RE BEAUTY CHINA HOLDINGS LTD

HCCW 364/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 364 OF 2009

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J U D G M E N T

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The Petition

1.  This is a creditor’s petition to wind up Beauty China Holdings Limited (“the Company”) presented by a syndicated group of lenders (“the Bank Syndicate”) comprising among others Industrial and Commercial Bank of China (Asia) Limited (“ICBC Asia”).

2.  The Company was incorporated in the Cayman Islands and its shares have been listed on the main board of the Singapore Exchange Securities Trading Limited. It was not registered under Part XI of the Companies Ordinance, Cap. 32. It is an unregistered company within the meaning of section 326, Cap.32.

3.  Pursuant to a letter of appointment dated 5 June 2008, ICBC Asia was appointed as the successor agent of a term loan facility dated 31 January 2008 (“the Loan Agreement”) in the sum of HK$135 million (“the Loan”) with an effective date from 5 July 2008. ICBC Asia was also appointed as a transferee of the Loan under a novation certificate dated 5 September 2008 by the Industrial and Commercial International Capital Limited.

4.  After the Loan Agreement was entered into, the Company repaid HK$2 million representing a partial repayment of the principal of the Loan.

5.  As at 6 March 2009, a total of HK$133,728,307.16, comprising the outstanding principal of HK$133 million with interest, was owed under the Loan Agreement.

6.  On 6 March 2009, the petitioners through their solicitors served a statutory demand pursuant to section 327(4)(a), Cap. 32 on the Company’s two last known addresses in Hong Kong. These addresses are Unit 1103, COL Tower, Wharf T&T Square, 123 Hoi Bun Road, Kwun Tong, Kowloon (“Unit 1103”) and Unit 1207, Telecom Tower, Wharf T&T Square, 123 Hoi Bun Road, Kwun Tong, Kowloon (“Unit 1207”).

7.  There is one supporting creditor, being the Standard Chartered Bank (Hong Kong) Limited, with the debt of HK$12,970,042.34 and US$767.39 with interest.

8.  The evidence in opposition came from an affirmation made by Wong Kin Tak, who is the company secretary of the Company, filed on 31 August 2009.

The grounds of opposition

9.  The Company raised two grounds of opposition.

10.  Firstly, the Company sought a 6-week adjournment for a potential investor, which is an investment bank, to complete its due diligence exercise on the Company which may lead to fund raising arrangements, to be implemented by the investment bank either underwriting a rights issue of the Company and/or investing in the Company by way of private placement of shares or convertible securities issued by the Company. Mr Wong deposed that 3 proposals had been made to the Company in this regard, one targeted at raising about HK$265 million and the other 2 each raising about HK$188 million.

11.  The identity of the investment bank was not disclosedin Mr Wong’s affirmation but the Companyhas disclosed this to the petitioners on 28 August and proposed to arrange direct negotiation between the petitioners and the investment bank. Mr Wong deposed that it is believed a serious negotiation is reasonably necessary and the prospect of reaching an agreement is positive. On that basis, at the last hearing of the petition on 31 August, the Company sought an adjournment of the petition for 6 weeks for due diligence to be completed and negotiation to be conducted between the investment bank and the petitioners.

12.  Ms Linda Chan for the petitioners informed the court at the last hearing although the petitioners do not know the details of the proposal to be put forward by the new investment bank, the petitioners are not interested in learning about any new proposal. The petitioners had already considered and rejected one restructuring proposal put forward by BNP Paribas in August 2009.

13.  The aggregate indebtedness owed to the petitioners and the Standard Chartered Bank is in excess of HK$145 million. The court is not told of the total liabilities of the Company but counsel for the Company has confirmed that the petitioners and the Standard Chartered Bank constitute the major creditors. As the petitioners and the Standard Chartered Bank are firmly disinclined to consider any new proposal from the Company, and they are clearly in the position to block any resolution required for restructuring by a scheme of arrangement, no purpose would be served by adjourning the petition.

14.  That being the stance taken by the majority of creditors, I indicated to counsel for the Company at the last hearing it is not necessary to consider whether the new proposal of the Company is viable or not as I was not inclined to grant any adjournment of the petition for that purpose. Iadjournedthe petition for 7 days to hear submissions on the other ground of opposition raised by the Company, which goes to the jurisdiction of the court to wind up this foreign company. Having ascertained from the Companyit has no further evidence to file in that respect, leave was given to the petitioners to file evidence in reply to Mr Wong’s affirmation, limited to the petitioners’ contention that it is appropriate for the Hong Kong court to exercise its winding-up jurisdiction against the Company.

15.  The petitioners filed an affirmation in reply being the 2^nd affirmation of Zeto Kam Tak.

16.  In his written submission for the adjourned hearing, Mr Adrian Lai,who appeared for the Company today, renewed the Company’s application for an adjournment of the petition for 6 weeks. He also sought to put in evidence by annexing to his submission two draft financial statements of the two Hong Kong subsidiaries of the Company, Colour Zone (H.K.) Limited (“Colour Zone HK”) and Kist Trading Limited (“Kist Trading”). I will take these draft financial statements into account.

17.  The renewed application for adjournment was made on the basis that after the last hearing, a director of the Company had a telephone discussion with ICBC Asia and the latter had told the Company if it has a firm repayment proposal, the Company may present the same to the court. Mr Lai suggested this appeared to indicate a softening in the petitioners’ position and the petitioners might be willing to consider a concrete proposal of the Company. I am quite unable to see it that way. Ms Chanhas confirmed to the court today that the position of the petitioners remains unchanged, the petitioners are not prepared to consider any new proposal of restructuring of the Company.

18.  It must be borne in mind that the statutory demand was served in early March 2009. The Company has had 5 months to put forward rescue proposals to its creditors. I note from its annual reportthe measures taken by the Company in this regard. At the request of the Company, the petitioners had agreed to a standstill until 27 April 2009 to allow the Company to proceed with negotiations with potential investors. Thepetition was presented only on 18 June. The Company had appointed BNP Paribas in mid May 2009 as the financial adviser to assist the Company to review all strategic options. As mentioned earlier, the proposals for restructuring put forward with the assistance of BNP Paribas were rejected in August 2009. With this background, it is understandable why the petitioners have declined to consider any new proposal from the Company.

19.  I refuse the application of the Company to adjourn the petition.

20.  I turn to consider the other ground of opposition taken by the Company, which is that the Hong Kong court should decline to exercise its winding-up jurisdiction againstthis foreign company.

The applicable legal principles

21.  The court has jurisdiction to wind up an unregistered company by the power conferred in section 327(1). I have considered the cases cited by Ms Chan and Mr Lai regarding the principles to be observed in considering whether it is appropriate to exercise this jurisdiction to wind up an unregistered company. I do not propose to enumerate these cases or set out the particular passages relied on by counsel.

22.  There are 3 core requirements, as formulated by Knox J in Re Real Estate Development Company [1991] BCLC 210 at 217c to d and approved by the Engish Court of Appeal in Stocznia Gdanska SA v Latreefers Inc. (No. 2) [2001] 2 BCLC 116 at paras. [27], [30] and [31]. These principles have been applied in Hong Kong, see for instance, Re Zhu Kuan Group Company Limited, HCCW No. 874 of 2003, 2 August 2004, Barma J, paras. 22 to 26.

23.  These core requirements are:

(1) there had to be a sufficient connection with Hong Kong, but this did not necessarily have to consist in the presence of assets within the jurisdiction;

(2) there must be a reasonable possibility that the winding-up order would benefit those applying for it; and

(3) the court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets.

24.  There is no dispute requirement (3) is satisfied here. The court is able to exercise jurisdiction over some if not all of the petitioners and the supporting creditor, Standard Chartered Bank.

Sufficient connection with Hong Kong

25.  In Mr Wong’s affirmation, he asserted that the Company “has no business in Hong Kong and no assets” and “the address to which the petition was served is only a correspondence address of the Company in Hong Kong”.

26.  It must be borne in mind the Company was and is an investment holding company. It does not directly carry out any manufacturing or trading activity. It has a number of wholly-owned subsidiaries incorporated in the British Virgin Islands, Macau, Hong Kong, the PRC and Samoa and some of these subsidiaries are engaged in the manufacturing and trading of cosmetic products.

27.  I find on the evidence the Company has maintained an office in Hong Kong and has carried on business at such office. Mr Wong’s assertion that the address was only a correspondence address is not borne out by the evidence.

28.  In its annual report for the year ended 31 December 2007, the Company informed the public that its “head office” and “principal place of business”was situated at Unit 1103 and that the principal activity of the Company was investment holding. In its annual report for 2008, it was stated that the Company’s “head office” and “principal place of business” was at Unit 1207.

29.  According to the Loan Agreement, the Company had an office in Hong Kong at Unit 1103 and according to the minutes of the board meeting of the Company dated 31 January 2008 provided to the Bank Syndicate at the time the Loan Agreement was entered into, the Loan Agreement had been considered and approved at a board meeting of the Company attended by 7 directors held at Unit 1103. In the fax dated 26 September 2008, the Company informed ICBC (Asia) the “business address” of the Company would be changed, with effect from 2 October 2008, to Unit 1207.

30.  The address at Unit 1207 is the only available address of the Company provided in the Company’s website.

31.  When the petition was served at Unit 1207 on 19 June 2009, service was accepted by a female staff who provided the process server with a name card of the chairman and managing director of the Company.

32.  There are other matters of note in the 2007 annual report of the Company denoting its connection with Hong Kong. It stated that the Company’s products were available in more than 30 Sa Sa stores in Hong Kong and Macau. In the section headed “Brand positioning”, the Company was described as a “Chinese cosmetics company led by Hong Kong management and local experts”. Under “Growth Strategies”, it was stated that as at the end of December 2007, the Company had successfully forayed into the OEM business (i.e. Original Equipment Manufacturing business) with 5 new customers from, among other places, Hong Kong.

33.  In both the 2007 and 2008 annual reports, 3 banks were named as principal bankers of the Company, and two of them were banks in Hong Kong.

34.  The Loan Agreement, for the substantial sum of HK$135 million and which gave rise to the petitioning debt, was prepared by solicitors in Hong Kong, and negotiated and approved by the Bank Syndicate and the Company in Hong Kong. Pursuant thereto, the Loan was advanced by the Bank Syndicate in Hong Kong by way of remittance to the agent via Clearing House Automated Transfer System operated by the Hong Kong Interbank Clearing Limited to a bank account in Hong Kong as directed by the Company. The governing law of the Loan Agreement is Hong Kong law and the Company agreed that any legal action or proceedings arising out of or relating to the Loan Agreement may be brought in the courts of Hong Kong and it irrevocably submits to the non-exclusive jurisdiction of the Hong Kong courts.

35.  Other than the petitioning creditors, the Company has at least one major creditorin Hong Kong being the Standard Chartered Bank. I do not accept Mr Lai’s submission the transaction under the Loan Agreement was the only transaction the Company had ever transacted in Hong Kong. It is clear from the annual report in 2008 that the majority of liabilities to bank creditors was owed to the Bank Syndicate and the Standard Chartered Bank in Hong Kong.

36.  Furthermore, as mentioned earlier, the Company has two wholly-owned subsidiaries incorporated in Hong Kong - Colour Zone HK and Kist Trading. Both were audited by auditors in Hong Kong.

37.  In the 2007 annual report of the Company, Colour Zone HK was stated to be a “significant subsidiary” and its principal activity was the trading of colour cosmetic products. The Company was stated to have given letters of financial support for four subsidiaries with a total net deficit of HK$44 million to continue to operate as a going concern and one of them was Colour Zone HK. In the 2008 annual report, Colour Zone HK was not stated to be a significant subsidiary but its principal activity has remained unchanged.

38.  As for Kist Trading, its principal activity as stated in the 2007 annual report was the trading of cosmetics and skin care products. In the 2008 annual report, this company was stated to be dormant.

39.  Both Hong Kong subsidiaries used Unit 1103 and later 1207 as its registered office. The managing director of the Company is a director of these subsidiaries.

40.  Mr Lai submitted there are jurisdictions which have more substantial and clearer connection with the Company such as the PRC or the Cayman Islands. This was because business was conducted in the PRC and the Company was incorporated in the Cayman Islands. Ido not agree with this. The Company’s business was investment holding, not trading or manufacturing which was conducted in the PRC. Other than being the place of incorporation, it was not suggested the Company has any connection with the Cayman Islands.

41.  I am satisfied on the evidence before me the Company does have sufficient connection with Hong Kong to justify the Hong Kong court setting in motion its winding-up procedures. The 1^st core requirement is satisfied.

Reasonable possibility of benefit if the Company is wound up

42.  I turn to the 2^nd core requirement.

43.  Mr Lai submittedthere is no reasonable possibility that the petitioners or any other creditors would benefit from the winding-up process in Hong Kong by reason of the following matters:

(1) apart from owning two subsidiaries incorpotated in Hong Kong, the Company maintains no assets or any bank deposits in Hong Kong;

(2) the Hong Kong subsidiaries are virtually worthless. According to the draft financial statements of Colour Zone HK, its liabilities far exceeded its assets in that the accumulated losses as at December 2008 amounted to HK$55 million odd;

(3) there is no suggestion there are affairs to be investigated by the liquidators in Hong Kong or that the winding-up process in Hong Kong would facilitate the investigation in other jurisdictions.

44.  Ms Chan pointed to a statement in the 2008 annual report that the Company was holding HK$70 million odd being cash and cash equivalents and pledged time deposits in Hong Kong dollars and submitted this showed the Company does have assets within the jurisdiction.

45.  I have difficulty about that. The fact that cash, cash equivalents and pledged time deposits were held in Hong Kong dollars does not necessarily mean these assets were held in Hong Kong. Besides, even if such assets were held in Hong Kong as at 31 December 2008, it is not known if these liquid assets have since been moved out of the jurisdiction. Mr Wong has asserted in his affirmation the Company has no assets in Hong Kong.

46.  The position about Colour Zone HK, an indirect wholly owned subsidiary of the Company, is somewhat different. Accordingto the draft financial statements as at December 2008, Colour Zone HK has a wholly owned subsidiary in the PRC, Zhuhai Handsome Jingxi Cosmetics Technology Development Company Limited, withthe paid-up share capital of HK$20 million, and it was engaged in the principal activities of the provision of technology support, quality control and marketing services. Although an impairment loss in this subsidiary was provided for in the draft financial statement, no explanation was given for this.

47.  Colour Zone HK has also among its current assets, amounts due from fellow subsidiaries of HK$6.3 million odd. It has cash and cash equivalents of HK$1.6 million odd according to the draft financial statement.

48.  I do not accept Mr Lai’s submission this company is virtually worthless. The fact that the liabilities of this subsidiary exceed its assets does not mean there is no prospect of some recovery for creditors of Colour Zone HK.

49.  Among the current liabilities of Colour Zone HK, there was an amount due to its immediate holding company, which is a BVI company, of HK$52 million. The BVI immediate holding company is wholly owned by the Company.

50.  Ms Chan also pointed out the significant subsidiary of the Company according to the 2008 annual report is a company in Zhuhai engaged in the manufacturing of cosmetics skin care products witha registered capital of HK$70 million. She submitted it would be expedient and effective for the administrationof the estate of the Company if a winding-uporder is made in Hong Kong and liquidators are appointed here in view of the proximity of Hong Kong to Zhuhai City.

51.  In view of this and there is some prospect of recovery by the Company as a creditor of Colour Zone HK, I am inclined to think there is reasonable possibility of some benefit accruing to creditors from a winding-up order in Hong Kong.

52.  I am persuaded it is appropriate in all the circumstances to exercise jurisdiction of this court to wind up the Company.

53.  I therefore make a winding-up order. The petitioners’ costs are to be paid out of the Company’s assets.