Chau Cheok Wa v. Ct Environmental Group Ltd

HCCW 133/2021

[2021] HKCFI 2602

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 133 OF 2021

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BETWEEN

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Before: Hon Linda Chan J in Chambers

Date of Hearing: 27 August 2021

Date of Decision: 27 August 2021

Date of Reasons for Decision: 2 September 2021

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R E A S O N S    F O R    D E C I S I O N

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1.At the hearing of the summons dated 20 August 2021 issued by the petitioner, Mr Chau Cheok Wa (“P”), for appointment of provisional liquidators (“PLs”) over CT Environmental Group Limited (“Company”), I dismissed the summons with costs against P. These are the reasons for my decision.

A. BACKGROUND

2.P is the chairman and executive director of Suncity Group Holdings Limited, a listed company in Hong Kong. P is connected with a Macanese company, Sun City Promocao De Jogos – Sociedade Unipessoal Limitada (“SCP”) which is a licensed Junket Promoter in Macau.

3.P is a judgment creditor of the Company pursuant to a default judgment obtained on 17 January 2020 in HCA 1940/2019 (“Default Judgment”) whereby the Company was adjudged liable to pay (1) $130,375,000 with interest at 30% p.a. from 20 July 2018 less $11,710,134.87 (being interest payment paid to P) (“1^st Debt”), and (2) $50,000,000 with interest at 30% p.a. from 26 July 2018 less $6,267,123.30 (being interest payment paid to P) (“2^nd Debt”).

4.The Company is incorporated in Cayman Islands and its shares have since 2013 been listed on the Main Board. The Company is an investment holding company and its main assets are indirect shareholdings in (and loans advanced to) various subsidiaries established in the Mainland (“Mainland Subsidiaries”) which, in turn, hold valuable real properties and facilities and operate their business in various cities in the Mainland. The Company and its subsidiaries are referred as the “Group”.

5.A simplified corporate structure of the Group, as depicted in Mr Jose Maurellet SC’s[1] skeleton submissions, is reproduced herewith.

6.On 29 March 2021, P presented the petition based on the 1^st and 2^nd Debts and the Company’s failure to comply with a statutory demand served on the Company on 9 February 2021 requiring it to pay the 1^st and 2^nd Debts.

7.The petition was defective in that it failed to set out the facts and matters relevant to the “3 core requirements” for the Hong Kong Court to exercise its discretion to wind up the Company (being a foreign company). Such matters were introduced by way of amendments to the petition on 7 July 2021. Consequently, the petition (as amended) had to be re-advertised and Registrar’s Certificate was only granted on 26 August 2021. The petition will be heard before Master on 1 September 2021 and will likely be adjourned to be heard before a Companies Judge the following Monday.

B. GROUNDS IN OPPOSITION TO THE PETITION

8.The Company filed Cheung 1^st and Cheung 2^nd on 6 July 2021 and 26 July 2021 in opposition to the petition and made the following points:

(1) The Company does not dispute the 1^st and 2^nd Debts, but reserves its right to challenge the same. According to the investigation conducted by an independent financial advisor in early December 2020, it was discovered that 3 days after the 1^st Debt had been remitted from SCP to the Company on 20 July 2018, $127 million was transferred from the Company’s bank account to the personal bank account of Mr Tsui Cham To (who was until August 2020, the chairman and executive director of the Company) (“Tsui”). The amount has not been returned to the Company or the Group. As Tsui has been detailed in the Mainland in connection with certain criminal offences in the past 2 years, the Company has not been able to obtain information from him on the use or the whereabouts of the sum.

(2) As at 30 June 2020, the Company and the Group had net liabilities of $181.7 million and $225.8 million respectively. This, however, has not taken into account the cash compensation of RMB 1,238 million (equivalent to $1,355 million) to be received by Guangzhou Lvyou (as defined in §5 above) from the local government authority in exchange for resuming the land from Guangzhou Lvyou (“Resumption Compensation”)[2].

(3) The major assets of the Group are all located in the Mainland. Except the first 20% which had already been received by Guangzhou Lvyou and applied to repay its debts, the balance of the Resumption Compensation in the amount of RMB 990 million will be paid in accordance with the progress of the relocation of the existing sludge and solid and hazardous waste treatment plant owed by Guangzhou Lvyou to a new site at Dagang Town, Nansha District (“New Site”), which is expected to be completed by 30 September 2022.

(4) As at 2 July 2021, the Company had 5 creditors and the percentage of the debts owed to them were: (a) Far Eastern International Bank Co Ltd (10.4%) (“Far Eastern”); (b) Bank of China (Hong Kong) Ltd (“BOC”) (33.83%); (c) P (36.24%); (d) deposit paid by Guangzhou R&F Properties Co Ltd (“R&F”) (18.81%) to a subsidiary of Company; and (e) loan from Gu Yaokun (0.72%).

(5) If one takes into account the onshore loans owed by some of the Mainland Subsidiaries to (a) Industrial and Commercial Bank of China Ltd (“ICBC”) as to RMB 890.9 million and (b) China Construction Bank (“CCB”) as to RMB 121.1 million, the 1^st and 2^nd Debts represent 10.72% of the indebtedness of the Group.

(6) There has been a change in management in that 4 out of 7 directors assumed their office in August 2020. Since then, they have been taking steps to deal with the indebtedness of the Group. These include (a) engaging Ernst & Young Transactions Limited in June 2021 to advise on raising funds through rights issue and other restructuring options, (b) disposal of a water treatment plant held by Guangzhou Yinlong[3] for RMB 259.8 million ($312.3 million) and disposal of the Company’s indirect interest or equity in 5 of the Mainland Subsidiaries for aggregate consideration of RMB 1,017 million (collectively “Disposal of Assets”), and (c) pursuing the relocation plan so as to obtain the balance of the Resumption Compensation.

(7) In early July 2021, a Creditors’ Agreement was executed by all major creditors of the Group (i.e. ICBC, BOC, Far Eastern, R&F) (collectively “Major Creditors”), Guangzhou Lvyou and Guangzhou Yinlong whereby the Major Creditors agreed to release the bank accounts and the lands located in the Mainland (which had already been foreclosed or frozen pursuant to the enforcement proceedings taken by them) so as to facilitate the Disposal of Assets[4].

(8) Amongst the Major Creditors, Far Eastern, R&F and BOC (which account for 18.66% of the Group’s indebtedness) signed letters to confirm their support of the Company’s opposition to the petition and to seek an adjournment of the petition so as to allow the Company to have sufficient time to restructure its indebtedness[5], while ICBC (which accounts for 61.99% of the Group’s indebtedness) has by letter stated that the petition had seriously impacted its rights in respect of its debt and urged the Company to properly deal with the petition so as to avoid a liquidation[6].

(9) The Company contends that the second core requirement will not be satisfied as the Company does not have any valuable assets within the jurisdiction and it is unlikely that the liquidators appointed in Hong Kong will be recognised in Cayman Islands or the BVI and they “will face huge challenges to change the control of the Company’s subsidiaries at all levels”.

(10) If the Company is wound up, it is unlikely that the liquidators will be able to make much recovery from the Company’s assets. Amongst the assets listed in the management accounts, (a) the receivables due from subsidiaries ($1,139.7 million) will not be recoverable given the financial state of the Mainland Subsidiaries; (b) the amount due from related parties ($80.8 million) was primarily due from Tsui; and (c) the prepayments and receivables ($24.4 million) had been paid pursuant to certain cooperation agreements already terminated or that they represented unamortised expenses recorded a long time ago.

(11) After the resignation of Tsui’s wife as chairman and executive director of the Company on 19 April 2021, the Board engaged new legal advisers to advise the Company on the suspected misappropriation of funds by Tsui, and a report was made to the Police[7].

C. SUMMONS FOR APPOINTMENT OF PLS

9.The summons and its professed urgency is said to have been triggered by 2 matters.

10.First, the “Whistle-blower” letter received by P on 9 August 2021. After the investigations conducted based on publicly available information, P found that:

(1) The previous Board had chosen 中安國際投資有限公司 (“Zhong An”), which is said to be a “semi state-owned enterprise backed by China International Council for the Promotion of Multinational Corporations”, as strategic investor of Guangzhou Lvyou for the construction and operation at the New Site. However, after the current Board had taken control of the Company, it resolved to replace Zhong An with 廣州華元匯管理諮詢有限公司(“Huayuan”) as the strategic investor and, thereafter, entered into a loan agreement with Huayuan and obtained a loan of RMB 350 million from Huayuan.

(2) The Board appears to have inexplicably favoured an investment agreement with Huayuan, under which the Group’s major assets are used as security (“Investment Agreement”), over an agreement with Zhong An, which P considers to be a “more commercially favourable agreement” as it did not require such security (“Original Investment Agreement”).

11.Second, on 19 August 2021, P received another anonymous letter (“Further Letter”) which indicated that the Investment Agreement had been approved at a Board meeting held on 9 August 2021 and the same was executed without modification. Worse still, it appears that the Board is “strong arming the management of the subsidiaries in the Group to execute guarantees by threatening to fire them if they did not do so”.

12.Relying on the above “questionable conduct” of the Board, Mr Maurellet submits that there is a “serious and justifiable concerns that the Company’s assets are in jeopardy and cannot be allowed to further remain under the Board’s control”. There is an immediate need to appoint PLs to protect the interest of P and the other creditors of the Company pending determination of the petition, and to allow independent investigation to be conducted without any delay. This is particularly so when P is entitled to ex debito justitiae to a winding up order.

C1. Procedural impropriety

13.I do not regard the 2 matters relied on by P sufficient to justify the summons to be made on an urgent basis. It is clear from the documents adduced by P in support of the summons that P has had access to the former management of the Group, and has been provided with extensive information and documents relating to the negotiations with the potential strategic investors. In this regard, the Company points out that the draft opinion from Messrs GFE Law Office was the same opinion procured by Dr Du Daohong (“Du”) and put to the Board at the meeting held on 9 August 2021. According to the Company, until mid-April 2021, Du was the Chief Internal Control Officer and general manager of the Group, and he has been one of the senior executives of various personal / private companies owned and controlled by Tsui.

14.As discussed in section C3 below, there is evidence in support of the Company’s contention that the 1^st and 2^nd Debts are not binding upon the Company. Given that Du has been working closely with Tsui, there is some basis for the Company to contend that the so-called Whistle-blower letter and the Further Letter were nothing more than the tactics deployed by Du with a view to stifle the ongoing effort of the Board to implement the Investment Agreement and the Disposal of Assets in an orderly manner.

15.I also consider that there is procedural impropriety on the part of P’s solicitors, Messrs K.B. Chau (“KBC”), in dealing with the summons. According to the records, KBC filed the summons and the supporting affirmations at 4:50 pm on Friday, 20 August 2021 and obtained an early hearing on 27 August 2021. At no time did KBC inform Messrs Patrick Chu, Conti Wong Lawyers LLP (“PCC”), the Company’s solicitors, that they were going to issue the application, let alone on an urgent basis. Even after the summons and the affirmations had been filed, KBC did not take any step to serve the summons and the affirmations on PCC. It was only after PCC had discovered the summons in the evening of 20 August 2021, followed by their letter to KBC dated 21 August 2021 enquiring about the summons, that at 11:49 am on 22 August 2021 (Sunday), KBC faxed a letter dated 20 August 2021 enclosing the summons and the supporting affirmations but without any exhibits. It was until 11:30 am on 23 August 2021 (Monday) that KBC served the summons and the affirmations on PCC.

16.As a result of the delay engineered by KBC, the Company has been deprived of more than 2 days to consider the application. The delay is inordinate and inexcusable, as KBC were aware that the summons would be heard on 27 August 2021, and the Company had to file affirmation in response to the summons and lodge its submissions by 10 am on 25 August 2021. Unsurprisingly, the Company was not able to file its evidence or submissions in good time: Mr Ho (counsel for the Company) lodged his 12-page submissions at 2:56 pm on 26 August 2021, which referred to Cheung 3^rd filed in opposition to the summons, but the same was not available to the Court until after 4 pm on 26 August 2021.

17.When the matter is raised with Mr Maurellet, he informs the Court that the handling solicitor has prepared a draft affirmation to deal with the Company’s complaint about the delay but such affirmation has not been filed. Other than reading out part of the draft affirmation, Mr Maurellet is unable to assist any further.

18.Had the Company been unable to file its evidence before the hearing which necessitated an adjournment of the summons, I would have ordered KBC to show cause as to why they should not bear the costs wasted as a result.

C2. Applicable principles

19.The principles governing application for appointment of PLs are well established. It is incumbent upon the applicant to satisfy the Court that (1) there is a good prima facie case for a winding-up order at the hearing of the petition; and (2) in the circumstances of the case, it is right that a provisional liquidator should be appointed (Re Union Accident Insurance Co Ltd [1972] 1 All ER 1105, at 1110a-c).

20.The basis for appointing provisional liquidator has been explained by Rogers VP in Re Legend International Resorts Ltd [2006] 2 HKLRD 192, §§25-27, 35-37, 49-50 in this way:-

“27. … The purpose of the appointment was to protect the assets of the Company and hence some danger to the assets, not limited to malfeasance, had to be shown.”

“35. … the appointment of a provisional liquidator must be for the purposes of the winding-up. Provided that those purposes exist there is no objection to extra powers being given to the provisional liquidator(s), for example those that would enable the presentation of an application under s.166 …”

“49. Even if it were established that the assets of the Company were in jeopardy it would be necessary for the court to consider whether the appointment of provisional liquidators would serve any useful purpose …” (underlined added)

21.Mr Maurellet submits that where there is questionable conduct on the part of the directors in control, which gives rise to justifiable concern that the company’s assets cannot properly be allowed to remain under their control, a PL may be appointed (Re Astrotech International Holdings Limited, HCCW 816/2002, 21 February 2003, §§104, 133, per DHCJ Poon (as he then was)). Further:

(1) Suspicious circumstances, which may not amount to misappropriation of assets, may be sufficient reason to appoint PLs to protect the interests of the creditors and shareholders where there is a need to preserve the status quo to ensure the least possible harm to all concerned pending the hearing of the petition, or there is a need for an independent investigation of the affairs of the company without delay (Re Luen Cheong Tai International Holdings Ltd [2002] 3 HKLRD 610, §§11-12, per Kwan J (as she then was)).

(2) The investigations may include investigations of those who have been managing the company with a view to considering bringing claims against them, or to report concerns about their fitness for management (Re Hua Han Health Industry Holdings Limited [2020] 2 HKC 53 at §§61-62 per Coleman J).

(3) Whether a PL should be appointed has to be decided based on commercial realities, the degree of urgency and need established by the petitioner, and the balance of convenience according to the circumstances (Re Boldwin Construction Co Ltd [2003] 2 HKLRD 237, §29(4), per Kwan J).

(4) Ultimately, the question is whether PLs would be in a better position and would be able to do more than the existing management both as a matter of the exercise of powers and as a matter of practicality (Re Hua Han Health Industry Holdings Limited, §126, per Coleman J).

C3. Good prima facie case for winding up?

22.It is well established that a judgment obtained by default or consent may in fact be for a disputed, unenforceable or even non-existent debt, on which a winding-up order should not be made. If the Court has before it all material necessary to determine the question, it will investigate whether, despite the judgment, the petitioner is not a creditor of the company (Re United Stock Exchange Ltd (1884) 51 LT 687; French, Applications to Wind up Companies, 4^th ed., §7.649).

23.In Cheung 3^rd, the Company set out the grounds in support of its contention that there is a bona fide dispute on substantial grounds in respect of the 1^st and 2^nd Debts. In summary:

(1) The Company found a purported loan agreement dated 19 July 2018 made between the Company (as borrower), Tsui (as guarantor) and P (as lender) for a loan of $135 million with interest at 30% p.a. (“Loan Agreement”)[8].

(2) On 20 July 2018, SCP transferred $130,375,000 into the Company’s bank account at BOC[9].

(3) According to the minutes of a board meeting purportedly held on 19 July 2018, the Loan Agreement was considered and approved by Tsui and Mr Xu Juwen (an executive director at the time) at the meeting (“Purported Meeting”)[10]. The investigation conducted by the independent investigator revealed that no notice of the Purported Meeting had been given to the other directors at the time.

(4) Despite the warning by the company secretary about potential connected transactions, on 20 July 2018, Tsui instructed the Company to transfer $127 million to his personal bank account at HSBC. The transfer was completed on 23 July 2018[11]. The Company does not have any record on how Tsui used the money or its whereabouts.

(5) The Company has never had any business dealings with P or SCP.

(6) The writ in HCA 1940/2019 was issued on 23 October 2019, at the time when the Board was still controlled by Tsui and his associates. For reasons unknown to the current Board, no acknowledgement of service was filed by the Company, whereupon P obtained the Default Judgment on 17 January 2020.

(7) The Company has been collating evidence to show that the Loan Agreement is void as against the Company and the Company did not benefit from the use of proceeds of the 1^st and 2^nd Debts. For this purpose, it has in mid-August 2021 applied for a Norwich Pharmacal order against HSBC to trace the whereabouts of the proceeds of the 1^st and 2^nd Debts.

24.In my view, as the matter now stands, there is sufficiently precise factual evidence to show that:

(1) the Purported Meeting and the resolutions passed thereat were invalid as notice of the Purported Meeting had not been given to all directors of the Company (Active Base Ltd v Roderick John Sutton & ors, HCCW 470/2005, 4 June 2008, §§104-106, per Kwan J (as she then was)); and

(2) the Loan Agreement is void for want of authority as the scope of actual authority would not include authority to act for the agent’s benefit, rather than of his principal (Hopkins v TL Dallas Group Ltd [2005] 1 BCLC 543, §88, per Lightman J). It is doubtful if P can rely on apparent authority, as a third party cannot establish apparent authority of an alleged agent by relying on the agent’s own unauthorised statement to clothe the agent with authority. Further, before any representation by the agent could be relied on to assist the contention that he had apparent authority, the court would have to be satisfied that the principal had given the alleged agent apparent authority to make the representation in question. Any such representation would have to be “clear and unequivocal”, as in any case of estoppel by representation (Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (in liq) (2010) 13 HKCFAR 479, §§66-71, per Lord Neuberger; Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, at 505-506, per Diplock LJ (as he then was)).

25.If the Loan Agreement is void, it would not bind the Company, and P cannot claim to be a creditor of the Company. I am not satisfied that P has shown a good prima facie case for winding up the Company.

26.Of course, the above is only a provisional view as P has not filed any evidence in response to Cheung 3^rd, and there is much to be said about the delay on the part of the Company in seeking to set aside the Default Judgment. No matter how Mr Ho puts it, the fact remains that despite having been in office for a year, the current Board has not taken any step to set aside the Default Judgment. It is only until Cheung 3^rd that the Company seeks to dispute the validity of the 1^st and 2^nd Debts.

27.Both counsel have advanced extensive arguments on whether the 3 core requirements can be satisfied. In light of my view that P has not shown a good prima facie case for winding up the Company, it is unnecessary for me to express any view on their arguments.

C4. Assets in jeopardy?

28.In his skeleton submissions, the only “questionable conduct” relied on by Mr Maurellet is the Board’s decision in approving the Investment Agreement which is problematic in that:

(1) Huayuan is a new company and does not have the apparent ability to advance a RMB 350 million loan to Guangzhou Lvyou.

(2) The terms of the loan agreement are uncertain. Apart from the first tranche of RMB 60 million, the remaining tranches are to be confirmed and Huayuan is not obliged to advance the remaining sums.

(3) It is a condition precedent to the drawdown that Huayuan is granted a certain degree of control over Guangzhou Lvyou, and if Guangzhou Lvyou cannot sign an investment agreement with Huayuan before 30 June 2021, Guangzhou Lvyou has to repay the principal and interest immediately. These place Guangzhou Lvyou in a weak bargaining position for the investment agreement.

(4) On 24 June 2021, a supplemental loan agreement was entered into whereby an entity named 深圳鑫森天下投資有限公司 (“Xinsen”) would step into the shoes of Huayuan under the Loan Agreement. One of the 2 shareholders of Huayuan (Chen An Dong) is stated to be Xinsen’s representative in the Investment Agreement.

29.The criticisms on the loan agreement with Huayuan/Xinsen are not well founded, as there is no dispute that the Group had already received the first tranche of the loan in the amount of RMB 60 million from Huayuan on 7 May 2021, and applied such loan for paying the initial expenses for the preparatory work for the development of the New Site[12].

30.Mr Maurellet submits that the issues and problems in relation to the Investment Agreement are “glaring”:

(1) It is difficult to see why the Board would replace Zhong An with Xinsen as its strategic investor, as Zhong An is wholly owned by a non-governmental body approved by the State Council of the PRC with a Special Consultative Status with the Economic and Social Council of the United Nations, with the aim of facilitating projects of Chinese and foreign enterprises.

(2) The Investment Agreement requires substantial guarantees and share pledges by other entities in the Group, which directly put all of the major assets of the Group at risk in that:

(i) the Holding Subsidiary, Guangzhou Lvyou, and all of the Holding Subsidiary’s wholly-owned subsidiaries must grant guarantees and share pledges to Xinsen. The land use rights to the New Site and shares in the Target Company are to be pledged to Xinsen (Cl 1.1(k), 5.1(g), 9, 24.1, 24.2). These guarantees and share pledges can be enforced if any party commits a breach (Cl 9.5).

(ii) Guangzhou Lvyou has to guarantee the profits of the Target Company. If the Target Company fails to reach certain targets, Xinsen has the right to seek compensation and can even ask for compensation to take the form of a transfer of shares by Guangzhou Lvyou, the Holding Subsidiary or any of the companies in the Group (Cl 7.4 ).

(3) The other terms of the Investment Agreement also lean heavily in favour of Xinsen in that:

(i) Under the Original Investment Agreement, Guangzhou Lvyou is able to control 51% voting rights and can nominate 3 out of 5 directors of the Target Company, including the chairman (Cl 3.1.1, 3.1.2). By contrast, under the Investment Agreement, these rights are held by Xinsen, and Guangzhou Lvyou can only control 49% voting rights and nominate 2 out of the 5 directors (Cl 3.7, 12.5).

(ii) Despite having control and management of the Target Company, the Board saw fit to allow Guangzhou Lvyou to guarantee the profits of the Target Company (Cl 7.2-7.4) and to compensate Xinsen if the Target Company fail to reach the profit targets.

(iii) Under the Original Investment Agreement, Guangzhou Lvyou does not need to inject any funds, and its land use rights to the New Site and technology would be treated as contribution to share capital (Cl 1.2.1). By contrast, under the Investment Agreement, Guangzhou Lvyou has to inject a total of RMB 100 million into the Target Company (Cl 3.5).

(iv) Under the Original Investment Agreement, Guangzhou Lvyou could keep all of the profits of the Target Company for its first calendar year of operations (Cl 4.2), but there is no such mechanism under the Investment Agreement.

31.Reliance is also placed on the contents of the Further Letter in which the writer alleged that improper pressure had been applied by the director(s) and/or the Board to steamroll the Investment Agreement at the Board meeting on 9 August 2021.

32.By reason of the matters set out above, Mr Maurellet submits that in approving and putting into effect the Investment Agreement, the Board failed to have regard the interest of the creditors of the Company, which should have been the paramount consideration of the Board in light of the Company’s insolvency (Cyberworks Audio Video Technology Limited v Remedy Asia Ltd [2020] HKCFI 398, §§66-68, per Coleman J)

33.It seems to me that the criticisms are directed to the perceived advantages and disadvantages of the Investment Agreement as compared to the Original Investment Agreement, which are matters for the Board to decide. It would be wrong for the Court to substitute its opinion to that of the management, or indeed question the correctness of such decision, if bona fide arrived at[13]. There is no suggestion that in deciding to approve the Investment Agreement, the majority of the directors did not act bona fide in what they considered to be in the best interest of the Company. The fact that P takes a different view on the commercial terms of the Investment Agreement would not render the act of the Board in approving and implementing the Investment Agreement to become questionable.

34.In any event, the Company has put forward evidence to explain why the Board did not proceed with the Original Investment Agreement[14]. In short:

(1) the Original Investment Agreement was merely a framework agreement setting out the key terms of the proposed investment by Zhong An. The negotiations did not reach beyond the stage of the framework agreement;

(2) the Original Investment Agreement was subject to a condition precedent, which required the New Site to have a market value of RMB 185 million. The condition could not be fulfilled as the estimated value of the New Site was only RMB 100 million;

(3) the amount to be invested by Zhong An was RMB 500 million, which was less than the RMB 550 million to be invested by Huayuan/Xinsen;

(4) the interest payable on the loan to be advanced by Zhong An is 10% p.a., which is 5% much higher than the loan to be advanced by Huayuan/Xinsen;

(5) there was a need to finalise the agreement with the strategic investor (and to secure the loan from such investor) as Guangzhou Lvyou had to inject the first tranche of investment by 30 June 2021 as required under the Compensation Agreement;

(6) the Board had considered the pros and cons of both Agreements at the meeting held on 21 April 2021 but did not make any decision. Instead, the Board offered Zhong An an opportunity to improve its proposed terms of investment (including to remove the condition precedent) so as to match the terms offered by Huayuan/Xinsen, but no response was received from Zhong An; and

(7) It was only at the Board meeting held on 23 April 2021 that the Investment Agreement was approved by 4 out of the 6 directors.[15]

35.In light of the above evidence, which is not challenged by P at the hearing, even if (contrary to my view) there is a proper basis for the Court to review the Board’s decision in approving the Investment Agreement, I do not think that the criticisms made by P are justified.

36.It follows that P has failed to demonstrate that the assets of the Group are in jeopardy or that there is an urgent need for independent investigation of the affairs of the Group.

C5. Not necessary or appropriate to appoint PLs

37.At the hearing, this Court asks Mr Maurellet what P says are the benefits of appointing the PLs over the Company or why is it thought that the appointment of PLs would be in the interest of the Company and its creditors as his skeleton does not address the point.

38.It seems to me that there is no benefit for PLs to be appointed over the Company, given that:

(1) the Investment Agreement has already been approved and implemented, and it is not suggested that the PLs can or should unwind the Agreement;

(2) the major assets of the Group in the Mainland had been provided as security to the onshore creditors (i.e. ICBC and CCB), and have been subject to ongoing enforcement proceedings in the Mainland; and

(3) the Major Creditors have agreed to release the secured assets for the purpose of the Disposal of Assets which, if implemented, would enable the Group to repay most, if not all, of its indebtedness.

39.On the other hand, the disadvantages of the appointment are obvious:

(1) It would hamper the ongoing effort of the Group in implementing the Disposal of Assets in an orderly manner.

(2) The Board has in the past 12 months taken active steps in managing the affairs of the Group and pursuing the Disposal of Assets with a view to repay the debts owed to the creditors. They are willing to continue to perform these functions. There is no reason why the Court should replace the directors with PLs who are complete strangers to the Company and would require much time and costs in understanding the affairs of the Group before they can perform their functions, even assuming all stakeholders would be willing to cooperate with them.

(3) Substantial remuneration would be charged by the PLs (and their team of assistants) in reviewing and managing the affairs of the Group, and significant legal costs would be incurred by the PLs in obtaining legal advice and taking control over the assets of the Group. All these costs would have to be paid in priority over the claims of the unsecured creditors.

(4) There is a risk that the appointment would jeopardise the Creditors Agreement, and result in the Major Creditors taking their own enforcement actions against the assets of the Group. This would not be in the interest of the creditors as a whole.

40.Mr Maurellet submits that the purposes or benefits of the appointment are as follows.

41.First, there is an urgent need for independent investigation of the affairs of the Group. For the reasons discussed in section C4 above, I do not think the point is made out.

42.Second, he relies on the contents of the minutes of the Board meeting held on 9 August 2021. Mr Maurellet submits that from the discussion of the directors, one can see that they were only concerned about their liability when the Company is being wound up and did not pay attention to the interest of the creditors. However, the decision to approve the Investment Agreement was made at the Board meeting held on 23 April 2021, and it is not clear why it is thought that the directors had to consider the interest of the creditors again at the Board meeting held on 9 August 2021.

43.Lastly, it is said that since the current Board has only been in office for a year and all that they have been doing are to investigate the affairs and selling the assets of the Group, which are the functions of PLs. There is no or not much harm in replacing them by PLs. I disagree. The disadvantages of the appointment are those discussed in §39 above.

D. COSTS

44.The Company submitted a statement of costs claiming $490,930 as the costs of the summons. I assessed the costs at $310,000. Amongst the costs claimed, the brief fee for junior counsel (with 3 years’ call) is in the amount of $250,000. Mr Ho seeks to justify his fee by saying that he has over 20 years’ experience in dealing with insolvency matters. However, the fact remains that he is a junior counsel with 3 years’ call and his fee will be assessed on that basis. Indeed, if a solicitor with his years of experience were to appear as advocate for the Company, the time claimed would at most be 1.5 days for consideration of documents and preparation of a 12-page skeleton which focuses on the 3 core requirements and general principles and does not contain much analysis on the evidence adduced by the Company or the points raised in Mr Maurellet’s skeleton. I therefore only allowed $80,000 as counsel’s brief fee which commensurate with the level of fee charged by a competent junior on a matter of this nature. I allowed 90% of the time costs claimed by the solicitors of the Company, having regard to the fact that they had to take instructions from the Company on the matters relied on by P in support of the summons, and drafted a detailed affirmation in opposition to the summons within 2.5 days.

Mr Jose Maurellet SC leading Mr Terrence Tai and Ms Jasmine Cheung, instructed by K.B. Chau & Co, for the Petitioner

Mr Look Chan Ho, instructed by Patrick Chu, Conti Wong Lawyers LLP, for the Respondent

Mr Alvin Sin of Official Receiver’s Office for the Official Receiver