RE CHINA SOUTH CITY HOLDINGS LTD

HCCW 54/2025

[2025] HKCFI 3719

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) NO 54 OF 2025

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REASONS FOR JUDGMENT

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1.  At the hearing of the petition presented by Citicorp International Limited (“Petitioner”) on 27 January 2025, I made a usual winding up order against China South City Holdings Ltd (華南城控股有限公司) (“Company”). These are the reasons for my judgment.

2.  The Company was incorporated under the former Companies Ordinance (Cap. 32) on 8 May 2002. Its shares has since September 2009 been listed on the Main Board of The Stock Exchange of Hong Kong Limited (stock code 1668).

3.  The paid up capital is HK$9,316,955,773.5 divided into 11,441,892,848 shares[1]. The largest shareholders of the Company are (1) SEZ Construction & Development Investment Holding Limited holding 29.28% which, in turn, is wholly owned by Shenzhen SEZ Construction and Development Group Co. Ltd (“SEZ”); (2) Accurate Gain Developments Ltd holding 20.16%, which is wholly owned by Mr Cheng Chung Hing, the founder of the Company; and (3) THL H Limited holding 8.35%, which is a wholly owned subsidiary of Tencent Holdings Ltd[2].

4.  The Company is an investment holding company and controls, through intermediate holding companies incorporated in the Mainland, Hong Kong, the BVI and Cayman Islands, a number of subsidiaries established and carry on business in the Mainland (together “Group”). The Group is a real estate developer and operates a large scale integrated logistics and trade centre in 8 major cities in the Mainland under the brand name “華南城”.

5.  The Petitioner is the trustee of the US$288,840,000 9% senior notes due April 2024 (“April 2024 Notes”) issued by the Company[3], and acts on the instructions of some beneficial holders including “AHG” (as defined in §6 below) all of whom are represented by Kirland & Ellis (“K&E”). The Petitioner is also the trustee of the “Other Notes” (as defined in §9(2) below). The April 2024 Notes together with the Other Notes are referred to as Senior Notes.

6.  The ad hoc group of beneficial holders of the Senior Notes[4] (“AHG”) hold US$502.7 million or 37.6% of outstanding principal under all the Senior Notes issued by the Company[5].

7.  The Petitioning debt is US$306,170,400 (“Debt”), being the outstanding principal and interest payable up to 12 April 2024 under the April 2024 Notes[6].

8.  As of 30 June 2024, the key assets of the Group comprised (1) project development with a combined value of HK$40,185,268,000; (2) investment properties with aggregate value of HK$44,484,324,000; (3) bank balances and cash of HK$895,972,000 of which HK$859,271,000 (or 96%) was restricted cash (which the Group is not able to use freely); and (4) trade and other receivables[7].

9.  The Company has raised funds offshore[8] to finance the business of the Group in the Mainland. For this purpose, it has issued 5 series of USD-denominated senior notes (collectively “Senior Notes”) which account for 84% of its offshore debts as well as borrowed loans from banks and through private financing. The offshore debts comprise[9]:

(1)  The outstanding principal and interest due and payable under the April 2024 Notes;

(2)  The amount due and payable under 4 series of notes with aggregate outstanding principal of US$1,050 million viz., (a) the US$287,180,000 9% senior notes due June 2024; (b) the US$202,500,000 9% senior notes due October 2024; (c) the US$333,000,000 9% senior notes due December 2024; and (d) US$227,259,776 4.5% senior notes due August 2027[10] (collectively “Other Notes”); and

(3)  The bank loans and other borrowings with total outstanding principal of HK$1,944,797,613 of which US$229,461,231 was owed to Fine Vision Opportunity Limited (“Fine Vision”).

10.  Each of the Senior Notes is (1) guaranteed by a number of subsidiary guarantors including China South City Management Company Ltd; and (2) subject to a keepwell deed dated 9 August 2022 provided by SEZ[11].

11.  In addition to the offshore debts, the Company has provided guarantees in respect of some onshore loans borrowed by the subsidiaries and the total liabilities as of 30 June 2024 amounted to HK$5,902,995,000[12].

12.  The applicable principles in dealing with a winding up petition presented by a creditor on insolvency ground have been stated in Re Jiayuan International Group Ltd [2023] HKCFI 1254 at §12:

(1)  A petitioner whose debt is not in dispute is entitled ex debito justitiae to a winding up order against the company. The burden lies on the company to demonstrate good grounds for the court not to make a winding up order.

(2)  The company will be deemed insolvent if it fails to satisfy the statutory demand within the time limit to do so.

(3)  Where the company is insolvent and unable to pay its debts, it is the creditors who have a real interest in the company. They can decide whether it is in their interest to have the company wound up. It is not for the company to assert otherwise even if there are valid grounds in support of its assertion.

(4)  If the company wants to seek an adjournment of the petition to implement any restructuring proposal, there must be a proper evidential basis in support of the request. Otherwise, acceding to the adjournment will only have the effect of delaying the entitlement of the petitioner to seek an immediate winding up order but without any corresponding benefit of receiving any payment from the company.

(5)  If the company opposes the petition on the ground that there is a reasonable prospect of being able to restructure and compromise the debts and restore its solvency, it has to demonstrate to the court that a concrete restructuring proposal or a scheme of arrangement has been prepared and put forward to the creditors for their consideration, and such proposal or scheme has the support of the requisite majorities of creditors.

(6)  It is not enough for the company to point to certain commercial discussions with some creditors or make a general assertion that it has been actively pursuing a restructuring proposal. Nor is it enough for the company to say that it is only seeking a short adjournment.

(7)  Unless the company is able to demonstrate that there is some useful purpose in adjourning the petition, there is no proper basis for the court to delay the creditor's right in seeking an immediate winding up order against the company.

13.  There is no dispute that the Company is insolvent and unable to pay its debts in that:

(1)  On 12 February 2024, the Company failed to pay the semi-annual interest due under the April 2024 Notes. The failure continued beyond 30 consecutive days and constituted an event of default[13].

(2)  On 9 February 2024, the Company failed to make the mandatory redemption payment due on the 9% senior note due October 2024, which constituted a cross default under the April 2024 Notes[14].

(3)  The Company failed to pay the outstanding principal under the April 2024 Notes which fell due on 12 April 2024[15].

(4)  The Company acknowledged that it had defaulted and cross-defaulted on the Senior Notes in various announcements, the Interim Report 2024 and the Annual Results for FY2024[16].

(5)  On 31 May 2024, the Petitioner’s solicitors served a statutory demand on the Company requiring it to pay the Debt within 21 days thereof. The Company failed to pay the Debt[17]. By virtue of s.178(1)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), the Company is deemed insolvent.

14.  Since its default under the April 2024 Notes, the Company has been seeking to formulate a proposal with a view to restructure and compromise its offshore debts. On 29 April 2024, the Company announced that it had appointed Linklaters and Alvarez & Marsal as legal and financial advisors for such purpose. Deloitte was appointed to prepare a liquidation analysis[18].

15.  However, the Company had not able to secure the support of the beneficial holders of the April 2024 Notes and some of them (including AHG) instructed the Petitioner to present the petition on 27 January 2025.

16.  The petition was heard before this Court on 14 April 2025 and 19 May 2025:

(1)  At both hearings, the Company applied for an adjournment for the purpose of pursuing the ongoing negotiations with the creditors including AHG in respect of a restructuring proposal. In particular, at the second hearing, the Company informed the court that on 12 May 2025, it had reached agreement with AHG on the payment of a work fee as compensation for the time and effort spent in negotiating with the Company on the proposed restructuring in the past and going forward (“Work Fee”).

(2)  The Company stated that certain beneficial holders of the Senior Notes and creditors with a total claim of HK$2.3 billion (representing 18.4% of its offshore debts) had indicated their opposition to an immediate winding up, and they supported giving the Company an opportunity to pursue its proposed restructuring. Some of them filed notices of intention to appear and ot hers provided letters of support to the Company[19].

(3)  The Petitioner agreed to a 3 weeks’ adjournment at the first hearing but at the second hearing, opposed the proposed adjournment and asked the court to make an immediate winding up order against the Company on the basis that no concrete proposal had been put forward by the Company.

(4)  Notwithstanding the fact that the Company had not been able to put forward any concrete restructuring proposal, let alone one which had the support of the requisite majorities of creditors, at the second hearing, this Court was prepared to grant a 3 months’ adjournment as proposed by the Company to ensure that it would have sufficient time to pursue the ongoing negotiations and obtain at least the in-principle support from the creditors for its restructuring proposal.

17.  For the reasons set out below, this is an appropriate case where the court should make an immediate winding up order against the Company.

18.  First, the Company is clearly insolvent. In addition to the matters set out in §13 above, the Company admitted that the Group[20] had been in financial difficulties in recent years and recorded a net loss of HK$8,975,904,000 in FY2024[21]. Although the Company relies on the improvement in the Group’s year-on-year operating income in the amount of RMB 30 million from leasing/operations in the first 6 months of 2025[22], such improvement pales insignificant as compared to the net loss recorded in the Group’s FY2024 accounts.

19.  Second, there is no realistic or feasible restructuring proposal to compromise the Company’s offshore debts and restore its solvency. It is clear from the latest affirmation filed by the Company[23] and the correspondence that no real progress has been made by the Company on its proposed restructuring in the past 3 months in that:

(1)  On 24 June 2025, the Company provided a revised proposal which was recalled on the same day.

(2)  On 25 June 2025, the Company provided another revised proposal, which was rejected by AHG as “completely disregards” their requests and commercial parameters.

(3)  On 15 July 2025, the Company provided a further proposal (being the latest proposal), which was rejected by AHG on the basis that it failed to make any “meaningful improvement” to the Company’s previous proposal, and was largely a repetition of most of the principles and position in the previous proposal[24].

(4)  As stated in K&E’s solicitors letter dated 5 August 2025[25], the Company’s proposal failed to meet the 2 requirements put forward by AHG namely, (a) to reflect the value of the Senior Noteholders’ claims under the keepwell deeds and (b) to contain financial support from the provider of the keepwell deeds[26] (“AHG Requirements”). Nor has the Company made any serious efforts to negotiate with AHG.

(5)  The Company has not even been able to arrange funds to pay the Work Fee.

(6)  Nowhere in Chan 7^th or Chan 8^th does the Company deal with what step has been taken by the Company to meet AHG’s Requirements or when such Requirements will be met, if at all. This is despite the fact that, as the Company well knew, the inclusion of the AHG Requirements was an essential condition for AHG to support any restructuring proposal put forward by the Company.

(7)  As AHG hold 37.6% of the Company’s total offshore debts, without their support, no scheme of arrangement could be proceeded with.

20.  There is therefore no utility for the court to grant a further adjournment of the petition as the Company will not be able to come up with a proposal which will be accepted by AHG.

21.  Although Fine Vision and 2 individuals have filed notices of intention to oppose the petition, the total amount of debt held by these creditors is only US$252,151,231, which represent 15.8% of the Company’s total offshore debts. As for those creditors who have not filed any notice of intention to appear and oppose the petition or explained what intended restructuring they seek to support, there is no proper basis for the Court to give weight to their views (Re Jiayuan at §18(5)). In any event, no valid ground has been put forward by any of the opposing creditors (including those who have not appeared in these proceedings) as to why they consider that it would be in the best interests of the creditors as a whole for the petition to be further adjourned when the Company is grossly insolvent and there is no viable proposal to restructure its offshore debts.