial agenda outside the bankruptcy proceedings” (emphasis added).’

6. When dealing with substantial listed companies with very significant debt the Court will expect the evidence that it is put before it to support an application to give time to allow a company to progress a restructuring to be consistent with the character of the business and the debt. In the present case the evidence suggests that the Company owns property in the Mainland worth approaching HK$19 billion and has net assets of HK$5 billion. There is no explanation of what its business model has been, why it guaranteed the Debt and how it finds itself unable to pay its debts. The Court is presented with a list of its principal property assets and its principal onshore and offshore creditors and a brief statement as to which obligations, for example under bonds, are in default.

…

10. It seems to me that the Company has failed to demonstrate a good reason for the Court to adjourn the Petition rather than accede to ICBC’s wish that it be put into immediate liquidation. ICBC is rather better placed to assess what it is in the creditors best interests than the Court. Generally unless there is a substantial body of creditors opposing a petition for sensible reasons the Court will defer to a petitioner’s wishes. I would add that ICBC is a Mainland bank and I think I can reasonably assume well placed to assess the prospects of the Company reaching a satisfactory resolution to its present financial problems. I will, therefore, make the normal winding-up order.

11. I would add that the lack of necessary information that I have described earlier in this Decision is, as I have observed in other decisions, far too common.  I am frequently faced with Mainland business groups, normally listed, who either do not receive appropriate advice or lack the wherewithal to provide the type of information that I have described.  If they fail to provide the necessary evidence to the Court to justify an adjournment they should assume that they will be wound-up.  They should also proceed on the basis that the evidence should be contained in evidence filed before a petition first comes on before a judge.  There is no excuse for substantial businesses who must be alive to their financial difficulties and the demands of creditors for repayment long before a petition is presented not filing evidence in order that creditors and the Court can consider the appropriate course to take early in winding-up proceedings.”

9.  As is apparent from the passages I have quoted I have endeavoured to make clear to companies and their advisers, and in particular Mainland businesses, what the court requires if they are to have a realistic prospect of obtaining an adjournment in the face of creditor opposition.  In the present case the burden on the Company is higher because it cannot point to any independent creditor (I accept that it is apparent from the Company’s evidence that, unsurprisingly, other members of the PUF Group who are creditors support an adjournment although none have confirmed this in writing), who supports an adjournment.  As is well-established the Court proceeds on the basis that the parties are the best judges of what is in their own financial best interests and will rarely depart from the creditors’ views if they are consistent.  In this case the Petitioner, which holds 54% of the Company’s debt is a sophisticated party far better placed to determine what is in the best financial interests of the bond holders than I am.

The adjournment application

10.  It is quite clear in my view that the evidence filed by the Company falls far short of that required to satisfy the criteria clearly explained in the authorities.  This failure is particularly unsatisfactory in the present case.  The PUF Group is a large and sophisticated business. The Company instructed Clifford Chance, who I think it reasonable to assume will have advised its board of the principles and criteria I have explained. It is also relevant that unlike the majority of petition proceeding in which the Petition is supported only by a short formal verifying affirmation, in the present case the Petitioner has filed two lengthy and detailed supporting affirmations explaining not only the Company’s insolvency, but also the reason why an immediate winding-up order is necessary.  In particular, the Petitioner believes that there is a need to urgently protect the Company’s single most valuable asset—its claim against its onshore parent entity, which amounts to RMB 5.25 billion.  The Petitioner is concerned that if the winding-up and regulating orders are not granted, there is a very real risk that this asset will be dissipated and lost in the process of the PUF Group’s onshore restructuring.  To the best of the Petitioner’s knowledge, the deadline for the submission of the restructuring proposal in the Mainland Administration is 30 April 2021.  Presumably, any claims not admitted by that date will be lost.  The Company is well aware of the Petitioner’s concern.

11.  The Petitioner declared an event of default on 10 March 2020 and formally demanded repayment from Kunzhi, the Company and the PUF Group on 16 April 2020.  None of those entities made any repayment, whether directly or indirectly.

12.  On 16 April 2020, the Petitioner filed a claim against the PUF Group in the Mainland Administration totalling approximately US$1.7 billion [11]. Despite the Kunzhi Bonds being backed by the PUF Group, the Petitioner’s claim was rejected.  The alleged reason given was that the PUF Group Deeds did not create enforceable rights between the Petitioner and the PUF Group.  Notwithstanding this, the Petitioner’s position is that it is clear and obvious that under the PUF Group Deeds, the Company has a direct claim against the PUF Group (the “Claim against PUF Group”) (as does Kunzhi).

13.  The Company’s statement of financial position as at 31 December 2019 has not taken into account the Claim against the PUF Group.  The claim totals around RMB5.25 billion, and represents the single largest asset of the Company.

14.  By reason of the default, the Petitioner commenced winding up proceedings against the Company in Hong Kong.  It also commenced winding up proceedings against HKJHC in Hong Kong, as well as Kunzhi and Nuoxi in the British Virgin Islands (“BVI”).  HKJHC was wound up on 13 January 2021.

15.  As there was an urgent need to protect the claims totalling US$1.7 billion, the Petitioner also took out applications for appointment of provisional liquidators over the respective guarantor and issuer entities.  Relevantly:

(1)  Joint Provisional Liquidators have been appointed over Kunzhi and Nuoxi in the BVI.

(2)  On 16 November 2020, Linda Chan J granted an ex parte mandatory injunction in favour of the Petitioner (“Injunction”), and adjourned the provisional liquidator application sine die with liberty to restore.  The Injunction required the Company to submit claim documents (prepared by the Petitioner’s representatives) against the PUF Group to the Mainland Administrator, and to provide relevant correspondence and updated financial statements to the Petitioner.  The Company is fully aware of and has not contested this Injunction.

16.  To date, the progress of the Claim against the PUF Group in the Mainland has been stagnant.  The Petitioner understands that the various claims have been submitted by the provisional liquidators of the issuers or via the Injunction route for the guarantor entities.  However, these have been held up by the Mainland Administrator on the grounds that the documents need “notarisation”.  The Petitioner is concerned that the Mainland Administrator has not commenced the process of reviewing the claims substantively.  The Company has provided no update on the status of the claim either.  It appears that the Company has not pushed for the adjudication of the claims as one would expect a creditor to.  None of these matters are discussed in any meaningful detail in the Company’s evidence in opposition.

17.  The Petitioner is concerned, in my view understandably, that given the history of this matter that the Administrator of the PUF Group cannot be relied on to bring an appropriate level of independence to bare when considering the offshore bonds holders claims.

18.  The Company’s explanation for the failure to provide the Petitioner and the Court with the level of information about the proposed restructuring that the authorities require is explained in [5]–[7] of Mr Fang’s 2^nd affirmation, which it is convenient to quote:

“As I have explained in Fang 1^st, the PRC Administrator has been devising a group-wide holistic restructuring plan of the PUFG Group, which includes the Company and its indebtedness. A critical step of such restructuring was to secure investors who are willing to inject money into the PUFG Group in support of the restructuring process. On 20 April 2020, the PRC Administrator made a public announcement to recruit strategic investors to support the PUFG Group’s restructuring.

The PUFG Group was established by the Peking University and is ultimately controlled by the Ministry of Finance of the People’s Republic of China. It was divided into at least 5 major industry groups, including information technology, healthcare and pharmaceuticals, real estate, finance, and commodity.

It came with no surprise that many potential investors have expressed their interests after the announcement of the recruitment in April 2020.  However, as the PUFG Group involves the state’s interests, the process of the selection of investors has to be kept strictly confidential; it also had to undergo rounds of competitive selections and internal discussions.  The PUFG Group and the PRC Administrator, therefore, could only divulge very limited details of the selection process (see e.g. the information provided by the PRC Administrator in FLT-3).”

19.  Exhibit FLT-3 is a one-page announcement dated 25 January 2021, which does little more than identify the three investors referred to in the passage from the affirmation I have quoted earlier.

20.  Mr Ng’s submission justifying an adjournment boils down to this.  PUF is a state owned enterprise.  As a consequence it was bound by restrictive confidentiality considerations referred to by Mr Fang and must be assumed to be hampered by cumbersome chains of reporting and decision making in determining how to respond to the Petition.  It should, therefore, be given more leeway than a private company might receive when the Court assesses its application for an adjournment.

21.  I have very little evidence of the difficulties and restrictions facing the Administrator appointed at the beginning of last year by the Beijing No 1 Intermediate People’s Court over the PUF Group.  I understand that the Administrator might have been working in circumstances, which give rise to considerations and difficulties that if PUF were a purely private company it might not.  However, it was for the Administrator and its advisers to work out how these issues could be addressed.  They could have filed evidence explaining the problems they faced much earlier.  The impression I have is that they had no or insufficient regard to the position of the bondholders or the Hong Kong proceedings once they were commenced in October of last year. This is not acceptable.  As I have sought to make clear in previous decisions, Mainland businesses, which choose to carry on business and raise funds in Hong Kong have to take the requirements of Hong Kong’s system seriously.  If they do not they are liable to be wound-up.  There may be occasions in which the fact that a business group is ultimately state owned is a material consideration in deciding how a petition should be dealt with, but this needs to be addressed properly at an early stage.  There are tools such as recognition and assistance that have been developed to assist Mainland companies, Mainland courts and Administrators to address difficulties that may arise at the interface between the systems in the Hong Kong SAR and the Mainland.  It is incumbent on Mainland companies and administrators to use them.  If they choose not to they leave the Hong Kong court with no choice but to apply the established principles in a conventional manner.

Conclusion

22.  The Company clearly has not satisfied the criteria for granting an adjournment and I make the normal winding-up order with a certificate for two counsel subject to the following qualification.

23.  The Petitioner seeks an immediate a regulating order and the immediate appointment of liquidators in order that steps can be taken to protect the creditors interests.  I am not minded at this stage to make a regulating order, particularly as the application is not supported by            the Official Receiver.  I shall, however, appoint Yeung Lui Ming, Ho Kwok Leung and Lai Kar Yan of Deloittes as liquidators if the necessary application being made by the Official Receiver under s 194(2) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32.