Re Shanell Ltd

HCMP 1439/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO1439 OF 2016

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J U D G M E N T

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INTRODUCTION

1.This is an application by the Company pursuant to section 670 of the Companies Ordinance, Cap 622, for an order that a meeting of creditors be held for the purposes of considering a scheme of arrangement (“the Scheme”).

BACKGROUND

2.The Company is a private company incorporated in Hong Kong with paid up capital of HK$100m, divided into ordinary shares of HK$1.00 each. Its shareholders used to be Mr Chiu (85%), Mrs Chiu (10%) and Mr Ng (5%) (collectively “the Shareholders”) .  In May 2016, Huang Guo-Bin (“the investor”) acquired 51% of the Company’s issued share capital from Mr Chiu as part of the restructuring and repayment exercise.

3.The Company has a wholly owned subsidiary, Shanell Trading (Shenzhen) Limited (“Shanell Shenzhen”) (collectively “the Group”). The Group is engaged in marketing and distribution of plastic materials.

4.The Company had substantial turnover of over HK$2.3 billion as at 31 December 2014.  However, it experienced liquidity problem since the end of 2015 due to the unfavourable movements of exchange rate of RMB and other currencies.

5.The Company is heavily insolvent.  Despite its turnover, the profits from the plastics business are not sufficient to repay its debts.  As at 8 August 2015, it has unencumbered assets of HK$147 million.

6.At the time of this application, the Company has 24 creditors who are banking institutions (“the Financial Creditors”).  The estimated total debt is HK$703.6m.

7.These are believed to be the only creditors as the Company has been settling its liabilities with trade creditors/non-financial institutions on cash basis.  There is also nothing to show that employees were owed any payments.

8.In respect of all but one (Western Union Bank) Financial Creditors, the Shareholders have provided personal guarantees in respect of debts owed by the Company.

9.At the request of the Financial Creditors, the Company engaged Pricewaterhouse Coopers (“PwC”) to make a debt restructuring proposal.

10.The investor acquired 51% shareholding at a consideration of HK$6 million, of which HK$1 million had been paid.  The investor would provide working capital to the business for its future operation subject to the Company entering into the Scheme with its creditors so that the Company would be free from its liabilities.

11.Under the Scheme, it is anticipated that a special purpose vehicle (“the Scheme Company”) would be set up, which would be solely liable for the admitted claims of each Scheme Creditor against the Company.

12.The assets of the Group, excluding certain assets (“the Excluded Assets”), will be assigned to the Scheme Company and realized.  The Excluded Assets will include the Company’s equity interest in Shanell Shenzhen, the customer and supplier lists, goodwill and IP rights relating to the business of the Group. All of the Excluded Assets shall remain with the Company for it to continue to operate its business.

13.The Scheme Creditors will be paid pro rata from the assets of the Group.

14.For Scheme Creditors who also hold personal guarantees, they will enjoy pro rata distribution of realized assets from outside the Group, belonging to Mr and Mrs Chiu, ie the share consideration of HK$6 million from the investor, proceeds of sale of a flat belonging to Mr and Mrs Chiu and dividends from the remaining 49% shares in the Company supported by a share charge.

15.Under the Scheme, all enforcement actions against the Company or its property will be withdrawn by the Scheme Creditors and no Scheme Creditors would sue the Company.

Analyses

16.There are 3 stages in the process by which a scheme of arrangement between a company and its creditors may become binding on dissentients: (i) an ex parte application for an order to summon a meeting of the creditors; (ii) proposals being approved by a majority of 75% in value of the claims of those present and voting in person or by proxy at the meeting; (iii) if approved by the requisite majority, sanction by the court, although the court is not bound to do so.  UDL Argos Engineering & Heavy Industries Co Ltd & ors v Li Oi Lin & ors (2001) 4 HKCFAR 358, §12, Lord Millet NPJ.

17.This application concerns the first stage.  The court does not need to address the question whether it is necessary to order more than one meeting: UDL Argos, §13.

18.In terms of constitution of the court meeting(s), a recent statement of legal principles have been summarized in Re KB (Asia) Ltd, HCMP307/2013, Harris J, 30 June 2014, at §§9-12:

“9. For the purpose of determining whether there were properly constituted classes of creditors in the Scheme Creditors’ Meeting, the Court of Final Appeal has laid down the following general principles in UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin (2001) 4 HKCFAR 358 (at §27):

(1) It is the responsibility of the company putting forward the Scheme to decide whether to summon a single meeting or more than one meeting. If the meeting or meetings are improperly constituted, objection should be taken on the application for sanction and the company bears the risk that the application will be dismissed.

(2) Persons whose rights are so dissimilar that they cannot sensibly consult together with a view to their common interest must be given separate meetings. Persons whose rights are sufficiently similar that they can consult together with a view to their common interest should be summoned to a single meeting.

(3) The test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interests not derived from such legal rights. The fact that individuals may hold divergent views based on their private interests not derived from their legal rights against the company is not a ground for calling separate meetings.

(4) The question is whether the rights which are to be released or varied under the Scheme or the new rights which the Scheme gives in their place are so different that the Scheme must be treated as a compromise or arrangement with more than one class.

(5) The Court has no jurisdiction to sanction a Scheme which does not have the approval of the requisite majority of creditors voting at meetings properly constituted in accordance with these principles. Even if it has jurisdiction to sanction a Scheme, however, the Court is not bound to do so.

(6) 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.

10. As Lewison J explains in Re The British Aviation Insurance Co Ltd [2006] BCC 14 at §82, which was decided after UDL Argos, in deciding whether the classes of creditors were correctly identified, the starting point is to identify the appropriate comparator. Where a company is insolvent (as is the present case) or insolvent liquidation is the only alternative to the scheme, then insolvent liquidation is the comparator.

11. The Court’s function under Section 166 has been defined as summary and quasi-inquisitorial. …”

19.Standard Chartered Bank is the lead bank in the Scheme with a liaison role with the Financial Creditors and PwC.  The Company understood from PwC that the Scheme is supported by the requisite majority.

20.The Financial Creditors have similar rights so they can consult together with a view to their common interest.  They should be given an opportunity to attend a meeting and consider the Scheme, the results of which are often the best practical guide to whether a scheme of arrangement is fair and to their commercial advantage: Re Cheung Kong (Holdings) Ltd [2015] 2 HKLRD 512, §23.

21.I therefore make an order in terms of the draft order, which includes the holding of a meeting of creditors, with provisions on notice to creditors, advertisement of the meeting, service of the Scheme document and who the chairman shall be.

22.I thank Ms Cheung for her assistance.

Ms Elizabeth Cheung, instructed by Adrian Yeung & Cheng, for the applicant