Re Union Asia Enterprise Holdings Ltd

HCMP 1093/2018

[2019] HKCFI 2349

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1093 OF 2018

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J U D G M E N T

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1.I have before me a petition for sanction of a scheme of arrangement in respect of the company, Union Asia Enterprise Holdings Ltd (“Company”), under section 673 of the Companies Ordinance (Cap 622). The Company was incorporated in the Cayman Islands in 2001 and its shares became listed on the Growth Enterprise Market Board of the Stock Exchange of Hong Kong Limited in 2002.

2.The Company is itself primarily a holding company, with subsidiaries engaged in several different areas of business, including trading of beverages and trading of metals and minerals.  In about 2012 or 2013, the Company’s financial position began to deteriorate, so much so that from having net assets of HK$404m as at March 2014, it had come to have a net deficit of HK$490m as at March 2019.  The accumulated losses stood at approximately HK$4.5 billion as at March 2018.  Cash flow is also dwindling, and it seems unlikely that the Company will be able to repay the substantial indebtedness falling due at the end of this year.  In the absence of a debt restructuring, the Company appears to be doomed to insolvent liquidation. 

3.It is against this background that a restructuring agreement has been entered into with an outside investor (“Investor”), Whistle Up Ltd.  In broad terms, pursuant to the proposed restructuring, the credit in the share premium account will be cancelled, existing shares will be consolidated, the nominal value of the consolidated shares will be reduced through a reduction of capital, and the authorised share capital will be reconstituted.  This will considerably reduce the accumulated losses of the Company.

4.There will then be an offer of approximately 227.7m new shares at the price of HK$0.19 per share, half of which will be available for subscription by members of the public and the other half by existing shareholders (with the exception of certain overseas shareholders, the Company’s directors and their associates, and shareholders with special rights). This offer, which is fully underwritten, is expected to raise approximately HK$43.2m, which will be applied, after payment of professional fees and expenses, as general working capital of the Company.

5.The Company’s group will cease to engage in their previous businesses.  In their place, the Investor will inject a subsidiary company, which in turn holds a group of companies running a business in the provision of interior design services, into the Company, in return for the allotment of 760m new shares at HK$0.19 each (totalling HK$144.4m). The Stock Exchange has given approval in principle with respect to the Company’s new listing application re‑submitted in January 2019.

6.The Investor will also provide a loan of up to HK$23m to the Company, of which up to approximately HK$18m will be settled by the allotment of approximately 94.7m new shares at the price of HK$0.19 each to the Investor.

7.The final component of the proposed restructuring is that the debts of the existing creditors will be compromised and discharged by the issue of approximately 70.3m new shares at the price of HK$0.19 each to the creditors on a pari passu basis.  The proceeds from the disposal of the assets of the Company, including its existing subsidiaries, cash and receivables, will also form part of the funds to be distributed to the existing creditors.  It is estimated that the consideration to be received by the creditors will have a value of approximately HK$13.4m. 

8.It is this last part of the restructuring, involving the compromise of existing creditors’ debts, that is the subject matter of the scheme of arrangement. 

9.As the company is incorporated in the Cayman Islands, there is concurrently a materially identical scheme of arrangement proposed there pending the sanction of the Grand Court in the Cayman Islands.  The Grand Court has already, on 6 September 2019, confirmed the reduction of capital I have mentioned earlier.

10.On 25 July 2018, and again on 25 July 2019, Anthony Chan J gave directions for the Company to convene a single meeting of the scheme creditors for the purpose of considering and, if thought fit, approving the Scheme.  That meeting was held on 4 September 2019.  Subject to one dispute, all the creditors present and voting voted in favour of the Scheme.

11.The dispute is this.  There is a debt originally owed by the Company to Kesterion Investments Ltd (“Kesterion”) which was recorded in a sum of approximately HK$92.8m in the accounts as at March 2016. The Company was notified in November 2016 that the debt had been assigned to CAAL Capital Company Limited (“CAAL”).  In November 2017, however, Kesterion instituted two actions (since consolidated) in Hong Kong against CAAL and the Company, alleging that the assignment was void, invalid, not legally binding and should be set aside.  These actions have not yet been resolved.

12.Both Kesterion and CAAL lodged a notice of claim for voting purpose in relation to the scheme creditors meeting.  Kesterion stated that the amount of the debt calculated up to the date of the meeting was approximately HK$105.8m, whereas CAAL stated it was approximately HK$98.9m. After reviewing the books and records of the Company, the chairman of the meeting determined that the amount of the debt was HK$98.9m.  Kesterion indicated it would vote against the Scheme (though its reasons are unknown), while CAAL indicated it would vote for the Scheme.  The Company did not dispute the existence of the debt, but because of the uncertainty in the identity of the creditor, the chairman decided to reject both notices of claim and forms of proxy submitted by Kesterion and CAAL.  Ms Linda Chan SC, who appears with Mr Danny Tang for the Company, submits that the chairman had the power to reject the votes of particular creditors on proper grounds if such grounds existed: In re Dee Valley Group plc [2017] EWHC 184 (Ch), §52.

13.In any event, it has been demonstrated that even assuming that Kesterion was admitted to vote at the meeting on the basis of the amount of debt it claimed and that it voted against the Scheme, the two resolutions (first, for the approval of the Scheme, and second, for the establishment of the scheme creditors’ committee) would still have been approved by the requisite majority of the creditors both in number and in value.  It should also be noted that, taking into account either Kesterion or CAAL, the creditors attending the meeting accounted for the vast majority of the Company’s indebtedness.

14.The function of the Court in determining a petition to sanction a scheme is summarised in Buckley on the Companies Acts (14^th ed) at page 473:

“ Function of the Court In exercising its power of sanction the court will see, first that the provisions of the statute have been complied with, second that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.”

15.The evidence shows that the statutory requirements have been complied with.  I have also taken into account the considerations set out in the authorities including Re Wheelock Properties Ltd [2010] 4 HKLRD 587, 590‑591 and Re Cheung Kong (Holdings) Ltd [2015] 2 HKLRD 512 at §29, which in my view support the approval of the Scheme in this case.  It is true that the return for the scheme creditors under the Scheme has been much whittled down from the initial proposal, due apparently to the concerns raised by the Securities and Futures Commission and the Stock Exchange with regard to attracting public participation in the restructured Company.  Still it represents an estimated return of 2.8% under the Scheme, compared to 0.5% under the liquidation scenario.  From that point of view, I am satisfied that the arrangement is such as an intelligent and honest man, acting in respect of his interests as a member of the single class of creditors, might reasonably approve.

16.Finally, in terms of connections with Hong Kong, it should be noted that the Company was listed in Hong Kong and is proposed to resume its listing in Hong Kong; its principal place of business is in Hong Kong; its management has always been carried on from Hong Kong; it is registered under Part XI of the former Companies Ordinance (Cap 32); and most of its debts, being obligations under convertible bonds and promissory notes, are governed by Hong Kong law.  On this basis I am satisfied that there is sufficient connection with Hong Kong for this court’s jurisdiction to sanction the Scheme to be engaged and to be properly exercised (as part of a restructuring comprising a similar scheme at the place of incorporation): see Re LDK Solar Co Ltd [2015] 1 HKLRD 458; Re Winsway Enterprises Holdings Ltd [2017] 1 HKLRD 1.

17.There will therefore be an order sanctioning the Scheme.

Ms Linda Chan SC and Mr Danny Tang, instructed by Yuen & Partners, for the Company