XCHRX Re Chinese Books Cyberstore Ltd (in Creditors' Voluntary Liquidation)

HCCW 183/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.183 OF 2001

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DECISION

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1. This is an application by liquidators appointed in a creditors' voluntary winding-up for the Court's sanction of an agreement for the sale of virtually all the company's assets.

2. The application is made under s.255 of the Companies Ordinance under which a liquidator may apply to the Court to determine any question arising in the winding-up of a company or to exercise any of the powers which the Court might exercise if the company were being wound up by the Court. Under s.255(2), the Court, if satisfied that the determination of the question or the required exercise of the power will be just and beneficial, may make any order as it thinks just.

3. There is also an application that 2 vacancies in the Committee of Inspection not be filled up.

The Company

4. The company in question is Chinese Books Cyberstore Ltd ("the Company"). It was founded in 1997 as a Hong Kong-based internet retailer, selling Chinese books online to retailers and institutions. The Company has a substantial database of titles and a large membership base. It also has two subsidiary companies, CBC Two Ltd and CBC Talents Ltd which ran celebrity websites and a platform for the electronic delivery of books and music.

Liquidation

5. It appears that the Company suffered substantial losses and in August 2000, it entered into creditors' voluntary liquidation under s.228A Companies Ordinance. Mr Kennic Lui and Mrs Lauren Lau were appointed Liquidators.

6. At the 1st meeting of creditors on 29 August 2000, it was resolved that there should be a Committee of Inspection. There were 10 nominations for membership and 5 members were appointed.

7. Claims received from creditors were in the region of $36.7m (before adjudication). On top of this, claims from employees were about $5.6m. with about $1.5m of that sum being preferential claims.

Assets

8. The sums received by the liquidators have amounted to about $3.8m only, with receivables estimated at about $2m. A valuation of the tangible assets (being mostly books in stock) shows the fair market value at about $1.2m. and a forced liquidation value of about $400,000, subject to a disputed lien by warehousemen of about $500,000. There is also some computer equipment which is of apparently less value.

9. The value of this Company lies in its intangible assets. By reason of being the first mover in its field, it has become a "brand name" and it enjoys substantial traffic, serving a worldwide population in Chinese products not limited to books but also including VCDs and DVDs. Although no sales have been made since the liquidation, the websites are still running so as to maintain customer interest.

Offer

10. Various efforts have been made by the liquidators to interest potential buyers. Inquiries were received from 20 parties including some well-known international companies. However, only one offer has been received.

11. On 7 August 2000, a 1st offer was received from iTVentures Ltd, a company controlled by Mr Gabriel Yu Chi-ming. Mr Yu controlled the majority shares of the Company and its former management. This offer lapsed on 24 August 2000.

12. On 7 November 2000, another offer was made by iTVentures at $3.68m. This was considerably lower than the fair market value of the 100% equity interest in the business enterprise of the Company as valued by professional valuers instructed by the liquidators who reported in January 2001.

Constitution of Committee of Inspection

13. On 10 November 2000, the 2nd meeting of the Committee of Inspection was held. By this time, 2 of the original members had resigned, the 2 being suppliers who assigned their debts to Mr Yu in September 2000. This left a Committee of Inspection of 3 members, comprising Mr Yu's representative, a representative of a company also associated to Mr Yu, and Mr Peter Lo Yuen-wah, a representative of the employees.

14. At the 2nd meeting of the Committee of Inspection therefore, Mr Yu's 2 representatives were conflicted out, leaving only 1 remaining member. It was considered by the liquidators that there were 2 alternatives, one being to convene a creditors' meeting to appoint replacements so that there would be independent Committee of Inspection members, and the other being to apply to the Court for sanction of the sale pursuant to iTVentures' offer.

15. The liquidators took the view that they should take the second option, the reasons expressed at the meeting being:-

(1) that the offer price was far below the original professional valuation (this was presumably an oral valuation as the report was dated January 2001);

(2) the Committee of Inspection (even with additional members) might not form an opinion, in which event the liquidators would still have to apply to Court;

(3) the new appointments would have to be independent;

(4) the costs and time lag in organizing a creditors meeting.

16. Accordingly, the decision was taken not to convene a creditors' meeting for the appointment of replacement members to the Committee of Inspection.

Application to Court

17. An Asset Sale Agreement was entered into on 18 January 2001. Clause 2.3 provided that the obligations were conditional upon the liquidators obtaining the direction of the Court to sell the assets on the terms of the Agreement on or before 31 March 2001. The present summons was not issued until 22 February 2001, more than a month after the Asset Sale Agreement had been signed. It was fixed for hearing today. It was served on Mr. Lo, who has chosen not to attend.

Decision

18. It is clear that the proposed sale is extremely sensitive. It comprises all the assets of the Company, at a price far below the fair market value. I shall not disclose the forced liquidation value as valued by the professional valuers as it should be kept confidential, but it is clear that Mr Yu is offering a very low figure for a business which, through financing arranged by him, has been maintained (or at least partly maintained) as a going concern.

19. In this connection, I note that it has been confirmed by the liquidators in their draft 2nd affirmation that they had never discussed the professional valuation with Mr Yu's representatives nor had supplied a copy of the reports to them by reason of their conflict of interests.

20. Nevertheless, viewed from the eyes of the general body of creditors, Mr Yu, as former majority shareholder and management, would in effect be regaining the same company having, as it were, discharged the bulk of the company's debts at a substantial discount through the process of liquidation. I would emphasize that I am not passing judgment on any of Mr Yu's actions, but it is clear that there is a conflict of interests between his positions as potential purchaser and as creditor.

21. In a situation such as this, it is necessary in my view that the proposed transaction be made as transparent as possible. The general body of creditors had resolved at the 1st creditors' meeting to appoint a Committee of Inspection, thereby demonstrating the creditors' wish that their representatives be kept informed and consulted on the progress of the liquidation. The sale of the Company's assets being undoubtedly one of the most important aspects of the liquidation, it would in my view be wrong to exclude them from this process, especially when the proposed sale is in such sensitive circumstances.

22. The prudent course should be to convene a creditors' meeting for the appointment of replacement members of the Committee of Inspection, instead of an application to the Court served only upon one member of an inquorate Committee of Inspection.

23. On behalf of the liquidators, it is accepted that this could have been done after October 2000 when the 2 supplier creditors resigned from the Committee of Inspection, but it has been submitted that in any event, Mr Yu might have some potential influence over nominations to the Committee of Inspection or any creditors' meeting called to sanction the proposed sale. Mr Yu has control over 32% of the total liabilities of the Company. However it should be noted that at the 1st meeting of creditors, creditors representing some 87% of the total liabilities attended.

24. The liquidators have in their draft 2nd affirmation said that in their experience, fewer creditors attend subsequent meetings, so it might be the case that the creditors attending this time might represent less than 87% of the total liabilities. That however remains speculation in the circumstances of this case.

25. There is here a large number of creditors who make up 68% of the total liabilities of the Company who are not under Mr Yu's control. At the 1st meeting of creditors, 8 creditors apparently not connected with him nominated themselves to act as members of the Committee of Inspection. It is not, therefore, as if there had been any unwillingness on the part of unconnected creditors to serve on the Committee of Inspection, or any demonstration of such apathy that Mr Yu would be able to "steamroller" his proposed purchase through the Committee of Inspection.

26. Further, if creditors are made aware that a meeting was being convened for the appointment of replacement members of a Committee of Inspection who was to consider the sale of the Company's assets to a company connected with 2 out of 3 members of the existing Committee of Inspection, those creditors who are interested in protecting their rights would no doubt attend and act to protect their own interests.

27. Accordingly, in the exercise of my discretion in the light of the circumstances above, I would decline to make the order sought to sanction the Asset Sale Agreement at this stage. As I had indicated in the course of the hearing, the Court's doors are always open to liquidators to assist them in the performance of their duties, and if the liquidators consider that an application should be made for the Court to sanction the sale after replacements are appointed to the Committee of Inspection and after consultation with them, no doubt the Court would consider the application in the light of the evidence then available. However, at this stage, I consider that the just and beneficial administration of the liquidation lies in respecting the wishes of the general body of creditors in the appointment of a Committee of Inspection who should be left to perform its duties.

Order

28. I would make no order on paragraph 1 of this summons, with liberty to the liquidators to restore.

29. I would order, in respect of paragraph 2, that the two vacancies be filled pursuant to s.207(7) of the Companies Ordinance .

30. I would order that the costs of the application be costs in the liquidation.