RE THE HONG KONG AND SHANGHAI BANKING CORPORATION LTD

HCCW 303/2019 and
HCCW 304/2019
(Heard Together)

[2019] HKCFI 2767

HCCW 303/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 303 OF 2019

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COMPANIES (WINDING-UP) PROCEEDINGS NO 304 OF 2019

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(Heard Together)

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REASONS FOR DECISION

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1.  This matter first came before this Court, on an ex parte basis, on 14 October 2019 where The Hongkong and Shanghai Banking Corporation Limited (the “Petitioner”), as a major creditor of both Youyuan International Holdings Limited (“Youyuan”) and Sunwell Trading (HK) Company Limited (“Sunwell”), applied to appoint provisional liquidators into Youyuan and Sunwell (the “Companies”).

2.  The Petitioner has lent a total of HK$351 million to Youyaun. The loan is guaranteed by Sunwell.  Youyuan has defaulted on the loan and Sunwell has defaulted on the guarantee. The amount outstanding as of 4 October 2019 was HK$356,064,974.52.

3.  Mr Chan appeared for the Companies on short notice and has helpfully filed a Notes of Submissions.  In view of the seriousness of the application, I directed that the hearing be adjourned to 3 pm on 18 October 2019 so that the Companies would be in a position to file evidence to resist the application.  I reminded Mr Chan that if the Companies were not disputing the debt, then it follows that a usual winding-up order would be made and liquidators would be appointed.

4.  Before the hearing on 18 October 2019, the solicitors acting for the Companies indicated to this Court they have no further instructions to act for the Companies and no evidence was filed to oppose the application. Having considered the matter carefully, I made the orders appointing provisional liquidators into the Companies.  I now give my reasons.

Material facts

5.  Youyuan was incorporated in the Cayman Islands in October 2009 and was listed on the Hong Kong Stock Exchange (stock code: 2268) on 27 May 2010.  Its most valuable assets are its Mainland subsidiaries and its Hong Kong listing status.

6.  Youyuan’s principal business, conducted through its subsidiaries (the “Group”), is the manufacturing and selling of wrapping tissue paper and other finished paper products (such as wallpaper products, copy paper, paper towels, ivory boards and core boards).

7.  Sunwell was incorporated in Hong Kong in September 2005 and Youyuan is its ultimate parent.

8.  Sunwell’s principal business, conducted again through its three Mainland subsidiaries, is the manufacturing and selling of paper products, being part of the Group’s business.

9.  There is no dispute that the Companies’ indebtedness to the Petitioner arose under a facility agreement between the Companies and a group of six banks (the “Bank Group”) to which the Petitioner is the facility agent and liaison bank dated 1 April 2019 in respect of HK$351 million and US$90.5 million dual currency term loan facilities (“Facility Agreement”). 

10.  Under the Facility Agreement, Youyuan is the borrower and Sunwell is the guarantor.

11.  The Petitioner holds some security interests securing the Companies’ indebtedness to the Petitioner, but given the low value of the security interests, the Petitioner is massively under-secured.

12.  The Companies’ indebtedness to the Petitioner under the Facility Agreement amounted to HK$356,064,974.52 as of 4 October 2019 and is now overdue.

13.  Mr Ho for the Petitioner submitted that the Companies are at least cashflow insolvent because:

(1)  the Companies have defaulted on their obligations to the Bank Group under the Facility Agreement and failed to meet the Bank Group’s demand for repayment;

(2)  the Group’s factories have ceased operation and thus have no means of generating revenue for the Companies; and

(3)  Youyuan seems to be balance-sheet insolvent as well due to the Group’s admitted inability to provide funds to Youyuan by way of dividend.

14.  The Petitioner is concerned that the Companies have plunged into a palpable chaos as a result of the following incidents which also led to the Petitioner’s discovery of the cessation of the Group’s factories’operations and a suspected large-scale asset dissipation:

(1)  Youyuan’s share price plunged by about 86% in the morning of 19 August 2019.

(2)  At about 11 am on 19 August 2019, at the request of Youyuan’s board of directors, trading in Youyuan’s shares was suspended.  

(3)  On 5 September 2019, Youyuan announced that the drastic share price drop on 19 August 2019 was caused by lenders enforcing their security over shares in Youyuan which was granted by affiliates of Mr Ke Wentuo (“Mr Ke”) an executive director and chairman of Youyuan to secure margin loans provided to Mr Ke and others.

(4)  The Companies have committed multiple events of default under the Facility Agreement, with no remedy in sight.

(5)  The Group’s factories have ceased operation with apparently few employees left.  The factory closure is troubling because:

(a)  When the Petitioner conducted a site visit on 22 August 2019, the factories were still apparently operating as normal;

(b)  On 2 September 2019, Mr Ke informed the Petitioner that the factories’ operation had been suspended;

(c)  On 5 September 2019, Mr Ke informed the Petitioner that the suspension of the factories’ operations was to save costs, but assured the Petitioner that operations were due to resume on around 10 or 11 September 2019;

(d)  Despite Mr Ke’s assurances, the factories had not resumed operation as of 12 September 2019 when the Petitioner’s representative visited the factories.

(e)  The Petitioner was then informed that the factories would resume operation on 20 September 2019.  But the factories had not resumed operation as of 23 September 2019 when the Petitioner arranged another site visit by its affiliates’ Mainland employees.

(6)  In September 2019, Mr Ke informed the Bank Group that the Group’s cash reserve stood approximately at RMB 30 million, a reduction of approximately 95% from about RMB 600 million which the Group said it had as at 30 June 2019.  No explanation was given for the cash depletion despite demand from the Bank Group for an explanation.

(7)  Worse, in September 2019, Mr Wong Yat Sum (“Mr Wong”), the chief financial officer and company secretary of Youyuan informed the Bank Group that he in fact had no access to the Mainland subsidiaries’ financial information.  All the books and records were controlled by a Mr Jimmy Wang, the Group’s PRC financial controller.  However, Mr Wang has apparently resigned on 26 August 2019 and there is no replacement.

15.  Mr Ho for the Petitioner submitted that the current position appears to be that the Group’s operations have ceased, its cash and liquid assets have been dissipated and nobody within the Group has access to its true financial information.

16.  In view of the above developments, the Petitioner has legitimate concern that the Companies’ assets are at serious risk of dissipation and there is an immediate need for an independent investigation.

17.  The Hong Kong Stock Exchange has also imposed the following conditions which Youyuan must satisfy before the trading of its shares can be resumed:

(1)  publishing all outstanding financial results and report and addressing any audit modifications;

(2)  informing the market of all material information for Youyuan’s shareholders and investors so that they may appraise of Youyuan’s position; and

(3)  remedying the issues causing the Company’s trading to be suspended and fully complying with the listing rules to the Hong Kong Stock Exchange’s satisfaction.

Applicable legal principles

18.  It is well established that after the presentation of a winding- up petition and before the making of a winding-up order, the Court has jurisdiction to appoint provisional liquidators under section 193 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (the “Ordinance”).

19.  The principles governing the appointment of provisional liquidators have been compendiously set out in Re China Solar Energy Holdings Ltd (No 2) [2018] 2 HKLRD 338, Re Boldwin Construction Co Ltd [2003] 2 HKLRD 237 and Re Prudential Enterprise Ltd (No 2) [2003] 3 HKLRD 136.

20.  In summary, before the Court makes an order to appoint provisional liquidators, the Court needs to be satisfied that:

(1)  a good prime facie case for a winding-up order has been made out such that it is likely that, on the hearing of the winding-up petition, a winding-up order will be made (the threshold requirement); and

(2)  in the circumstances of the case it would be right that a provisional liquidator be appointed (the discretionary requirement).  The discretionary requirement can be satisfied if there is a need to safeguard against the risk of dissipation of the company’s assets or for any reason which the Court sees fit.  As to whether it is right for a provisional liquidator to be appointed in all the circumstances, this is to be decided on the basis of commercial realities, the degree of urgency and need established by the petitioner, and the balance of convenience according to the circumstances.

21.  Under section 327 of the Ordinance, the Court has jurisdiction to wind up a company incorporated outside Hong Kong. However, generally speaking, the Court would not exercise its discretion to do so unless the following three core requirements are satisfied:

(1)  there must be sufficient connection with Hong Kong which may, but does not necessarily have to, consist of assets within the jurisdiction;

(2)  if a winding-up order is made, there must be a reasonable possibility of benefit to those applying for the winding-up order; and

(3)  one or more persons interested in the distribution of the assets of the company must be persons over whom the court can exercise a jurisdiction.

22.  Recently, our Court of Appeal in China Medical Technologies, Inc v Samson Tsang Tak Yung [2018] HKCA 111 (CACV 197/2014, unreported, 28 February 2018), Barma JA at §20 said:

“ This passage indicates that, when considering a creditor’s petition to wind up a foreign company, the court should approach the exercise of its discretion to do so by reference to a single overarching question—whether there is a sufficient connection between the company and Hong Kong that would justify the winding up of the company in Hong Kong, thereby putting in motion the full machinery of winding up in respect of it, notwithstanding that the company was incorporated elsewhere. The three core requirements may thus, I suggest, be best understood as aspects of the enquiry into the sufficiency of the connection between the company and this jurisdiction. In that context, it is notable that the second requirement, that of likelihood of benefit to the petitioner from the making of a winding up order in Hong Kong, is described as a condition that is always necessary, and often sufficient. This indicates, to my mind, that there can, as the judge held, be cases in which the failure to satisfy the third condition will not be fatal to the making of a winding up order.”

23.  In deciding who should be appointed as provisional liquidator, the Court considers what is in the best interests of all parties interested in the winding-up.  The Court may decline to appoint any nominated provisional liquidator if his appointment conflicts or is likely to conflict with the best interests of the winding-up as a whole including the best interests of all parties concerned in the winding-up.  A guiding principle in appointing a provisional liquidator is that he must be independent and seen to be independent.  (See Re Orient Power Holdings Ltd [2008] 2 HKLRD 494 at §26 per Kwan J (as she then was).)

Applying the law to the facts

24.  It is clear to this Court that the Petitioner has made out a prima facie case that a winding up order will be made as there is no substantial dispute to a very substantial amount of debt.

25.  I am satisfied that there are legitimate concerns about a real risk of dissipation of assets which is a traditional ground that justifies the appointment of provisional liquidators.

26.  I am also satisfied that Youyuan has substantial connection in Hong Kong as a Hong Kong listed company.

27.  The fact that the Petitioner is a secured creditor does not prevent it from presenting a winding up petition.  (See Re IJ Langleb Ltd [1996] 4 HKC 68.)

28.  I also take into account the following matters:

(1)  There is a present need to appoint independent professionals to manage the Companies’ affairs, in particular, with a view to preserve the value of the Companies’ shareholdings in their various Mainland subsidiaries.  There is urgency in restoring the Mainland subsidiaries’ operations.

(2)  There is an urgent need to preserve the Group’s inventory which is primarily paper based.  There is a serious risk that if the inventory is not taken care of and/or sold promptly, it will perish and reduce the creditors’ recovery.

29.  On the facts and evidence as presented to this Court, this is an appropriate case to appoint provisional liquidators so as to preserve the commercial value of the Companies for the benefit of all the creditors of the Companies.

30.  As to the candidates, the Official Receivers have made some very apt and pertinent observations as to the qualification and suitability of two of the proposed candidates.  This Court agrees with the observations of the Official Receiver.

31.  The Petitioner duly took on board the Court’s concerns and proposed Ms Wing Sze Tiffany Wong and Mr Keith Andrew Williamson as joint and several provisional liquidators.  The Official Receiver has no objection to the same.

32.  Accordingly, I made an order appointing Ms Wong and Mr Williamson as the joint and several provisional liquidators on the terms of the draft orders as agreed to by the Official Receiver.

33.  I also ordered that the costs of the Official Receiver in the sum of HK$22,000 each in both Petitions to be paid by the Petitioner forthwith.  

34.  Finally, it remains for me to thank Mr Ho for the Petitioner for his helpful submissions.