Re Rexlot Holdings Ltd

HCCW 45/2020

[2020] HKCFI 2212

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 45 OF 2020

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Before:  Deputy High Court Judge Maurellet SC in Court

Date of Hearing:  20 August 2020

Date of Judgment:  20 August 2020

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JUDGMENT

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INTRODUCTION

1.There is before me a creditors’ winding-up petition (“the Petition”) which is presented pursuant to section 327 of the Companies (Winding-Up) Ordinance (“the Ordinance”). 

2.The original petitioners were BFAM Asian Opportunities Master Fund LP (“BFAM” or “the 1st Petitioner”), Discovery Global Opportunity Master Fund Ltd, Discovery Global Focus Master Fund Ltd, and Quantum Partners LP (collectively “the Petitioners”). 

3.The Petition was filed on 9 March 2020. 

4.REXLot Holdings Limited (“the Company”), formerly known as OSK Asia Corporation Limited, was incorporated in Bermuda on 8 August 1997, and was registered on 11 July 2000 as a non-Hong Kong company under Part 11 of the then Companies Ordinance.  It has a principal place of business in Hong Kong, in Kowloon Bay. 

5.The Company is listed on the stock exchange of Hong Kong, although the trading of its shares has been suspended since 1 April last year.

6.The Petitioners hold bonds which are divided in two categories.  They are known as the 2017 bonds, which were convertible bonds originally due on 28 September 2016, but later extended to 2017; and the 2019 bonds, which were also convertible bonds and due on 17 April 2019. 

7.Both bonds were constituted by trust deeds (“Trust Deed(s)”) executed by the Company as issuer and the Bank of New York Mellon, London branch, as its trustee (“the Trustee”).

8.Between 11 May 2017 and early in 2020, the Company published a number of announcements on its website indicating that it had devised various plans to repay outstanding amounts on the said bonds and was taking certain steps to deal with the matter. 

INSOLVENCY PROCESS

9.On 26 September 2019, the 1st Petitioner served a statutory demand relying on section 327(4)(a) of the Ordinance by leaving the said statutory demand at the Company’s principal place of business in Hong Kong.  As explained above, the Petition was then filed on 9 March 2020.

10.As the Company is not a Hong Kong incorporated company, it is trite that the Petitioners need to establish that it is appropriate to exercise the court’s jurisdiction to wind up an overseas company and, therefore, the “three core requirements” have to be satisfied[1]. 

11.The Petitioners have in their Petition pleaded a number of factors which they say justifies the Court exercising its jurisdiction to wind up an overseas company.  I do not understand the Company to be suggesting that the Petitioners have failed to satisfy the Court that it was a proper case to wind up this Company on the said jurisdictional grounds.

12.Mr How-chung Chan (also known as Victor Chan) is a significant shareholder of the Company and also one of its executive directors.  He controls a company called Kingly Profits Limited which is also a creditor of the Company to the tune of HK$80 million-plus. 

13.The Petition first came before Harris J on 8 June of this year who gave directions for the filing of evidence and adjourned the substantive hearing to 20 August, which is today’s hearing. 

LOCUS OF PETITIONERS AND TRUSTEE / SUBSTITUTION

14.The Company disputes the locus of the Petitioners to present the petition by reason of the wording in the Trust Deed.  In particular, they point to clause 10.1 of the Trust Deed which provides that:

“The trustee may at any time at its discretion without further notice institute such proceedings against the issuers it may think to recover any amounts due in respect of the bonds which are unpaid or to enforce any of its rights under this trust deed or the conditions, but it shall not be bound to take any such proceedings unless... (certain conditions).”

“...only the trustee may enforce the provisions of the bonds or this trust deed and no bond holder shall be entitled to proceed directly against the issuer unless the trustee, having become bound to do so, to proceed, fails to do so within a reasonable time and such failure is continuing.”

15.What is quite clear is that this gives rise to fairly complicated legal arguments as to whether or not, in such a situation, a bond holder has locus to commence winding-up proceedings or whether only the Trustee can do so.  This goes both to the question of the construction of the relevant trust deed and also other legal arguments including whether or not such a term, assuming it has the effect contended for by the Company, would amount to a ‘statutory fetter’[2].

16.I understood from the written submissions filed by Mr Hew Yang-wahn who ably represented the Petitioners that they were seeking a winding-up order forthwith and were against the notion of any adjournment, no matter how short. 

17.In the course of argument, I pointed out that if the question of locus had to be dealt with now this was not a matter which was straight forward and therefore was likely to result in some adjournment.  Upon taking instructions, he confirmed that the Petitioners would be content for the Trustee to apply and substitute itself instead as petitioner.

18.I should point out that on 3 June 2020, the Trustee had applied by summons pursuant to Rule 33 to substitute the Petitioners. 

19.Rule 33 of the Winding-up Rules provides that:

“When a petitioner is not entitled to present a petition or whether so entitled or not, where he:

(a) Fails to advertise his petition within the time by these rules prescribed or such extended time as the Registrar may allow or

(b) Consents to withdraw his petition, or to allow it to be dismissed, or the hearing adjourned, or fails to appear in support of his petition when it is called on in court on the day originally fixed for the hearing thereof, or on any day to which the hearing has been adjourned, or

(c) If appearing, does not apply for an order in the terms of the prayer of his petition, the court may, upon such terms as it may think just, substitute as petitioner any creditor or contributory who in the opinion of the court would have a right to present a petition, and who is desirous of prosecuting the petition.  An order to substitute a petitioner may, where a petitioner fails to advertise his petition within the time prescribed by these rules or consents to withdraw his petition, be made in chambers at any time.”

20.The application to substitute was not opposed and given the Petitioners’ indication, I made an order in terms of the Trustee’s summons[3].  There was no dispute, and there could be no dispute, that the Trustee has locus to present and prosecute the present Petition before me.

ADJOURNMENT OF THE PETITION

21.The Trustee, therefore, submits that a winding-up order can and should be made forthwith subject to any application for an adjournment to be made by the Company.

22.Mr Bernard Man, leading counsel for the Company[4], sought an adjournment on its behalf for a period of at least six weeks or so. 

23.He persuasively submitted, in effect, that there was something to be gained (potentially a lot) and very little to be lost by adjourning the Petition for a very short while.

24.He very fairly accepted that in situations such as the present, adjournments were not usually granted against the opposition of petitioning creditors given the right ex debito justiciae to a winding-up order.

see HSBC v SMI Holdings Group [2019] HKCFI 1948, and Re X 10 Ltd (1989) 2 HKLR 306 at 309I to J.

25.In support of the adjournment application, he highlighted a number of features. 

(1)  That since a substantial part of the Company’s underlying assets were in the mainland and that the operations themselves consisted of a lottery business operation through mainland Chinese subsidiaries, it would take liquidators, assuming the company were liquidated, some time to realise the value of the business, which is further complicated by certain foreign exchange control restrictions. Further, if the Company were to be liquidated, the mainland Chinese lottery authorities may or may not award new lottery contracts to the said mainland Chinese subsidiaries. The authorities there, having maintained stringent requirements on the financial position of the lottery operators and, therefore there was a significant risk that the mainland authorities would either revoke or otherwise end the licences to operate the said lottery businesses if the holding Company were to be wound up.

(2)  He highlighted the considerable upside for all the creditors (presumably including the shareholders) if an adjournment were granted given the significant commitment which Mr Victor Chan was willing to make.  Notwithstanding that I can see the force in the arguments of Ms Rachel Lam, SC who appeared for the Trustee, and Mr Hew, in that not a lot is known is about Mr Victor Chan’s personal financial situation, I accept that on the evidence it would appear that he is making a genuine attempt by putting his money where his mouth lies.  On 18 September 2019, Mr Chan sought to file his third affirmation (for which leave was sought and leave was granted) to update the Court on the latest position and also, as it were, to sweeten the offer made to the creditors in an attempt to sway them in support of an adjournment of the Petition.

26.In the latest iteration of the repayment plan, six payments were anticipated to be made, the first on 30 September 2020, and the last on 30 September 2021. 

27.The first payment to be made on 30 September 2020 would be for approximately HK$100 million in order to pay overdue interest on the 2017 bonds and the 2019 bonds.  The second partial repayment on 31 December 2020 would be for an amount it is anticipated of HK$50 million and would seek to repay some of the interest but also some of the principal amount. 

28.Pursuant to this plan, therefore, which involves repaying approximately HK$800 million or so, the creditors’ indebtedness would be satisfied by September next year.

29.In the course of his address Mr Man SC on behalf of the Company and, in particular, Mr Victor Chan, sought to go further to assuage the creditors’ doubts and concerns by personally undertaking to pay the first partial repayment and the second partial repayment if the Company was not able to pay and if the Company had not been wound up at the date of the said proposed repayments.

30.All in all, I agree that the offer made and the proposal for an adjournment is not one which the Court would consider to be obviously unattractive given the alternative possibilities.  As the sword of Damocles got closer, it is natural that the Company and those behind it who have an economic interest would be willing to give concessions which they previously would not.

31.Those later concessions which are now made cannot automatically be viewed with cynicism, although, given the history of the many failed proposals, one can see why some creditors would not be enthusiastic or confident about them.

32.Obviously, if there is no viable plan, restructuring or benefits to be had, then that would be an end of the matter and the Company would be wound up immediately. 

33.However, the fact that there is such a viable plan does not lead necessarily to the converse conclusion that an adjournment ought to be granted. 

34.In situations such as the present where the Company is obviously insolvent at least in the sense of cash-flow insolvency, is unable to pay its debts as they fall due, the interest of unsecured creditors is paramount. 

35.It is not for the Court to substitute the views of the creditors and, in particular, the views of the unsecured creditors with its own judgment as to the economic viability or attractiveness of various options and it is easy to see why.

(i)  It is obviously in the creditors’ own interest to choose the option which economically and financially makes the most sense to them based on the evidence and material before them.

(ii)  In many situations, including the present one, one can see that there are obvious pros and cons in either allowing a short adjournment or seeking an immediate winding-up order.  This involves different competing considerations.  Often it would involve choosing between two undesirable options and picking the least undesirable of the two.  It is for these reasons that the Court looks to the creditors and their views, both in terms of quantity (i.e., the amount owed to them) and the quality. 

36.The views of the ‘related’ creditors are taken into account although, of course, the Court is aware that this may or may not colour their support one way or the other. 

37.In the present case, all the creditors[5] save those associated with Mr Chan support an immediate winding-up order.  Whether the support amongst bond holders is 58% as suggested by the Company or whether it is more than that does not quite matter given the present circumstances, there is simply no independent creditor supporting an adjournment.

38.I also bear in mind that in the present case before me there is bound to be a number of creditors who have not expressed a view or who have not appeared in the Petition. 

39.Whether this is due to apathy or other reasons, one cannot tell.  However, I have borne in mind that of those who have supported an immediate winding-up order these included independent and financial institutions such as BlackRock and Value Partners and, of course, one of the original Petitioners, BFAM. 

40.The fact that the independent creditors (if I may call them that) have all supported an immediate winding-up order is a powerful factor militating in favour of an immediate winding-up order.

DISPOSITION AND COSTS

41.For those reasons, balancing the above considerations I refuse to grant an adjournment of the Petition and it follows that an immediate winding-up order is made. 

42.I shall now hear the parties as to costs.

(submissions on costs)

43.I will make a costs order nisi that (1) the Trustee’s costs be paid out of the assets of the Company and (2) the costs as between the original Petitioners and the Company be costs reserved, with liberty to restore.

44.It remains for me to thank Mr Hew for the Petitioners, Ms Lam, SC for the Trustee, and Mr Man, SC for the Company for their able submissions. 

Mr Hew Yang-Wahn, instructed by Latham & Watkins LLP, for the 1^st to 4^th Petitioners

Mr Bernard Man, SC, instructed by Baker & McKenzie, for the company (with Ms Natalie So for written submissions only)

Ms Rachel Lam, SC, instructed by Clifford Chance, for the trustee

Attendance of the Official Receiver was excused