Re Target Insurance Co Ltd

HCCW 246/2022

[2022] HKCFI 3036

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP)  PROCEEDINGS NO 246 OF 2022

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Before:  Hon Linda Chan J in Court

Date of Hearing:  26 September 2022

Date of Order:  26 September 2022

Date of Reasons for Judgment:  3 October 2022

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REASONS FOR JUDGMENT

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1.At the hearing of the Petition presented by Target Insurance Company, Limited (Managers appointed)  (“Company”), I made the usual winding-up order against the Company. These are the reasons for my judgment.

2.The Company was incorporated under the former Companies Ordinance (Cap. 32)  in 1977.  It has paid-up capital of HK$803,000,000. All the issued shares are held by Target Insurance (Holdings)  Limited (“TIHL”), a company listed on the Main Board of The Stock Exchange of Hong Kong Limited.

3.The Company is an authorized insurer and its business is regulated by the Insurance Authority (“IA”)  under the Insurance Ordinance (Cap. 41)  (“IO”).  As of December 2021, the Company provided over 10,000 insurance policies for taxi in Hong Kong, which represented about 60% of the market.   

Debt owed by NBL and its winding up

4.Since June 2020, the Company has maintained a managed account with Nerico Brothers Limited (“NBL”)  in respect of securities (cash account)  and spot forex (cash account)  (“Account”).  Under section A, clause 3(b)  of the Institutional Services Client Agreement, NBL shall open, maintain and operate the Account in accordance with the Company’s instructions.  By October 2021, NBL transferred an aggregate amount of HK$1.4 billion to the Account. 

5.At the IA’s request, the Company has since the end of October 2021 demanded NBL to return all the monies deposited in the Account but to no avail. 

6.On 7 January 2022, the IA exercised its power under s.35(2)(b)  of the IO to appoint Managers[1] over the Company.  One of the mandates of the Managers is to recover the monies transferred from the Company to NBL as the IA was concerned that those monies had been unlawfully transferred away which would seriously affect the Company’s ability to make payments under its insurance policies and meet the solvency requirement under the IO. 

7.According to the investor statement issued by NBL, as at 17 January 2022, the amount standing in the credit of the Account was US$154,177,206.74 (“Sum”). Despite repeatedly acknowledging the Company’s entitlement to the Sum, NBL failed to repay the same to the Company.

8.On 18 January 2022, the Company served a statutory demand on NBL requiring it to repay the Sum within 21 days.  Other than remitting US$7,035.74 to the Company on 25 January 2022, NBL failed to pay the balance of US$154,170,171 (“Debt”)  to the Company. 

9.On 10 February 2022, the Company presented a winding-up petition and applied for appointment of the Managers as provisional liquidators over NBL on the grounds that (1)  there was an urgent need to investigate the whereabouts of the Sum, which had been concealed by the management of NBL; (2)  if the Sum was not located and recovered, it would prejudice NBL’s ability to repay its creditors including the Company; and (3)  if the Sum was not recovered timeously, it would put the Company in a precarious position which, in turn, would affect its ability to fulfil the obligations under the insurance policies in force. 

10.At the hearing on 17 February 2022, NBL through counsel confirmed that it did not dispute the liability to pay the Debt, but opposed the appointment of provisional liquidators on the ground that NBL had been attempting to recover the Debt from Four Dimensions Global Strategy Fund.  After hearing arguments of the parties, DHCJ Bernard Man SC appointed the Managers as provisional liquidators of NBL (“PLs”). 

11.At the hearing of the petition against NBL on 3 May 2022, the Debt remained unpaid.  Nevertheless, NBL filed an affirmation of Wan Kai Leung Paul to oppose the petition asserting that (1)  NBL was solvent and that there was a reasonable prospect for NBL to repay the Debt to the Company within a reasonable time; and (2)  NBL would be able to withdraw the Sum “within a reasonable time upon compliance with the relevant requirement”, and the director responsible for handling the transactions (Mr Lee Cheuk Fung Jerff (“Lee”))  would be able to give the court a further update upon his return from Singapore on 29 April 2022.  This was notwithstanding the fact that in as early as February 2022, Lee already said to the court that NBL had been in the process of complying with the Cayman regulations and retrieving the Sum. 

12.Having regard to the fact that NBL had failed to pay the Debt despite being given more than 6 months to do so, this Court made the usual winding-up order against NBL.

HCA 305/2022

13.Upon further investigation carried on by the PLs, they came to the view that the Company was the victim of a fraud perpetrated by or with the knowledge of Mr Ng Yu (also known as Neo Ng)  (“Yu”), a former director of the Company. The PLs believed that the Sum had been misappropriated from the Company and transferred to the corporate vehicles of Yu with the assistance of Lee. 

14.On 25 March 2022, the Company made an ex parte application and obtained (1)  a Mareva injunction against Lee, Yu and his corporate vehicles viz., Amber Hill ES Fund SPC, Neo Tech Inc., YF Securities Pte Ltd (formerly known as Amber Hill Securities Pte Ltd)  and Amber Hill Capital Ltd (collectively “Vehicles”)  enjoining them from disposing of or dealing with their assets up the amount of the Debt; (2)  a proprietary injunction against the Vehicles over those parts of the Sum received by them (together “Injunction”)  and (3)  a disclosure order requiring the defendants to disclose their assets (“Disclosure Order”). 

15.On 28 March 2022, the Company commenced HCA 305/2022 against Lee, Yu and the Vehicles to claim the Debt. 

16.At the return date hearing on 29 April 2022, DHCJ Paul Lam SC granted an interim stay of the Disclosure Order[2] and continued the Injunction pending determination of the summonses for continuation and discharge of the Injunction.  In the Decision dated 13 May 2022 [2022] HKCFI 1362, the Judge referred to Yu’s affirmation dated 26 April 2022 where he said that the estimated value of his assets in Hong Kong (which included the assets held by Neo Tech Inc)  was over US$183 million (i.e. more than the Debt).  Amongst the assets listed, Yu said that 138,822,000 shares in TIHL under the name of Smart Neo (which is wholly and ultimately owned by him beneficially)  worth HK$124,898,153.40 (equivalent to US$16,012,583.76)  based on the average price of HK$0.8997 between 23 April 2022 and 4 January 2022.  This was despite the fact that trading of the shares in TIHL had been suspended for a few months. 

Financial position of the Company

17.Meanwhile, the Managers, with the assistance of accounting and actuarial specialists, prepared the management accounts of the Company made up to 31 May 2022 based on Hong Kong Financial Reporting Standards (“Management Accounts”).  In the Management Accounts, full provision was made for the Debt[3] to reflect the Managers’ view that upon the winding up of NBL, it is doubtful if the Debt can be recovered from NBL.  The Management Accounts show that as at 31 May 2022, the Company had assets of HK$1,179,042,786.53 and liabilities of HK$1,711,929,938.24 and, as such, was balance sheet insolvent with net liability of HK$532,887,151.71.

18.By letter dated 4 July 2022, the Managers informed the IA that the Company was balance sheet insolvent and was deemed insolvent pursuant to s.42 of the IO.  The Managers decided not to renew insurance policies and would exercise their power under s.38B and Schedule 7 to the IO to petition for the winding up of the Company.  The Managers requested the IA to serve notices on the Motor Insurers’ Bureau of Hong Kong (“MIB”)  and Employees Compensation Insurer Insolvency Bureau (“ECIIB”)  in light of the Company’s insolvency. 

19.By letter dated 14 July 2022, the IA informed the Managers that it supports a petition for the winding up of the Company and will notify MIB and ECIIB that it is satisfied that the Company is unable or unlikely to pay in full the liabilities under the motor policies and employee compensation policies as they fall due, after the Managers publicly declare that the Company cannot by reason of its liabilities continue its business.

20.On 15 July 2022, the Managers caused the Company to present the Petition for a winding-up order on the grounds that the Company (1)  is deemed insolvent pursuant to s.42(1)  of the IO; and (2)  was balance sheet insolvent as at 31 May 2022.    

21.Thereafter, the MIB and ECIIB, in accordance with their respective insolvency fund agreements entered into with the Government, assumed the Company’s liabilities under the existing motor policies and employees’ compensation policies respectively, which constituted 94% of the total insurance liabilities of the Company.  Since then, MIB and ECIIB have become unsecured creditors of the Company and the debts owed to them represent 88% of the total unsecured indebtedness of the Company.

22.As regards the remaining 6% of the remaining insurance policies not assumed by MIB and ECIIB (in the region of HK$94.9 million)  (“Residual Claims”), they are preferential payments under s.265 of the Companies (Winding Up and Miscellaneous Provisions)  Ordinance (Cap. 32)  (“CWUO”), and the Company has more than sufficient cash (HK$378 million)  to settle the same such that no unsecured creditor will be prejudiced.  Under the direction of the IA, and with the consent of MIB and ECIIB (qua unsecured creditors of the Company), the Managers exercised their power (as reinforced by s.49A(3)  of the IO which overrides s.182 of CWUO)  to continue to service the Residual Claims pending determination of the Petition.

23.Against the above facts and matters, which are not in dispute, it is clear that the Company is insolvent under ss.177(1)(d)  and 178(1)(c)  of the CWUO and should be wound up by the court.  This is particularly so when MIB and ECIIB, which hold 88% of the unsecured debts of the Company, both indicated that they support the Petition.  The IA, represented by Mr John Scott SC (leading Mr Jonathan Lee), also supports the Petition. 

24.For completeness, I agree with the submissions of Mr Martin Ho, counsel for the Company, that the Company is also deemed insolvent by virtue of s.42(1)  of the IO and s.177(1)(d)  of the CWUO. 

25.Section 42(1)  of the IO provides as follows:

“Subject to subsection (1A), an authorized insurer shall be deemed for the purposes of sections 177 and 327 of the Companies (Winding Up and Miscellaneous Provisions)  Ordinance (Cap. 32)  to be unable to pay its debts if at any time the value of the assets of the insurer does not exceed the amount of its liabilities by the relevant amount within the meaning of section 10.”

26.According to calculations prepared by the Company’s accounting team in accordance with the Insurance (General Business)  (Valuation)  Rules (Cap. 41G):

(1)  Since the Company’s relevant premium income (HK$459,815,430.41)  or its relevant claims outstanding (HK$1,064,811,447.33)  exceeds HK$200 million, Case 3 under s.10(1)  of the IO applies.

(2)  Under Case 3, the “Relevant Amount” is the aggregate of HK$40 million and the greater of (a)  one-tenth of the amount by which the said income in that year exceeded HK$200 million (i.e. HK$25,981,543.04; or (b)  one-tenth of the amount by which the said claims outstanding as at the end of that year exceeded HK$200 million (i.e. HK$86,481,144.73).

(3)  Accordingly, the “Relevant Amount” is HK$126,481,144.73, being the aggregate of HK$40 million and HK$86,481,144.73.

(4)  As at 31 May 2022, the Company had net liability of HK$503,301,071.33 based on the calculation adjustments mandated under the IO.

27.As the net asset position of the Company is below the “Relevant Amount” as required under s.10 of the IO as at 31 May 2022, the Company is deemed insolvent for the purposes of s.177(1)(d)  CWUO by virtue of s.42(1)  of the IO.  This means that even if (which I do not think is the case)  there is any basis to doubt the full provision made in respect of the Debt, the Company is still deemed insolvent and should be wound up by the court.   

28.At the hearing, Mr Abraham Chan SC (leading Mr Michael Lok and Mr Charlie Liu), counsel for TIHL, opposes the Petition and submits that it should be stayed on case management ground for the following reasons:

(1)  The winding up of the Company would pose substantial disruptive risk to legitimate policyholders and the wider insurance market;

(2)  The insolvency of the Company depends on the whereabouts and recoverability of the Debt.  The Managers themselves acknowledged that it is difficult to assign a value on the Debt with any degree of certainty given the on-going proceedings brought to recover the proceeds from the defendants (i.e. HCA 305/2022);

(3)  As regards deemed insolvency under s.42 of the IO, it involves novel question of law and the calculation requires actuarial specialist.  It is not a matter which can be determined at the callover hearing of the Petition;  

(4)  There are ongoing proceedings before the Insurance Appeal Tribunal in IAT/1/2022 brought by TIHL to challenge the decision of the IA in appointing the Managers over the Company which has been set down for a 3-week trial in June 2023; and

(5)  There is strong public interest dimension in the Petition in that (a)  the Company is the main business of TIHL (which, in turn, has public shareholders), (b)  MIB and ECIIB are public funds; and (c)  the winding up of a major insurer would pose potentially serious and disruptive effect to policyholders and the wider market. 

29.In view of the insolvency of the Company, TIHL has no real interest in the proceedings and cannot be heard to say whether the Company should be wound up or not.  In any event, none of the points raised by Mr Chan are valid grounds for the court to defer or stay the Petition, let alone for an unspecified period.   

30.In so far as the policyholders are concerned, their rights would not be affected by the winding-up order.  For those policies transferred to and assumed by MIB and ECIIB, they will continue to be serviced by those funds.  As for the policyholders of the Residual Claims, they have been dealt with by the Managers, with the assistance of the staff of the Company. There is no reason to think that the Managers will not continue to deal with the Residual Claims after the Company is wound up by the court.  As a matter of fact, the Official Receiver has applied by ex parte summons dated 21 September 2022 for a regulating order to dispense with the holding of the first meetings of creditors and contributories and to appoint the Managers as liquidators of the Company.  A regulating order was made after the hearing, and the Managers were appointed as liquidators of the Company.   

31.As regards the solvency of the Company, it is not in dispute that the Management Accounts were prepared in accordance with the relevant accounting standards.  There is no basis to suggest that the provision should not be made in respect of the Debt given that (1)  the Company had for over 11 months been demanding the return of the Debt but to no avail, (2)  NBL was wound up by the court on the ground that it was insolvent, and (3)  the present whereabouts of the proceeds of the Debt remains unknown.  As the defendants in HCA 305/2022 have not admitted liability to the Company’s claim, there is no certainty as to whether the Company will be able to recover the Debt or any part thereof, let alone within a short time.  This means that the Company will not have the benefit of the use of the Debt in its business until recovery is made in HCA 305/2022. 

32.Indeed, it lies ill in TIHL’s mouth to suggest that the Company may not be insolvent, given that the IA had since 16 March 2022 been requesting TIHL (and other controllers of the Company)  to comply with their obligations under the Letter of Undertaking dated 28 October 2014 given to the IA whereby they undertook to provide financial support to the Company in the event that its solvency ratio fall below 200% of the relevant amount determined in accordance with the IO.

33.The deemed insolvency of the Company is based on the formula stipulated in s.42 of the IO and can readily be ascertained, as discussed in §§25 to 27 above. 

34.The ongoing IAT proceedings is irrelevant to the question as to whether the Company should be wound up.  At the highest, it only has the effect of vitiating the decision of the IA in appointing the Managers over the Company.  It has no bearing on the recoverability of the Debt or the solvency of the Company.   

35.Lastly, the public interest dimension and the 3 matters identified by Mr Chan are the result of the act of the former management of the Company in transferring the Sum beyond the reach of the Company when there was no apparent reason or justification to do so.  They are irrelevant to the separate question as to whether in light of the current financial state of the Company, it should be wound up by the court. 

36.For the avoidance of doubt, as TIHL fails in its opposition, it is not entitled to any costs incurred in the Petition. 

Mr Martin Ho, instructed by DLA Piper Hong Kong, for the Company

Mr Abraham Chan SC leading Mr Michael Lok and Mr Charlie Liu, instructed by Angela Lau Law Office, for the Opposing Contributory

Mr John Scott SC leading Mr Jonathan Lee, instructed by Kirkland & Ellis, for the Insurance Authority

Ms Mabel Yuen, of Official Receiver’s Office, for the Official Receiver