RE APP (HONG KONG) LTD

HCCW 1130/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1130 OF 2003

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J U D G M E N T

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1. This is the adjourned hearing of a creditor's petition to wind up APP (Hong Kong) Limited ("the Company"). The petition has been adjourned on four previous occasions since it was first heard before a master on 3 December 2003. The debt of the petitioning creditor, American Home Assurance Company ("the petitioner"), is not in dispute. The only question is whether the petition should be further adjourned to allow the Company to proceed with the necessary measures to obtain the requisite majority of votes in favour of a scheme of arrangement with its creditors and then to seek the sanction of the court to the scheme. The Company has issued an originating summons on 16 February 2004 to convene a meeting of creditors for this purpose. On 24 February 2004, that application was adjourned sine die at the request of the Company with liberty to restore pending the resolution of the question if the winding-up petition should be further adjourned.

2. The petitioner's stance is that no further adjournment of the petition should be granted and the Company should be wound up forthwith as it is unlikely that the court would sanction the scheme of arrangement for these reasons:

(1) the Company can only secure a statutory majority in favour of the scheme by virtue of creditors related to the Company and/or the investor voting in its favour;

(2) these related parties have a special interest in promoting the scheme, other than maximising the recovery of their own debts;

(3) the Company has failed to provide full and candid information to the creditors about the special interest of the related parties and other material matters; and

(4) in the circumstances, the court would discount or disregard the votes of the related parties as their views cannot be regarded as fairly representative of the class in question.

3. At the outset of the hearing, I have rejected an application made by Mr Charles Manzoni on behalf of the Company to adjourn the petition for seven days to allow the Company an opportunity of filing evidence to rebut some of the allegations in the latest affirmation filed by the petitioner on 24 March 2004. A pertinent consideration was the indication from the petitioner's counsel Mr Jonathan Harris that he would be prepared to abandon reliance on certain parts of the petitioner's latest affirmation for the purpose of this hearing. I therefore ordered the petitioner to withdraw that affirmation and to file a fresh affirmation with those parts removed. I also allowed the Company to rely on an affirmation made by one of its directors on the basis that the properly affirmed version is to be filed within seven days. The petitioner and the Company have duly filed these affirmations after the hearing.

The background

4. I will first set out the background matters.

5. The Company was established in Hong Kong on 15 August 1997 with an authorised capital of HK$78 million, consisting of 78 million ordinary shares of HK$1.00 each, all of which have been issued and are paid up. It is a substantially wholly owned subsidiary of PT Purinusa Ekapersada ("Purinusa"), a company incorporated in Indonesia. About 98% of the issued share capital of Purinusa is directly and indirectly owned by Asia Pulp and Paper Company Limited ("APP"), a company incorporated in Singapore. APP is the holding company of a group of companies ("the APP Group") engaged in pulp and paper manufacture and distribution and situated, inter alia, in Singapore, Malaysia, Indonesia, the People's Republic of China, Australia, the United Kingdom and the United States. In 2002, the APP Group was one of the largest pulp and paper producers in the world, producing more paper than any other company in continental Asia.

6. The APP Group operated production facilities in Indonesia through four principal Indonesian operating companies - PT Indah Kiat Pulp & Paper Tbk, PT Pabrik Kertas Tjiwi Kimia Tbk, PT Pindo Deli Pulp and Paper Mills, and PT Lontar Papyrus Pulp & Paper Industry (collectively, "the PIOCs") and in China through four principal operating companies incorporated in that country (collectively, "the PCOCs"). The PIOCs have given notice of intention to appear and to oppose the petition and they appeared by Mr Richard Zimmern at this hearing. Apart from the PIOCs, there are two other opposing creditors which have given notice of intention to appear. They are APP China Trading Limited and Lucky Ever Limited. These companies are substantially owned by Purinusa and have directors in common with the Company. They appeared by Miss Teresa Wu at this hearing.

7. Between 1998 and August 2002, the Company operated as the Hong Kong trading and distribution arm for the APP Group. In August 2002, the Company ceased trading on its own account, changed its management and reduced its workforce. It has since been engaged in providing administrative and support services for other companies in the APP Group.

8. The APP Group had embarked on an aggressive expansion programme between 1994 and 2000 and issued about US$7.5 billion in bonds, notes and preference shares. There were also borrowings from banks in many countries. By late 2000 and early 2001, the liquidity of APP, its operating subsidiaries and the APP Group as a whole was materially and adversely affected.

9. On 12 March 2001, APP and its subsidiaries announced a standstill on the payment of principal and interest on their outstanding financial indebtedness, excepting certain payment obligations to suppliers and trade creditors and certain providers of short-term working capital facilities. From March 2001 to mid 2002, APP engaged in discussions with its creditors in an endeavour to negotiate an overall restructuring plan for the APP Group.

10. Due to the disparate nature of the debt and creditor profile of the APP Group, the diversity of applicable laws from different jurisdictions governing the companies and their creditors, and the difficulties this created in terms of negotiating an overall restructuring, the initial approach of attempting a comprehensive consensual restructuring of all of the debts of APP and the APP group of companies simultaneously was abandoned. From mid 2002, restructuring discussions have focused on (1) the PIOCs; and (2) the PCOCs and their holding companies on an entity-by-entity basis.

11. On 30 October 2003, Master Restructuring Agreements ("the MRAs") in respect of the PIOCs were signed by the PIOCs, the Indonesian Bank Restructuring Agency, the Export Credit Agencies of the governments of Germany, Austria, Canada, Spain, Sweden, Italy, France, Denmark and Finland, a number of Japanese trading houses and financial institutions including ABN AMRO Bank NV and Bayerische Hypo-und Vereinsbank AG. They represent about 40% of the eligible creditors. Certain creditors of some of the PIOCs, including the Export-Import Bank of the United States, have refused to sign the relevant MRAs. The majority of creditors of each PIOC comprise bondholders; they have not been afforded the opportunity to accede to the relevant MRA, due to securities law requirement in the United States that must be fulfilled before an exchange offer can be made in relation to their existing PIOC debt. Unless such threshold is reduced, the MRAs will not become effective until acceded to by 90% of their respective eligible creditors or as otherwise provided in the MRAs or by law. It is estimated that the combined debt of the PIOCs which is eligible to be restructured under the MRAs will be approximately US$7 billion.

12. On 7 November 2003, a scheme of arrangement ("the Bermuda Scheme of Arrangement") was approved by the Supreme Court of Bermuda in respect of the debts of APP China Group Limited ("APPCGL"), an intermediate holding company of the companies within the APP Group incorporated in China (including the PCOCs, collectively "the PRC Companies"), pursuant to which the creditors of APPCGL (including noteholders holding US$344 million in principal amount of guaranteed senior discount notes issued by APPCGL and other creditors holding approximately US$141 million in debt) will exchange their debt for new shares comprising 99.9% of the total issued share capital of APPCGL. Following the issue of new shares pursuant to the Bermuda Scheme of Arrangement, APP will no longer be the ultimate controlling shareholder of the PRC Companies, although APP's ultimate controlling shareholder (in their capacity as shareholders of creditors of APPCGL) are indirectly entitled to a substantial shareholding in APPCGL as a result of the Bermuda Scheme of Arrangement.

13. The implementation of the Bermuda Scheme of Arrangement and the finalisation of the MRAs have cleared the way for the resumption of discussions with creditors with respect to the restructuring of the outstanding indebtedness of the PCOCs. Restructuring negotiations with creditors of the PCOCs are due to be held in early 2004.

14. The petitioner, which is an insurance company, insured APP International Trading (V) Limited ("APPIT(V)") against the risk of default in payment of trading companies in the APP Group in respect of certain export trade financing transactions. APPIT(V) is a special purpose company incorporated in the Cayman Islands under a structured finance transaction, pursuant to which (i) goods were sold by the PIOCs to APPIT(V) and on-sold to the trading companies in the APP Group, including the Company, in 2000 and 2001; (ii) the receivables of APPIT(V) were assigned to the lenders; (iii) the funds were advanced by the lenders against the security of the receivables pursuant to a loan facility; (iv) the funds advanced were used to pay the PIOCs for the goods supplied; and (v) the petitioner insured APPIT(V) against the risk of default in payment by the trading companies and the risk of default in payment by APP as guarantor. APPIT(V) has at no time been a member of the APP Group. It is the only supporting creditor that has given notice of intention to appear in the petition and has also appeared by Mr Harris in this hearing.

15. The export trade financing transaction involving APPIT(V) has been terminated. Claims have been made by APPIT(V) and the underlying financial institutions against the petitioner under the insurance policy. In respect of some of these claims, the petitioner has made a settlement payment to APPIT(V) and the financial institutions and, in return, taken an assignment of all sums of money now due, or to become due, from certain trading companies, including the Company, under certain identified invoices. The debt of the Company which has been assigned to the petitioner pursuant to a Release and Assignment Agreement dated 20 June 2002 is US$3,432,932.67, and forms the subject of these winding-up proceedings. A statutory demand was served by the petitioner on the Company on 28 August 2003 for JPY485,662,902.00 and the petition herein was presented on 8 October 2003.

16. There remains other claims made by APPIT(V), and/or the underlying lenders, against the petitioner under the insurance policy. On 22 October 2003, a writ of summons was served on the Company by APPIT(V) in relation to the Company's alleged role in the application of the amount of US$24,284,513.00 payable to APPIT(V) at the direction of APP ("the APPIT(V) Claim"). The APPIT(V) Claim is disputed by the Company.

17. It is not in dispute that the Company is massively insolvent. The Company's assets comprise substantially trade receivables and other amounts due from companies in the APP Group and other related parties, and the recoverability of such amounts is uncertain. On its own evidence, the Company's debts amount to between HK$767,561,072.00 and HK$1,194,328,264.00 and its recoverable debts are a small percentage of this amount. Members of the APP Group and other related parties hold a very substantial portion of the unsecured indebtedness of the Company. The Company has no secured indebtedness.

The proposed scheme of arrangement and in-principle support

18. The Company has proposed a scheme of arrangement under section 166 of Cap. 32, the essential elements of which may be stated as follows:

(1) All unsecured creditors of the Company, with the exception of four claims specifically excluded, will be bound by the scheme. The excluded claims are: obligations of the Company arising out of a settlement agreement dated 22 August 2002 or the underlying financing transaction to which it relates involving APP International Trading (VI) Limited, another special vehicle incorporated by the APP Group with certain banks; claims in respect of rent payable by the Company; claims in respect of wages or benefits due to employees of the Company or in respect of Mandatory Provident Fund contributions; and amounts owed in respect of taxes by the Company.

(2) All unsecured creditors are invited to file notices of claim, which will be determined by the scheme administrator, and either admitted or rejected.

(3) All disputes concerning the admissibility of the debts will be determined by the scheme adjudicator.

(4) In consideration of the discharge and settlement in full of all admitted claims, creditors will have a choice to take immediate cash payment of either HK$0.10 for every HK$1.00 of their admitted claims or one new share of par value HK$1.00 for every HK$1.00 of their admitted claims, such share to rank pari passu to the existing shares.

(5) All costs of the scheme and the scheme consideration will be new money, paid by the "controlling shareholders", who are defined in the scheme documents as the members of the Widjaja family who exercise, directly or indirectly, control of APP.

19. The Company has recommended acceptance of the proposed scheme on the basis that the value of the scheme consideration is significantly greater than the return which creditors could expect in a winding up. The Company believes that the recoverability of its receivables, which comprise 99% of its total assets, would not exceed 5% in a liquidation of the Company. The rate of recovery in a liquidation has been estimated by the Company to be in the range of 2.6% to 4%. For creditors who elect to receive new shares in the Company, they have the prospect of receiving dividends from distributable profits as the Company intends to pursue a strategy for revenue generation based on income derived from the provision of management, administrative and other support services to other members of the APP Group and related parties. It is envisaged that the ongoing process of negotiating and implementing restructurings across the APP Group would have the effect of gradually stabilising and normalising operations. Further, the PRC Companies are planning to add significant production capacity in Hainan and Ningbo.

20. The Company has on 29 January 2003 sent letters to all creditors informing them of the main terms of the proposed scheme and seeking in-principle support. Of the 18 known creditors listed in the 2nd affirmation of Ooi Kim Hock filed on behalf of the Company on 17 March 2004 (including the APPIT(V) Claim, which is disputed by the Company), 12 are related to the Company in that they are either members of the APP Group or the PRC Companies. 15 creditors have responded. 11 creditors, all related to the Company, provided letters of in-principle support; two creditors, not related to the Company, gave verbal support; one unrelated creditor (the Bank of East Asia Limited), stated that it is in the course of reviewing the subject matter and in view of the limited information supplied, is not in a position to indicate whether to give in-principle support; one unrelated creditor (the petitioner) does not support the scheme. Based on the various debt scenarios, the existing in-principle support ranges between 73.18% and 91.62%.

The legal principles

21. Mr Manzoni submitted that at the present stage, the court should only look to the in-principle support of the creditors for the proposed scheme, and should not look beyond and into the prospects of obtaining sanction for the scheme. By way of example, he cited Re UDL Holdings Ltd (No. 1) [1999] 3 HKC 210, in which the court declined to make a winding-up order as the court was satisfied on the evidence that "a substantial majority of the creditors of the company have expressed in principle support for the scheme and there are at least reasonable prospects of the scheme obtaining the approval of the requisite majority" (at 219D to E). This was the case even though there were substantial arguments as to whether the scheme would obtain approval at the sanction hearing (see Re UDL Holdings Ltd (No. 3) [2000] 3 HKC 405). Mr Manzoni submitted that if it were otherwise, the company would be put in an impossible position to respond on behalf of the creditors who have not voted on the scheme. Creditors may be less inclined to appear at this early stage, when they have not voted in favour of the scheme. It cannot be assumed that the company can speak on their behalf at this stage. Further, the court would be asked to predict how it might react to an unknown set of circumstances, evidence and submissions on the future occasion of the sanction hearing when interested parties would appear. It is therefore inappropriate to consider sanction questions at this hearing.

22. I see the force of this submission, but I do not think the court should adopt such a rigid approach of never looking beyond the in-principle support and into the prospects of obtaining sanction for the proposed scheme when considering whether a winding-up order should be made. The present hearing is not a "dry run" of the sanction hearing for the scheme, but if a sufficiently clear case could be made out that the proposed scheme is not viable, I see no objection in principle why the court should not look into the prospects of obtaining sanction in considering if a winding-up order should be made.

23. Mr Manzoni's fallback argument is that if the court should look towards the sanction hearing, the threshold over which the company must pass should be relatively low: provided it is reasonably arguable that sanction would be obtained, the court should decline to wind up the company and adjourn the petition. Further, in this instance, as it is the petitioner's contention that it is not reasonably arguable that sanction would be granted, it is for the petitioner to make good that contention. In support of this argument, he has prayed in aid the dictum of Willmer LJ in Re P & J Macrae Ltd [1961] 1 All E R 302 at 307H:

"I have no doubt that, where a majority of creditors do for good reason oppose a petition for the winding-up of a company, then prima facie they are entitled reasonably to expect that their wishes will prevail, in the absence of proof by the petitioning creditor of special circumstances rendering a winding-up order desirable in spite of their opposition."

(See also Re UDL Holdings Ltd (No. 1), supra. at 217F to 218E).

24. Mr Manzoni submitted that in this instance in-principal support for the proposed scheme is, ipso facto, a valid and sufficient reason why the wishes of the majority should be given effect (Re UDL Holdings Ltd (No. 1), supra. at 218F). Moreover, the Company has shown good reason by reference to the financial evaluation between liquidation and the scheme as mentioned earlier. It therefore becomes incumbent on the petitioner to show some special reason why it is entitled to a winding-up order despite the opposition of the majority.

25. Mr Harris urged the court to take a rather different approach. He submitted that the onus on a company seeking an adjournment of a petition to carry out a restructuring proposal is a high one. In support of this, he cited two judgments of Le Pichon J (as she then was) in Re Golden Dragon Development Ltd, HCCW No. 236 of 1999, 16 July 1999 and Re Hong Kong Brewing & Restaurants Ltd, HCCW No. 664 of 1999, 8 November 1999. I am unable to find any direct support in these judgments for this submission of Mr Harris.

26. I would accept Mr Manzoni's fallback argument. What the company is required to demonstrate on the evidence for present purpose has been expressed in various terms: "reasonable prospects of the scheme obtaining the approval of the majority" (Re UDL Holdings Ltd (No. 1); "the makings of a viable scheme with evidence of adequate support (both in number and value)" (Re Golden Dragon Land Development Ltd); "the framework of a viable restructuring ... and it had the 'in principle' support of a significant majority of the creditors who wished to see the restructuring proposal proceed further" (Re Hong Kong Brewing & Restaurants Ltd). I do not think the onus on the company to establish the viability of a proposed scheme at the present stage of the proceedings is unduly high.

Creditors with special interest

27. The main issue raised by the petitioner here is that the in-principle support of the parties related to the Company should be disregarded. This is different from the contention that the related parties should constitute a different class to the non-related parties for the purpose of the scheme meeting that may be convened. The latter contention would be reserved to the sanction hearing of the scheme.

28. Mr Harris placed reliance on the judgment of the Court of Final Appeal in UDL Argos Engineering & Heavy Industries Co. Ltd & Ors. v. Li Oi Lin & Ors. [2001] 3 HKLRD 634. In setting out the principles concerning the constitution of classes in paragraph 27 of the judgment, Lord Millett had this to say at 647J to 648B:

"The Court will decline to sanction a Scheme unless it is satisfied, not only that the meetings were properly constituted and that the proposals were approved by the requisite majorities, but that the result of each meeting fairly reflected the views of the creditors concerned. To this end it may discount or disregard altogether the votes of those who, though entitled to vote at a meeting as a member of the class concerned, have such personal or special interests in supporting the proposals that their views cannot be regarded as fairly representative of the class in question." (emphasis supplied)

29. In Re BTR plc [2000] 1 BCLC 740, Chadwick LJ made similar statements as follows at 747g to 748b:

"The way in which Parliament's intention is to be given effect - as it seems to me and as it has seemed to judges over the century or so since Bowen LJ considered the matter in 1892 - is that the court is not bound by the decision of the meeting. A favourable resolution at the meeting represents a threshold which must be surmounted before the sanction of the court can be sought. But if the court is satisfied that the meeting is unrepresentative, or that those voting in favour at the meeting have done so with a special interest to promote which differs from the interest of the ordinary independent and objective shareholder, then the vote in favour of the resolution is not to be given effect by the sanction of the court. That, as it seems to me, is the check or balance which Parliament has envisaged. Further, that, as it seems to me, is the only practical check that can be imposed in circumstances where, as Jonathan Parker J pointed out, it is a fact of life that shareholders having shares which confer the same rights under the company's constitution and under the scheme may, nonetheless, be motivated to vote in different ways. ... Parliament has recognised that it is for the court exercising the function described by Jonathan Parker J to hold the ring between different interests; and to decline to sanction a scheme if satisfied that members having one interest have sought to take advantage over those having another ..." (emphasis supplied)

30. Mr Harris also made reference to Buckley on the Companies Acts, 2000 edition, paragraphs [425.53] and [425.54] on the exercise of the discretion whether to sanction a scheme. He submitted that the available evidence points to the "compelling conclusion" that the related parties will vote in favour of the proposed scheme for reasons other than a desire to maximise the recovery of their own debt. In support of this, the petitioner made the following points:

(1) Two of the substantial creditors, APP China Trading Limited (with an anticipated claim of HK$477,714,239.89) and Lucky Ever Limited (with an anticipated claim of HK$87,571,737.88) have common directors with the Company. A lesser creditor, Vestwin Industrial Limited (with an anticipated claim of HK$2,331,989.00) also has a director in common with the Company. 12 out of the 18 creditors are related to the Company in that they are either members of the APP Group or the PRC Companies. Of the letters of support exhibited by the Company, the letters of APP China Trading Limited, Lucky Ever Limited, APP International Trading (China) Limited and Vestwin Industrial Limited were all signed by Ooi Kim Hock, who is the general manager of the Company. It is unrealistic to expect the related parties to make independent decisions whether to support the proposed scheme and the Company's assertion that these related parties would not be influenced by the interests of the APP Group as a whole is not credible.

(2) It would make no difference to these related parties whether they receive 10 cents or 50 cents in the dollar under the scheme. It would however help the APP Group if it can minimise the amount it has to pay to third party creditors to compromise the Company's debts.

(3) In respect of the debt restructuring of the PIOCs, the creditors will receive up to 50% of their existing debts under the MRAs. The debts of the PCOCs have not been restructured but the PCOCs continue to pay interest to their financial creditors. There is no good reason why the creditors of the Company should accept far less from the controlling shareholders under the proposed scheme than what is apparently being offered to the financial creditors of the APP Group. The inference is that the controlling shareholders are attempting to secure a compromise of the Company's debts on terms, which are considerably more favourable to the Company than the financial creditors insist upon, by procuring the related parties to vote in favour of the proposed scheme.

31. For the votes of supporting creditors to be discounted when it comes to the sanction of a scheme, it is not sufficient that they are parties related to the company being the subject of debt restructuring. This is apparent from the extracts in the judgments of Lord Millett and Chadwick LJ and the extract in Buckley referred to earlier. The Company has put forward the following matters and contentions to counter the suggestion that the related parties are not sufficiently independent to make them fairly representative of the class of unsecured creditors:

(1) In the absence of evidence to the contrary, it ought to be assumed that directors will act in accordance with their fiduciary duties owed to their companies and in the best interest of the relevant company (Re UDL Holdings Ltd (No. 3), supra. at 424C to D). In the case of APP China Trading Limited, Lucky Ever Limited and Vestwin Industrial Limited, where there are one or more directors in common with the Company, evidence is filed that these common directors had disqualified themselves from the boards of these three companies in relation to any decision with respect to the proposed scheme of the Company. The PIOCs have not filed evidence but have submitted through their counsel Mr Zimmern that their support for the proposed scheme is based solely on an economic analysis of the recoverability of existing debts due to them from the Company as an alternative to the scheme.

(2) The APP Group is not pursuing an overall restructuring. Restructuring discussions have focused on the PIOCs and the PCOCs and their holding companies on an entity-by-entity basis. The related parties are not dependent on the proposed scheme for the validity of their own restructuring or survival.

(3) Most related parties are insolvent themselves, and have duties to their own creditors. Their duty to their own creditors would require them to act in their own interests rather than in the interests of the APP Group.

(4) The shares of two of the related parties, PT Indah Kiat Pulp & Paper Tbk and PT Pabrik Kertas Tjiwi Kimia Tbk are publicly listed on the Jakarta and Surabaya stock exchanges and are subject to Indonesian capital markets regulations and the supervision of the capital markets regulator, Bapepam. Three related parties, IK Import & Export Limited, TK Trading Limited and TK Import & Export Limited, as subsidiaries of the publicly listed companies, are effectively subject to the same supervision and restrictions. These five related parties are all accountable to their respective outside shareholders.

(5) Two other related parties, PT Pindo Deli Pulp and Paper Mills and PT Lontar Papyrus Pulp & Paper Industry, have raised financing through the issuance of bonds registered with the Surabaya stock exchange and are also subject to Indonesian capital markets regulations and supervision by Bapepam.

(6) Once the MRAs become effective, the PIOCs will be subject to restrictions in the MRAs which prohibit intermediaries within the APP Group, such as the Company, from being involved in international or domestic pulp sales or international paper sales on behalf of the PIOCs. In the case of international paper sales, the prohibition may be waived by the monitoring committee, a body appointed from the creditors. For international pulp sales, the prohibition may only be waived by a majority of all accepting creditors of a given PIOC. Other provisions in the MRAs require the PIOCs to conduct all business dealings on arms length commercial terms and in the ordinary course of business.

32. Mr Manzoni has referred me to these Australian cases where the court had considered the issue of special interest of creditors in deciding whether to sanction a scheme of arrangement: Re Chevron (Sydney) Ltd [1963] VR 249; Re Jax Marine Pty. Ltd [1967] 1 NSWR 145; and Re Landmark Corporation Ltd [1968] 1 NSWR 759.

33. In Chevron (Sydney) Ltd, the debenture holders, 60% of whom were also shareholders, would obtain no benefit under the scheme whereas shareholders would obtain significant benefit (in contrast, in the present situation, the related parties would obtain no particular benefit from the proposed scheme which is not available to all the creditors). The court felt some initial difficulty in concluding merely from the result of the meeting that the debenture holders as such considered the scheme to be of benefit to them when they voted in favour of the scheme. It was only after supplementary evidence was filed at the adjourned hearing that the court was satisfied that a reasonably minded debenture holder might consider it to his advantage that the scheme should be adopted and decided to sanction the scheme with modifications. In his judgment at 255, Adam J stated as follows:

"The true position appears to be that where the members of a class have divergent interests because some have and others have not interests in a company other than as members of the class the Court may treat the result of the voting at the meeting of the class as not necessarily representing the views of the class as such, and thus should apply with more reserve in such a case the proposition that the members of the class are better judges of what is to their commercial advantage than the Court can be. In so far as members of a class have in fact voted for a scheme not because it benefits them as members of the class but because it gives them benefits in some other capacity, their votes would of course, in a sense, not reflect the views of the class as such although they are counted for the purposes of determining whether the statutory majority has been obtained at the meeting of the class."

The above dicta were approved and adopted in Landmark Corporation Ltd, supra. at 766.

34. Thus, Mr Manzoni emphasised that the question of special interest of creditors and whether their votes should be discounted is a question to be looked into at the sanction hearing. I agree this should be looked into substantially at the sanction hearing. But insofar as a company in seeking an adjournment of the winding-up petition ought to show reasonable prospects in obtaining sanction for the proposed scheme, and if the question of special interest of creditors should be raised as an issue in that context, that would be a relevant matter for consideration at the present stage. Approaching this in the manner I have indicated earlier, the company is required to do no more than to show that it is reasonably arguable the support of the special interest creditors would not inevitably be discounted at the sanction hearing.

35. As to the commerciality of the proposed scheme, Mr Manzoni made the following submissions:

(1) The Company has assessed that in a liquidation scenario, the rate of recovery would be in the range of 2.6% to 4%. In comparison, the notes issued by various APP finance subsidiaries have traded in the over-the-counter market in the past year at prices of between 3.5% and 7.5% of the respective face values of the bonds. It was contended that the market prices for the APP bonds are reflective of real recovery rates across the group and that the Company's estimates would appear to be within the market's range.

(2) A large part of the receivables is owed by companies that are the subject of the standstill arrangement, and is dependent on the restructurings of the PIOCs and the PCOCs. A significant part of the receivables is owed by APP International Trading (VI) Limited ("APPIT(VI)") in the sum of HK$264 million odd, this is a non-related party and like APPIT(V) is a special purpose vehicle for the purposes of a securitisation programme involving entities in the APP Group. The recovery from APPIT(VI) is doubtful as it has no assets other than receivables and bank balances from time to time pledged in respect of the securitisation programme. The only other significant receivable from a non-related party is King Paper Source (Shanghai) in the sum of HK$178 million odd. Despite the Company's efforts to collect, this debt is over 12 months old and given the difficulties of debt recovery in China, the Company did not think the recovery rate would significantly exceed 5%.

(3) The proposed scheme offers the option of an immediate 10% recovery with new money. An immediate and certain 10% is a highly attractive offer.

(4) As for the rate of recovery in the MRAs, it would not be correct to compare the 10% recovery under the proposed scheme with the 50% recovery in the MRAs. The debts under the MRAs were to be restuctured in three tranches, with respective terms of payment of 10, 13 and 20 years.

36. In summary, Mr Manzoni submitted that it is reasonably arguable that the proposed scheme is commercially attractive such that an intelligent and honest man, acting in the interests of the class as a whole, might reasonably approve. As the court is not at this stage sanctioning the scheme, the court ought to allow the scheme to proceed through the necessary procedure so that the creditors may vote on it and the court can consider it on a future occasion.

37. As stated earlier, for present purpose, the Company is required to establish reasonable prospects of a viable scheme with sufficient in-principle support. I am unable to draw a compelling inference that in giving their support the related parties must have been motivated by interests other than those to which an intelligent and honest man, acting in the interests of the class as a whole, might have regard, so that the votes of the related parties would inevitably be discounted at the sanction hearing. It seems to me that the matters put forward by the Company do merit serious consideration and there is something to be said for the commerciality of the proposed scheme. I am inclined to agree with Mr Manzoni that it is reasonably arguable that the votes of the related parties may not necessarily be discounted at the sanction stage, so that the Company has shown reasonable prospects of a viable scheme with sufficient in-principle support.

Alleged lack of candour

38. Another ground advanced by the petitioner that the proposed scheme is unlikely to be sanctioned is the alleged failure of the Company to give full and frank disclosure. The petitioner made much of the fact that the Company was slow or not forthcoming in providing information on its receivables and liabilities and the relevant source documents. Mr Harris referred to two specific examples concerning two of the debtors of the Company, King Paper Source (Shanghai) and Mighty Power Investments Limited. There is no explanation why massive quantities of goods were supplied to the former notwithstanding no payment was made on outstanding invoices. In respect of the latter, which is a related party, it is unclear from the last available financial statement if its net liabilities were arrived at after taking into account the debt owed to the Company of some HK$205 million. The explanatory statement for the proposed scheme does not give a sufficient explanation why the Company did not think it likely that the receivables due from these two debtors would exceed 5%. Mention was also made in the last affirmation of the petitioner of other deficiencies in the information provided relating to receivables and liabilities of the Company.

39. Mr Manzoni took issue with the contention that no sufficient information was disclosed as regards the financial position of Mighty Power Investments Limited. He submitted that it was apparent from the latest balance sheet of that company that there was no cash to repay the Company. As for the alleged lack of candour, it was simply a difference of approach between the petitioner and the Company as to how the evidence should be presented for the purpose of these proceedings, with the Company taking the view that questions which might be raised at the sanction hearing were not relevant to its application for adjournment and the petitioner taking the opposite view that the court should look at all matters relevant to the sanction hearing at this stage and inviting the court to infer there was lack of candour insofar as the Company did not provide such information at the outset or has failed to provide full information. He further submitted that the scheme documents could be modified or amended to take into account the criticism of the petitioner.

40. I have considered the alleged deficiencies in disclosure raised in the petitioner's affirmations and addressed by Mr Harris, separately and cumulatively. I am not inclined to find that the disclosure made by the Company is so deficient that there would be no reasonable prospects of its obtaining sanction for the proposed scheme.

41. I do not think it necessary to consider the allegation made by the petitioner as regards set-off, in that the set-offs were not taken into account in the Company's assessment of the likely support for the scheme until the point was raised by the petitioner in an earlier hearing, as it would appear from the evidence filed by the Company subsequently that even if a full set off is provided for, it would make little significant difference to the level of in-principle support.

Conclusion and orders

42. For the above reasons, I decline to make a winding-up order against the Company at this hearing. I grant an adjournment to the Company for three months to 2 August 2004, for the Company to take necessary action to progress with its proposed scheme of arrangement. I give liberty to restore the petition to an earlier date on seven days' notice. The Company is to file evidence on the progress of the restructuring seven days before the adjourned hearing.

43. I make an order nisi that the petitioner is to pay the Company and the opposing creditors who have appeared (with one set of costs for these creditors) their costs of the hearing before me in any event, as the petition and the application for adjournment could not be dealt with in the call-over hearing on a Monday and it was set down for one day for substantive arguments and the Company is successful in its application.

44. I have heard submissions on the question of costs reserved in respect of an earlier application for a validation order, which I refused, on 8 March 2004. There is placed before me the letter of the Official Receiver dated 26 March 2004. The petitioner has also placed before me its skeleton bill of costs and sought a gross sum assessment. I propose to disallow the fees of the second fee earner of the petitioner's solicitors and deduct 6 hours from the time spent of the other fee earner. I make the following orders:

(1) the Company is to pay the petitioner's costs in the application for a validation order in any event, such costs are assessed on a gross sum basis at HK$86,500.00; and

(2) the Company is to pay the costs of the Official Receiver in the application in any event, such costs are assessed on a gross sum basis at HK$4,725.00.