mopdf.com

Corporate Insolvency Cases2.Companies seeking adjournment of winding-up petition in order toprogress a restructuring of its debts should file timely and sufficientevidence of the proposed restructuringRe Founder Information (Hong Kong) Ltd [2021] HKCFI 311The Company was the guarantor of a series of floating rate bonds issued by Kunzhi Limited.On 28 October 2020, The Bank of New York Mellon (the “Petitioner”), a holder of the bonds,issued a petition seeking winding up against the Company (the “Petition”) on the ground ofinsolvency relying on failure to make payment following a demand for the payment of thebonds and interest accrued on them. The debt was not disputed.The Company opposed the Petition and sought an adjournment of the Petition citing aproposed onshore restructuring plan. The Petitioner opposed the adjournment and sought animmediate winding-up order.The principles guiding the court in applications by a company seeking an adjournment inorder to progress a restructuring of debt was recently restated in the case of Re LerthaiGroup Limited [2021] HKCFI 207. A balancing exercise would be approached where theCourt would take into account:(a) A qualitative assessment of the number of creditors for and against a winding-uporder.(b) The reasons proffered by the supporting and opposing creditors.(c) The feasibility of the proposed restructuring.Where the company is unable to find a creditor to oppose an immediate winding-up, theevidence will need to be all the more compelling.On the facts, none of the Company’s independent creditors filed notice to oppose theimmediate winding-up. On the other hand, the Petitioner, the Court noted, which holds 54%of the Company’s debt is a more “sophisticated party” and is “far better placed to determinewhat is in the best interest of the bond holders” than the Court.Further, the Court accepted there was an urgent need to protect the Company’s single mostvaluable asset – its claim against its onshore parent entity, Peking University Founder Group,which is likely to be dissipated and lost in the process of the onshore restructuring.Back to top7

Lastly, the Court found that the Company failed to provide sufficient details of therestructuring plan, including but not limited to the process of selecting the white-knight. Inconclusion, the Court made an immediate winding-up order.Back to top8

3.A company which wishes to restrain presentation of a petition mustdemonstrate that it is clear that the petition is an abuse of processHung Yip (HK) Engineering Co Ltd v Kinli Civil Engineering Ltd [2021] 1 HKLRD 860Kinli Civil Engineering Limited (“Creditor”) issued a statutory demand on 14 February 2020against the Company for a debt of HK 4,773,651.63 (“Debt”). Prior to the issuance of thestatutory demand, the Creditor sent 10 letters to the Company seeking payments.Nonetheless, the Company did not reply to any of these letters nor contact the Creditor toexplain the non-payment. It was not until the Company’s solicitor’s letter of 2 March 2020 (“2March Letter”) (three days before the 21-day period for satisfying the statutory demandexpired) that the Company made any effort to dispute the debt.On 7 March 2020 (Saturday), the Company’s solicitors asked for confirmation by the nextday that a petition would not be issued, otherwise an application would be made for aninjunction on an urgent basis. Given the time the letter was sent, the Creditor’s solicitors didnot reply. On Sunday 8 March 2020, the Company’s solicitors approached Linda Chan J,who directed that there be a hearing at 9:30am on Monday 9 March 2020. Upon hearing theurgent application, Linda Chan J granted an ex parte interim injunction prohibiting theCreditor from presenting a winding-up petition based on the statutory demand (“Injunction”).The Creditor agreed to have the Injunction continue until the underlying originating summonswas determined. The matter was listed before Harris J for hearing.Harris J clarified that a company which wishes to restrain presentation of a petition isrequired to demonstrate that it is clear that such presentation would be an abuse of process,in particular where a petitioner knew at the time the petition was presented, or should haveappreciated, that the company had a bona fide defence on substantial grounds.Demonstration that the company had a bona fide defence on substantial grounds is notsufficient. Generally, in order to establish that presentation of a petition would be an abuseit is necessary for a company to adduce evidence that addresses the following matters:(1)(2)(3)(4)(5)(6)Back to topThe debt and how it is alleged by the creditor to arise.When and how the debt has been disputed prior to presentation of the statutorydemand and any application to the court for an injunction.What is said to be the bona fide defence on substantial grounds.The solvency of the company.Prejudice that will be caused by the presentation of the petition.Whether or not it is asserted that the creditor is consciously using the threat ofpresentation of a petition improperly and is so the facts and matters relied on asdemonstrating this.9

On the facts, Harris J considered that the Injunction should not have been granted becauseas at 9 March 2020 when Linda Chan J heard the application it would not have been anabuse for the Creditor to present a petition, because the Creditor could quite properly takethe view that it had not been demonstrated that there was a bona fide and substantialdefence to all of the Debt.Further, Harris J found that there had been material non-disclosure in that the Companyfailed to draw attention to the fact that the Company had not until 2 March 2020 disputed theDebt, and thus there was nothing to alert the court of the Company’s total failure to respondto the Creditor’s payments claims and chasing letters. As a consequence, the partiesdiscussed settlement resulting in the applicant being dismissed by agreement.Back to top10

4.Hong Kong Court dismissed an application made by the PL for aregulating orderRe Hsin Chong Construction Company Limited (In Liquidation) [2021] HKCFI 559The PL of the Company applied for a regulating order pursuant to s.227A and theappointment of the PL as liquidators. A number of the major creditors of the Company, suchas AIG Insurance Hong Kong Limited supported the application while two sophisticatedcreditors, HSBC and West Kowloon Cultural District Authority (“WKCDA”) opposed theapplication and about 2/3 of the creditors had not expressed a view. HSBC and WKCDA areof the view that the creditors should meet and determine which insolvency practitionersshould be appointed as liquidators as they have reservations about the way in which the PLhave carried out their duties.A regulating order is usually made where, by reason of a large number of creditors orcontributories, it is impractical to hold a first meeting: Re JV Fitness [2018] 1 HKLRD 55. Onmaking a regulating order, the Court may also make various directions regardingdispensation of the first meeting of creditors/contributories and/or appointment of liquidators,as provided for in section 227B(1).After considering the circumstances in the present case, the Court dismissed the PL’sapplication for a regulating order for the following reasons: The PL failed to demonstrate that they have considered conducting a remote meetingwhereas Covid-19 was cited to be the major reason to justify the application; and There are legitimate concerns about the conduct of the PL. Without any good reason, creditors should not be deprived of the opportunity to havea meeting and canvas properly the options of liquidators.In conclusion, the PL’s application for a regulating order was dismissed.Back to top11

5.Regulating order granted as the Company was massively insolvent andhad very little money to pay the JPL’s out of pocket expenses oforganising meetings of contributories and creditorsHua Han Health Industry Holdings Ltd [2021] HKCFI 793The Company was incorporated in the Cayman Islands and listed on the Main Board of theStock Exchange of Hong Kong. On 11 April 2019, Cypress House Capital Limited (“Cypress”)presented a winding up petition against the Company on the grounds of insolvency.Cypress’s debt was subsequently satisfied and Cypress agreed to dismiss the petition.Prior to the petition’s dismissal, a shareholder, Haw Par Corporation Limited (“Haw Par”)issued two summonses, seeking the appointment of JPL and for substitution as petitioner.On 18 July 2019, Coleman J granted both applications.The JPL, subsequently appointed, applied for an order under s227A for a regulating order,and in particular:(1)to dispense with the first meetings of the creditors and contributories of theCompany for the purpose of considering the appointment of a liquidator;(2)to appoint the JPL as the Joint and Several Liquidators of the Company;(3)for a committee of inspection of the Company to be constituted and to comprise ofthe four major creditors of the Company (collectively holding over 99% of theCompany’s debts (“Major Creditors”)).In support of the application, the JPL relied on the following reasons:(1)It would clearly be impractical to hold the creditors’ and contributories’ firstmeetings bearing in mind the very large number of contributories, the prohibitivelyhigh costs associated with summoning such meetings, the lack of financialresources of the Company and the risk of leakage of confidential informationrelating to their investigation.(2)The application had the support of the four Major Creditors.(3)The views of purported shareholders opposing the application should be given littleweight in light of the fact that the views of creditors in an insolvent liquidation takeprecedence over those of contributories; and that the identities and complaints ofthe purported shareholders were unsubstantiated and unverified.Back to top12

(4)As to the identity of the liquidators, it would be most cost-effective to appoint theJPL as liquidators as they had been conducting investigations all along.(5)As to the committee of inspection, the proposed composition would be fair and justwith the Major Creditors representing majority of the debts.A number of purported contributories of the Company opposed the application.The principles, which guide the court in determining applications for regulating orders havebeen recently summarised by Harris J in Re Hsin Chong Construction Company Limited[2021] HKCFI 559:(1)A regulating order is usually made in a situation where, by reason of a largenumber of creditors or contributories, it is impractical to hold a first meeting;(2)On making a regulating order, the Court may also make various directionsregarding dispensation of the first meeting of creditors/contributories and/orappointment of liquidators, as provided for in section 227B (1);(3)The estimated costs for summoning a first creditors’ meeting were a significantfactor taken into account when deciding to dispense with the same;(4)As to the appointment of liquidators in the usual case where there is a disputebetween creditors and contributories on the choice of liquidators, and the disputeis to be resolved by the court, the court would usually have regard to the wishes ofthe independent creditors.On the evidence, the Court agreed with the JPL that the Company was massively insolventand had very little money to pay the JPL’s out of pocket expenses of organising meetings ofcontributories and creditors. Further, the Court also concluded that the identities andcomplaints of various purported shareholders were unidentified and unsubstantiated.Regarding the appointment of liquidators, the Court found no justifiable reasons why thecreditors’ choice (i.e. the JPL) should not be determinative, particularly as the JPL werealready substantively involved with the matter.Accordingly, the Court granted the regulating order sought by the JPL.Back to top13

6.A contributory’s petition for winding-up ordered to be struck out as theCourt found that there are alternative remedies availableWong Chung Hon v Tse Wai Shum [2021] HKCFI 313The Petitioners sought to wind up Chungshan Commercial Association, Hong Kong(“Association”), a company limited by guarantee, on just and equitable grounds, contendingthat there is a lack of confidence in management, loss of substratum and that the conduct ofthe 1st and 2nd Respondents, as directors of the Association, falls entirely outside themembers’ contemplation.The Respondents sought to strike out the Petition, on the ground, amongst other things, thatthe Petitioners are acting unreasonably in seeking winding up relief when there arealternative remedies available.It is well established that the remedy of winding-up on a contributory’s petition is a remedy oflast resort: Fulham Football Club (1987) Ltd v Richards & Anor [2012] Ch 333 at §§54-57;Wong Tin Chee v Wong To Yick & Anor [2001] 2 HKLRD 683 at 687E. Further, it is clear thata contributory’s petition for winding-up can be struck out if, assuming that the petitionerproves all the facts in the petition, it is clear that there is no real possibility or prospect of awinding-up order being made.On the facts, the Court took the view that there is no realistic prospect that the Court willmake a winding-up order against the Association even if all the allegations in the Petition areproved to be correct and true, for the following reasons:1.All the complaints concerned about the misconduct of the delinquent directors, namely,the 1st and 2nd Respondents, who allegedly caused, procured, authorized and/orrecklessly sold seven real properties of the Association at an undervalue and toconnected parties, the delinquent directors controlled the management and caused thedepletion of assets and caused expenditures to overtop incomes and the delinquentdirectors obtained improper travelling benefits for themselves or for persons connectedto them. The Association can always sue them for the loss and damages that theAssociation has suffered as a result of their misconduct, by derivative action or byunfair prejudice petition. Alternatively, the members can vote the 1st and 2ndRespondents out and sue them for their misconduct;2.The relief that the Court can grant under section 725 of the Companies Ordinance(Cap. 622) are very wide, including an order to direct the Association to make a claim,an appointment of receivers and/or removal of the 1st and 2nd Respondents as directorsof the Association. There is thus no need to resort to the remedy of winding up so as toaddress the complaints of the Petitioners.Back to top14

3.It is a fortiori that a company limited by guarantee, particularly, a charitableorganization should not be put into liquidation unless there are very strong reasons todo so. The Association has a history over 108 years and about 1,300 members. Further,it is solvent and active in its social and charitable activities. A winding up order wouldprejudice the interest of all other members as well as those benefitting from thecharitable activities of the Association.Back to top15

7.A timely reminder: contributories’ petition for winding-up should be thelast resortHui Chau Hing v Hui Chi Sum Water D. [2021] HKCFI 205The Company has a substantial portfolio of properties and is engaged in propertiesinvestment and carries on the business of leasing out retail shops for rental income. It wasnot disputed that Company received monthly rental income of HK 203,000 or HK 2,436,000annually. In a letter issued by CBRE dated 18 November 2020, CBRE opined that on anasset-based approach, the fair value of 100% equity value of the Company as at 26September 2019 is HK 93,630,000. It only has an outstanding bank mortgage with WingHang Bank Limited in the sum of around HK 2 million in total.The Petitioners, who own together 30% shareholding in the Company, alleged that theCompany’s affairs are being or have been conducted by the 1st and 2nd Respondents in amanner unfairly prejudicial to the interests of the Petitioners. The Petitioners sought a buyoutorder and alternatively a winding up order in respect of the Company.The Respondents applied to strike out the winding up relief contending that the Petitionersare acting unreasonably in seeking a winding-up relief when there is a relief of buy-outavailable and there is no real possibility or prospect of a winding up order being made by theCourt.The legal principles in relation to striking out petitions are well established. The burden is onthe applicant to show that it is plain and obvious that the petition would fail on the ground thatthere is an alternative remedy available to the petitioner and that the petitioner is actingunreasonably for not pursuing other reliefs. The court may also strike out the winding-uprelief if there is no prospect of the court making winding-up order since the companyconcerned carries on an ongoing profitable business, is solvent and has valuable goodwilland know-how. Where a prima facie case has been shown that the ability of the respondentto finance any buyout is seriously in doubt, it is hardly “plain and obvious” that winding uprelief should be struck out at this stage or that it is unreasonable to insist on seeking awinding up relief. However, it is not always necessary for a respondent to adduce evidence indetail as to how they can raise finance to buy out a petitioner in the event that a buyout orderis made by the Court.On the facts, the Court took the view that there is no realistic prospect that even if all theallegations in the Petition were proved to be accurate after trial, the Respondents would notbe able to buy out the Petitioners’ shares if so ordered by the Court to do so.First, the Company is a going concern, solvent and has substantial net assets in the region ofHK 70 million to HK 90 million. If the Court were to make a buy-out order against the 1st toBack to top16

3rd Respondents, apart from the 1st to 3rd Respondents’ own personal assets, theirshareholding in the Company is also of sufficient value. The Company could sell some of itsproperties or raise finance by mortgages and make distributions amongst its shareholders sothat the 1st to 3rd Respondents would have sufficient cash to comply with any buy-out orders.In any event, the Petitioners will be able to look to the 1st to 3rd Respondents’ interest in theCompany to satisfy any buy-out orders.In the circumstances, the Court concluded that there is no realistic prospect that theRespondents will not be able to buy out the Petitioners’ shares if so ordered. Accordingly, thewinding up relief was ordered to be struck out.Back to top17

8.Appointment of provisional liquidators over a defunct asset managementcompany ordered to be continuedSecurities and Futures Commission v Adamas Asset Management (HK) Ltd [2021]HKCFI 729The Securities and Futures Commission (SFC) presented a petition to wind up AdamasAsset Management (HK) Limited (the “Company”). SFC applied ex parte that theappointment of PL of the Company be continued pending determination of the Petition oruntil further order.The Company was incorporated on 23 August 2011. It has, since 20 February 2013, been alicenced corporation under s.116 of the Securities and Futures Ordinance (Cap. 571) (the“Ordinance”) to carry on Type 9 (Asset Management) activities. It is a fund manager oradviser of various funds formed under the laws of Cayman Islands for professional investors.The Company is solely beneficially owned by Mr Paul Lincoln Heffner, who was also theCompany’s sole director. On 1 January 2021, Heffner committed suicide and died in HongKong. Since then, all of the Company’s employees have resigned. Since Heffner’s death,the Company has come to a standstill.It transpired subsequently that some unknown persons attempted to take over the control ofthe Company by, amongst other things, submitting a false Form ND2A form (Notice ofChange of Company Secretary and Director (Appointment/Cessation)) to the CompaniesRegistry on 29 January 2021, which was after Heffner’s death. Following the registration ofthe said form, they would be able to misrepresent to the outsiders and the general public thatthey have the authority to act for and on behalf of the Company.It is trite that, before the Court appoint a provisional liquidator, the applicant must (a)demonstrate a prima facie case for the granting of winding-up order; and (b) show that in thecircumstances of the case a provisional liquidator should be appointed, which is to bedecided on the basis of commercial realities, the degree of urgency and need

8. Appointment of provisional liquidators over a defunct asset management company ordered to be continued Securities and Futures Commission v Adamas Asset Management (HK) Ltd [2021] HKCFI 729 9. What evidence is required for seeking adjournment of a