RE TRINITY (MANAGEMENT SERVICES) LTD

HCCW 420/2020

[2021] HKCFI 2207

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 420 OF 2020

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D E C I S I O N

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1.  Trinity (Management Services)  Limited (“Company”)  is a subsidiary of Trinity Limited (“Holdings”), which is incorporated in Bermuda and listed on the Main Board of the Stock Exchange of Hong Kong.

2.  On 4 November 2019, the Company defaulted on its loan repayment obligations to Standard Chartered Bank (Hong Kong)  Limited (“Standard Chartered”)  in the amount of HK$150 million plus interest.  On 4 December 2019 Standard Chartered served a statutory demand.  In the following months, Holdings discussed with Standard Chartered the possibility of a restructuring to resolve the Company’s indebtedness, but they made no progress.  As at 23 November 2020, after the exercise of a right of set-off, the Company remained indebted to Standard Chartered for approximately HK$150 million (“Debt”), which is not disputed.  On 8 December 2020, Standard Chartered presented this Petition to wind up the Company on the grounds of insolvency relying on failure to satisfy the statutory demand.

3.  The Debt is guaranteed by Holdings. On 8 December 2020, Standard Chartered also presented a petition in Bermuda seeking the winding up of Holdings.  On 8 March 2021 Holdings applied in Bermuda for the appointment of provisional liquidators.  On 26 March 2021 the Bermuda court appointed members of RSM as provisional liquidators and adjourned the Petition for three months.  The adjournment was sought in order to give the Company time, with the assistance of the provisional liquidators, to progress a restructuring of Holdings.  It was supported by some of Holdings’ banking creditors none of whom are creditors of the Company.  The Petition came on again on 26 June 2021 and was adjourned for one month.  I understand that it will be heard the day after the substantive hearing of this Petition before me today in Hong Kong.

4.  The Company proposes that this Petition be adjourned in order that what it and Holdings (who also appeared before me today)  describe as a restructuring can be progressed.  The term “restructuring” is a misnomer for what is proposed.  Holdings is a garment designer, manufacturer and retailer.  It proposes to sell one of its best known brands, Cerruti 1881 (“Cerruti”), and to pay Standard Chartered, and its other banking creditors, in full.  It is not suggested that the debt be restructured at all, neither does it appear that there is any plan to rehabilitate what Holdings’ Board recognise is a problematic business model. On the basis of what I have been presented with, it would appear that Holdings’ Board intend to pay off the banks and then continue with the existing business albeit without one of its best known brands.  What the Company seeks is simply an adjournment of this Petition for a period of time at the end of which Standard Chartered can be paid in full.  The period is uncertain.  As even on the Company’s own evidence it is unlikely that any binding agreement for the sale of Cerruti would be signed before the end of this year it follows that Standard Chartered would have to wait until next year to receive payment.  I describe the progress to date of Holdings’ attempts to sell Cerruti later in the judgment.

5.  The application for the appointment of provisional liquidators in Bermuda appears to have been driven by Holdings’ wish to adjourn the Petition and to bolster its application by offering the appointment of insolvency practitioners as some oversight over the process.  Although in the papers the provisional liquidators’ are described as having been appointed on a soft-touch basis it seems to me that certainly assessed by the criteria and principles applicable in Hong Kong this is also something of a misnomer.  Management of Holdings has been left in the hands of Holdings’ Board.  The provisional liquidators’ role is more in the nature of an independent financial adviser, who can report to the court its views on the progress of the sale of Cerruti, which is a process managed by the Board.  Essentially the procedure is in the nature of a debtor in possession process with a degree of court supervision assisted by the appointment of insolvency practitioners, who are not in any meaningful sense liquidators. Hong Kong does not favour debtor in possession processes.  The reasons for this and its impact on restructuring of insolvent companies are a matter to be considered in detail on another occasion, but I would note for the benefit of practitioners that the Hong Kong court is likely to look carefully in future at recognition (which has not been sought in the present case, which is of itself indicative that what Holdings is attempting to achieve is not properly characterised as a restructuring)  of foreign provisional liquidators appointed on such carefully circumscribed terms.

6.  Having clarified the nature of what Company is seeking I now turn to consider the principles that govern applications for an adjournment of a petition to allow time for the debtor to pay an undisputed debt.  It is not in dispute that a creditor is entitled to a winding up order ex debito justitae if a debtor fails to pay an undisputed debt, but that the court has a discretion to adjourn a petition in order to allow a debtor who claims that with time he will be able to pay the creditor the opportunity to do so.  What is in issue is the correct approach of the court to determining whether or not to grant an adjournment if the petitioner objects to a debtor being given more time.  There is a helpful discussion of the relevant considerations in Snowden J’s decision in In re Maud [1], which concerned personal bankruptcy, although in my view the same principles apply in corporate insolvency, albeit how they apply may differ because of the different character of the financial and commercial problems that arise in personal and corporate insolvency.

“99. At this juncture, I should refer to a further point concerning the adjournment of a winding up or bankruptcy petition that also featured in the judgments of the registrar and in the arguments of the parties. A practice exists under which the judge may exercise his discretion to adjourn the petition rather than make an immediate bankruptcy or winding up order on the basis that there are reasonable prospects of payment of the petition debt within a reasonable period. All practitioners who have cut their teeth on petitions day in the Companies Court or have appeared on bankruptcy petitions before the registrars will be familiar with this practice, and with the pleas made with varying degrees of effectiveness, ingenuity or desperation on behalf of debtors seeking time to pay undisputed debts.

100. The practice was described by Lewison LJ in Sekhon v Edginton [2015] 1 WLR 4435, paras 15–19:

‘15. [Insolvency] Rule 7.51A … provides that, with some exceptions, the CPR apply to insolvency proceedings with any necessary modifications, except so far as inconsistent with the Insolvency Rules. It seems to me, therefore, that in the case of a bankruptcy petition the jurisdiction to adjourn is now found in CPR r 3.1(2)(b).

16. There are, however, differences between insolvency proceedings and an ordinary civil action. First, insolvency proceedings are class actions designed to secure distribution of an insolvent’s assets pari passu between all his creditors. They are not merely a debt collection process. The primary purpose of the proceedings is to enable an independent person to ascertain and preserve the debtor’s assets and to achieve that pari passu distribution.

17. Second, the presentation of a petition has the effect that any disposition of property made without the consent of the court by a person who is subsequently adjudicated bankrupt is void: see Insolvency Act 1986, section 284. Accordingly, delay in dealing with a petition is liable to have adverse consequences for creditors generally: see In re A Debtor (No 72 of 1982); Ex p Mumford Leasing Ltd v The Debtor [1984] 1 WLR 1143 applied in Judd v Williams [1998] BPIR 88.

18. Against this background, the practice has evolved in relation to the grant of adjournments of bankruptcy petitions where the debtor asks for time to pay. The starting point is that, if the petitioning creditor establishes that the statutory conditions are fulfilled, he is prima facie entitled to a bankruptcy order: see In re A Debtor (No 452 of 1948); Ex p The Debtor v Le Mee-Power [1949] 1 All ER 652 and the In re A Debtor (No 72 of 1982) case, both referred to in Judd v Williams.

19. The court, of course, has the power to adjourn the petition, but the practice is to do so only if there is credible evidence that there is a reasonable prospect that the petition debt will be paid within a reasonable time. There are many statements to this effect in the cases of which the following recent ones are representative: “A debtor clearly has no right to an adjournment in these circumstances, although it may be that a court would grant one if he could produce convincing evidence that the debt would be paid within a very short period”: Anderson v KAS Bank NV [2004] BPIR 685, para 23, per David Richards J. “A petitioning creditor has a prima facie right to obtain a bankruptcy order on, as this was, a duly presented petition where the liability of the debtor for the petition debt is, as it is here, clearly established. Equally, the court hearing the petition has a discretion to adjourn the petition for payment if, but only if, there is a reasonable prospect of the petition debt being paid in full within a reasonable time: see In re Gilmartin (A Bankrupt) [1989] 1 WLR 513, 516 and much subsequent authority to a similar effect. There must be credible evidence to support such a prospect if the court is to grant an adjournment for payment”: Harrison v Seggar [2005] BPIR 583, para 7, per Blackburne J. “There is no doubt that the court retains a discretion not to make a bankruptcy order, even where the petition debt has been clearly established and any grounds of opposition have been dismissed. However, the authorities establish that in such circumstances the discretion to adjourn should only be exercised if there is a reasonable prospect of the petition debt being paid in full within a reasonable period … Furthermore … ‘There must be credible evidence to support such a prospect if the court is to grant an adjournment for payment’”: Ross v Revenue and Customs Comrs [2010] 2 All ER 126, para 72, per Henderson J. If the debtor does not produce any evidence of his ability to pay, he takes the risk that the court will not accept his bare assertion as to his means and ability to pay: see Dickins v Inland Revenue Comrs [2004] BPIR 718.

20. A decision whether or not to grant an adjournment is, of course, a discretionary case management decision and, consequently, the judge’s exercise of his discretion in this case cannot be impugned on appeal except on the usual grounds for impeaching a judicial exercise of discretion.’

101.  As the authorities cited by Lewison LJ make clear, this practice can be viewed either as the exercise of a general discretion of the court to refuse to make a bankruptcy order and/or as an exercise of the discretionary case management powers of the judge to adjourn the petition.  For reasons that I have already explained, it is almost always exercised at the behest of the debtor in situations where the petition is not otherwise opposed.  Moreover, as the authorities to which Lewison LJ referred demonstrate, it places the onus upon the debtor to produce evidence of his means and ability to pay, and requires the judge to form his own view of whether that evidence justifies giving the debtor a (limited)  period of time to pay.”

7.  A debtor has to put before a petitioner and the court a proposal for repayment, which is both precise and credible.  A debtor might, for example, 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 demonstrates that this is probable.  Saying, as in the present case, that I would like the petition adjourned for a period at the end of which I will come back to court and report on how things are going is obviously very different and if the criteria are as I describe them in the first sentence of this paragraph the Company has clearly not satisfied them.

8.  What the Court has been presented with is a justification for an adjournment, which elides different things: seeking time to pay a debt in full, restructuring a swathe of corporate debt with the support of some creditors and protection of creditors’ interests by the appointment of provisional liquidators.  This has tended to obscure the fact that in fact the Company in this Petition (and I apprehend Holdings in Bermuda)  are only really doing the first.  As I have already explained what is proposed is not properly characterised as a restructuring.  The provisional liquidators have been appointed on the application of Holdings after this Petition and Standard Chartered’s petition in Bermuda had been issued in order I think it might reasonably be assumed to bolster Holdings application for an adjournment.  Their appointment seems to have been of limited effect in protecting creditors’ interests as demonstrated by the fact that it having been brought to their attention that there are reasons to be concerned about the purchase of inventories by a subsidiary of the Company, which at least in part appears from an announcement by Holdings to have led to Pricewaterhouse Coopers resigning as auditors of Holdings at the end of March 2021, the provisional liquidators felt constrained yesterday to issue a summons in Bermuda to obtain access to the necessary documents to investigate the matter.

9.  Much weight was placed before me by Mr Lok on behalf of Holdings on the fact that the majority of the banking creditors supported a further adjournment of the Petition in Bermuda and that weight should be given to their views as Holdings say that the Company’s liquidation would end the attempts to resolve Holdings financial problems because the Company is a necessary part of the Holdings Group providing, and I simplify, logistical and data services.  I am inclined to agree with Mr Ho that the services that are described could easily have been migrated to another company if Holdings took the view that they are essential to the Group’s continued operation, but that seems to me to be a peripheral point.  The evidence filed by the Company and Holdings does not demonstrate that on the balance of probabilities the banks will be paid in full within a reasonable period.  Although Knight Frank have produced a valuation for Cerruti of HK$1.36 billion, which if received would be sufficient I was told to pay the banks (although there seems to be some question about the extent of Holdings liabilities over and above that amount)  the only offer that has been received is US$45 million (HK$351 million)  despite Holdings having had some time to find a buyer for a famous brand, with an established business with substantial retail outlets in the Mainland.  The other banking creditors of Holdings have been prepared to agree to a short adjournment, but even amongst those who have supported an adjournment to date there is some fracturing of positions with the Bank of China now beginning to take enforcement action in the Mainland.

10.  Holdings is the largest creditor of the Company and weight has to be given to their views, although regards needs to be had to the fact that Holdings is associated with the Company. The views of Holdings (as related parties of the Company)  may not be given the same weight as independent creditors: see for instance Re Lowestoft Traffic Services Co Ltd [2] in which Hoffmann J notes that it is “proper to discount the opposition of those opposing creditors who are clearly associated with the management of the company, particularly when, as in this case, it is said that the main reason why there should be an order for compulsory winding up is the necessity for an independent investigation into their management”.  However, as Harman J succinctly put in Re Medisco Equipment Ltd [3], “discounting his weight I believe to be proper; ignoring him I believe to be wrong”.  Ultimately, as I said in Re Lerthai Group Ltd [4], one looks at the reasons underlying the creditors’ views and considers the commercial reality of the case.

11.  Mr Lok having acknowledged that the weight to be given to Holdings’ wishes had to be discounted, argued that in so doing regard had to be had to the fact that Holdings’ wishes are consistent with those of the other banks.  I accept that this is to some extent true, but as I have explained their views are clearly not perfectly aligned.  The banks’ position is carefully hedged in terms of time. I think it reasonable for the court to proceed on the basis that the Board of Holdings’ views reflect a desire to protect the enterprise value of the business for the benefit of shareholders.  The banks desire the maximum recovery.  It may be that for a period those different interests have resulted in a common approach to the Bermuda proceedings, but I do not think that this justifies granting other than a short adjournment unless the court is satisfied that at the end of it, it is more likely than not that Standard Chartered’s debt will be paid in full.  I am not so satisfied.  I will make the normal winding up order.