Re North Mining Shares Company Ltd (in Liquidation)

HCMP 832/2023

[2023] HKCFI 2439

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 832 OF 2023

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REASONS FOR JUDGMENT

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1.By Petition dated 30 August 2023 (“Petition”),the joint and several liquidators[1] (together “Liquidators”) of North Mining Shares Company Limited (in liq) (“Company”) seek the court’s sanction of a scheme of arrangement between the Company and the “Creditors” in respect of all the unsecured claims which the Creditors have against the Company on the terms set forth therein (“Scheme”). At the hearing, the Scheme was sanctioned. These are the reasons for my judgment.

2.The application for sanction is made by the Liquidators (as opposed to the Company) as required by s.673(4) of the Companies Ordinance (Cap. 622) (“CO”).  The Liquidators put forward the Scheme for the purpose of discharging all the unsecured claims which the Creditors have against the Company in return for the “Scheme Shares” (as defined in §11(3) below) to be issued by the Company so as to restore its solvency.   

A.  BACKGROUND

3.The Company was incorporated in Bermuda on 10 April 1995 and was registered as an oversea company under Part XI of the former Companies Ordinance (Cap. 32) on 27 September 1995 and a non-Hong Kong company under Part 16 of the CO.  It has paid-up capital of HK$373,926,180.6 divided into 23,370,386,286 ordinary shares of HK$0.016 each.[2]

4.The shares in the Company had since 27 September 1995 been listed on the Main Board of The Stock Exchange of Hong Kong Limited (“SEHK”).  Trading in the Company’s shares has since 1 April 2021 been suspended.[3]

5.The Company is an investment holding company which held a number of direct and indirect subsidiaries (together “Group”) engaging in mining and chemical businesses in the Mainland.  The main indirect (non-wholly owned) subsidiaries are:

(1)  Shaanxi Province Luo Nan Xian Jiulong Kuangye Company Limited (陝西省洛南縣九龍礦業有限公司) (“Jiulong Kuangye”) which engages in the business of mining operations including exploitation, exploration and trading of mineral resources (molybdenum). 

(2)  Anhui Tongxin New Material Technology Company Limited (安徽同心新材料科技有限公司) (“Anhui Tongxin”) which engages in the business of chemical trading operations, including research and development, manufacturing and trading of chemical products (including various types of hydrocarbon petroleum resin commonly used in industrial applications), and provision of related technical services.[4]

6.The Company and the Group have since 2019 been in financial difficulties.  Pursuant to a winding-up petition presented against the Company on 25 November 2021, the Company was ordered to be wound up on 16 May 2022.On 18 July 2022, the Liquidators[5] were appointed to office. 

7.In order to resume trading, the Company is required to satisfy the resumption conditions imposed by SEHK by 30 September 2023 which include obtaining a permanent stay of the winding-up order against the Company.[6]

8.According to the audited financial statements of the Company and the consolidated financial statements of the Group for the year ended 31 December 2022, the Company and the Group were insolvent in that:

(1)  The Company had net liabilities of HK$1,372 million; and

(2)  The Group had net current liabilities of HK$2,854 million and net liabilities of HK$1,506 million. 

9.As at the date of the Restructuring Agreement (i.e. 21 February 2023), the total amount of unsecured claims held by the Creditors against the Company was HK$1.729 billion. 

10.As of 18 July 2023, the Liquidators received 22 proofs of debts claiming an aggregate amount of HK$1.75 billion against the Company.[7]  Amongst these claims, HK$2.8 million are “Excluded Claims”.[8]

B.  SCHEME

11.The Scheme forms part of the Proposed Restructuring put forward by the Company to restructure its capital and indebtedness.  It involves:

(1)  “Capital Reorganisation” which comprises (a) Share Consolidation; (b) Capital Reduction; (c) Share Subdivision; and (d) Share Premium Reduction and applying the credit arising from the Reduction to eliminate the accumulated losses standing in the accounts of the Company.  Upon the Capital Reorganisation becoming effective,the Company’s capital will consist of New Shares of HK$0.02 each. 

(2)  “Investor Subscription” whereby Huatune Corporation 華豚(集團)有限公司 (“Investor”) will pay HK$40 million as consideration for subscribing 256,410,256 shares to be issued by the Company at HK$0.156 per share.  Of this amount, up to HK$21.5 million will be used by the Company to  discharge the professional fees and expenses associated with the preparation and implementation of the Scheme, and the balance will be used as general working capital of the Group.[9]

(3)  On the basis that the total amount of unsecured claims which the Creditors have against the Company is HK$1.729 billion and the price of the shares is HK$0.156 per share, the Company will issue 11,086,710,827 shares to the Creditors under the Scheme (“Scheme Shares”).

(4)  Upon the Scheme becoming effective: (a) the Creditors will receive such number of Scheme Shares based on the amounts of their claims admitted (“Admitted Claims”) as consideration for the discharge of the Admitted Claims; and (b) all the Admitted Claims will be discharged and released.[10]

(5)  If the total amount of the Admitted Claims is less than HK$1.729 billion, the remaining Scheme Shares will be disposed of by Amasse Capital Limited (“Placing Agent”) in the market, and the proceeds will form part of the Scheme Fund to be distributed to the Creditors. 

12.The Investor and the Placing Agent are creditors of the Company in the amounts of HK$540 million and HK$300,429.90 respectively.

13.If upon issuing the Scheme Shares, the Company does not have sufficient public float as required by the Listing Rules, the Placing Agent will place such portion of the Scheme Shares issued to Harvest Wealth International Limited (a major creditor of the Company) (“Harvest Wealth”) in the market and the proceeds will be distributed to Harvest Wealth.[11]

14.At the special general meeting of the Company held on 7 July 2023, resolutions were passed by the shareholders to approve the Capital Reorganisation, the Investor’s Subscription and the issuance of the Scheme Shares.[12]

15.Under the Scheme:

(1)  The estimated value of the Scheme Shares would yield a recovery rate of 15.57% or 3.5% based on the projected net asset value of the Company as at 2025.[13]

(2)  If the Scheme is not implemented, it is estimated that the recovery rate to the Creditors will be from 0% to 2.09% in 3 to 5 years’ time.[14]

C.  ANALYSIS

16.In considering whether to sanction a scheme of arrangement, the court will consider the following factors[15]:  

(1)  Whether the scheme is for a permissible purpose;

(2)  Whether creditors who were called on to vote as a single class had sufficiently similar legal rights that they could consult together with a view to their common interest at a single meeting;

(3)  Whether the meeting was duly convened in accordance with the court’s directions;

(4)  Whether creditors have been given sufficient information about the scheme to enable them to make an informed decision whether or not to support it;

(5)  Whether the necessary statutory majorities have been obtained; and

(6)  Whether the court is satisfied in the exercise of its discretion that an intelligent and honest man acting in accordance with his interests as a member of the class within which he voted might reasonably approve the scheme.

17.For the reasons explained below, each of the above factors have been satisfied.

C1.  Permissible Purpose

18.The purpose of the Scheme is to compromise and discharge the debts owed by the Company and third party guarantees executed in favour of the Creditors.  This is a permissible purpose of a scheme of arrangement (Re Moody Technology Holdings Limited[2022] HKCFI 1992, §15; Re Swissport Fuelling Ltd[2021] 1 BCLC 527, §§43-45).

C2.  Classification of Creditors

19.In determining whether the classes of scheme creditors are properly constituted, the following principles are pertinent (Re Moody§16):-

(1)  Whether creditors who are called on to vote as a single class have sufficiently similar legal rights so that they can consult together with a view to their common interest at a single meeting[16]. For this purpose, the court considers the rights of creditors, not their separate commercial or other interests.

(2)  The court takes a broad approach to the composition of classes so as to avoid giving unjustified veto rights to a minority group of creditors.  In Re Noble Group Ltd[2019] Bus LR 947 §87, Snowden J (as he then was) observed that the modern trend is to resist any tendency to increase the number of classes.  The court should not get too picky about potential classes and it is relevant to consider practical considerations.

(3)  The court has to consider on the one hand, the rights of the creditors in the absence of the scheme and on the other hand, any new rights to which the creditors become entitled under the scheme.  If there is a material difference between the rights of the different groups of creditors, they may constitute different classes.  Whether they do so depends on a judgment as to whether such difference makes it impossible for the different groups to consult together with a view to their common interest.

20.In the present case, all the Creditors are unsecured creditors of the Company and their right to receive the Scheme Shares under the Scheme is the same.  Although the Investor and Placing Agent have additional role under the Proposed Restructuring, such role does not have any effect on their rights qua creditors of the Company.  As for Harvest Wealth, the proposed arrangement for disposing some of the Scheme Shares issued to it is to ensure that the Company will comply with the requirement of maintaining sufficient public float which is necessary for the Company to resume trading.  The arrangement does not render the rights of Harvest Wealth to become so dissimilar with the rights of the other Creditors such that they cannot consult together with a view to their common interest at a single Court meeting. 

C3.  Compliance with Court’s Directions

21.The Company has complied with all the directions given by this Court at the hearing on 26 July 2023 in that on 7 August 2023 (being 21 days before the Scheme Meeting):

(1)  A Notice of Scheme Meeting substantially in the form of Annexure 1 to the Order (“Notice”) was duly advertised in the Standard and Sing Tao Daily;

(2)  The Notice, the composite document containing the Scheme, Notice and Explanatory Statement (“Composite Document”), and a form of proxy for use at the Scheme Meeting substantially in the form of Annexure 2 to the Order, and a Notice of Claim Form (collectively, “Documents”) were made available for download at the Company’s website at http://www.northmining.com.hk;

(3)  The Documents were available for collection by any Creditors at the principal place of business of the Company in Hong Kong during usual business hours prior to the day appointed for the Scheme Meeting;[17] and

(4)  The Documents were sent (a) by email to those Creditors which had provided valid email addresses to the Company; (2) by prepaid surface mail to those Creditors which had their last known addresses in Hong Kong; and (c) by courier to those Creditors which had their last known addresses elsewhere.[18]

22.Further, in accordance with the directions of the court, the Company convened and held the Scheme Meeting on 28 August 2023 for the Creditors to consider and, if thought fit, approving the Scheme.[19]

C4.  Explanation of Scheme

23.It is the responsibility of the Company to provide sufficient information on the effect of the Scheme, in the explanatory statement (s.671(3) of the CO).  The explanatory statement has to be perfectly fair and, as far as possible, give all the information reasonably necessary to enable the recipients to determine how to vote and the information needs to be up to date (In re Dorman, Long & Co [1934] Ch 635 at 657; Re Heron International NV [1994] 1 BCLC 667).

24.The Explanatory Statement sets out the details in relation to the ongoing restructuring of the Group, as well as the reasons for implementing the Scheme.  These include:

(1)  The background of the Company and the Group;

(2)  A summary on the principal features of the Scheme and its advantages and disadvantages;

(3)  The prospect of the Group after implementation of the Scheme by reference to its business plan and profit forecast;

(4)  The risk factors in relation to the Scheme; and

(5)  Comparative analyses and estimates on the returns to the Creditors under the Scheme and in a liquidation scenario. 

25.The above information is sufficient for an honest and intelligent creditor to make a decision whether or not to approve the Scheme.

C5.  Approval by Requisite Majorities

26.Section 674(1)(a) of the CO provides that a creditor’s scheme must be approved by a majority in number representing at least 75% in value of the creditors present and voting, in person or by proxy.  At the Scheme Meeting held on 28 August 2023, 18 Creditors attended (either personally or by proxy) and all of them voted for the Scheme.[20] 

C6.  Views of an Intelligent and Honest Man

27.The court would be slow to differ from the view of the majority who are better judges of whether it is in their interests to approve the Scheme unless there is something glaring wrong in the scheme (Re Moody §25; UDL Argos Engineering & Heavy Industries Co Ltd & Ors v Li Oi Lin & Ors (2001) 4 HKCFAR 358 §25).  In the present case, all the Creditors present and voting at the Scheme Meeting voted for the Scheme. 

28.In any event, the following matters show that the Scheme is one which an intelligent and honest person might approve.

29.First, the expected rate of return under the Scheme is 3.5% – 15.57%[21], which is much higher than the expected return in liquidation scenario (at 0% – 2.09%).[22]

30.Second, if the Scheme becomes effective, the Company will be able to return to solvency with estimated net asset of around HK$11.5 million.[23]

31.Although the Group will remain insolvent upon the implementation of the Scheme with estimated consolidated net liabilities of approximately HK$206 million[24], there is reasonable basis to believe that the Group can continue to trade as a going concern and will return to solvency having regard to the following matters:

(1)  The Group’s mining business (under Jiulong Kuangye) ceased due to the expiry of the mining licence in 2019, which adversely affected the Group’s profitability.  In early 2023, the main mining licence was successfully renewed (up to February 2034).  It is anticipated that ancillary licences for the mining business’ operation will be renewed imminently, such that the full operation of the mine can resume in around September 2023.  Given the considerable increase of the price of molybdenum in the Mainland in recent years, it is expected that the mining operation will generate considerable profits for the Group.[25]

(2)  The Group’s chemical trading operations also suffered serious adverse impact in recent years.  During Covid-19 pandemic, many suppliers suspended their operations and Anhui Tongxin had less bargaining power over the price of the raw materials due to limited supply.  This drove up the costs of the operations of Anhui Tongxin.  As the socio-economic climate has begun to improve in the Mainland, the management  anticipates that Anhui Tongxin will be in a position to select suppliers with better price offers and its operation will become profitable from 2024 onwards.[26]

(3)  In fact, the net liability of the Group is mainly due to the HK$300 million loan due by Anhui Tongxin, which has been in default since 2019.  Anhui Tongxin is on good terms with the creditor and the management believes that the risk of the creditor taking enforcement action against Anhui Tongxin in the near future is remote.[27]  Even if Anhui Tongxin has to be liquidated, it would not have a major impact on the profitability of the Group as almost 80% of the profits of the Group is expected to be generated by Jiulong Kuangye.[28]

C7.  International Dimension

32.There are 2 main issues which the court has to take into account when considering whether to sanction a scheme of arrangement which concerns a foreign company, which I describe as jurisdiction issue and utility issue.

33.As regards jurisdiction issue, where, as here, the Company is a foreign company, the court has to consider whether it is a company within the meaning of s.668(1) of the CO.  This requires the company to be “a company liable to be wound up under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32)”.  As explained by Godfrey Lam J (as he then was) in Re LDK Solar Co., Ltd [2015]1 HKLRD 458, §§43-55, in the context of a creditors’ scheme:

(1)  The applicant needs to satisfy the court that there is sufficient connection between the foreign company and Hong Kong; and the second and third core requirements for the court to exercise its discretionary jurisdiction to wind up a foreign company do not have to be fulfilled. 

(2)  The concern of the court is to see whether there are connecting factors with the jurisdiction so that the scheme, if approved, will have a substantial effect.  For this purpose, presence of substantial assets within the jurisdiction (against which the creditors may be able to take enforcement action) and the presence of a sufficient number of creditors subject to the personal jurisdiction of the court (who would be bound to act in accordance with the scheme, both within and outside the jurisdiction), may supply the necessary connection.   

(3)  As a matter of Hong Kong law, a foreign composition does not discharge a debt unless it is discharged under the law governing the debt (i.e. the Gibbs rule[29]).

34.I note that the Gibbs rule has been applied and followed in other common law jurisdictions including Cayman Islands[30] but not in Singapore[31].   

35.The jurisdiction issue is satisfied.  Although the Company is a foreign company, it has substantial connections with Hong Kong in that (1) it has been registered as a non-Hong Kong company under Part 16 of the CO; (2) it has a principal place of business in Hong Kong; (3) the affairs of the Company, both before and after liquidation, have been directed and carried out in Hong Kong; (4) the Company’s shares have been listed on SEHK; and (5) the principal purpose of the Scheme is to comply with the resumption conditions imposed by SEHK so as to resume trading of its shares.

36.As for utility issue, this stems from the principle that the court would not act in vain and would not exercise its power to sanction a scheme which does not serve any useful purpose. The court will sanction the scheme provided it is satisfied that the scheme would achieve a substantial effect, and the company does not have to show worldwide effectiveness or worldwide certainty (Re China Singyes Solar Technologies Holdings Limited [2020] HKCFI 467 §18(3)(iv), per Harris J).  In E-House (China) Enterprise Holdings Limited FSD2022-0165 Segal J considered the issue under the rubric of “international effectiveness of the scheme” and explained the rationale in this way:

“At the convening hearing, the Court also needs to consider, at that stage on a preliminary basis, whether there is no point in convening a meeting of creditors because even if scheme creditors were to vote in favour and the Court were to sanction the scheme it would ultimately be ineffective since the scheme would not bind creditors and would be of no effect in other jurisdictions in which the company concerned had valuable assets or could be subject to insolvency proceedings (and there was a real risk that dissenting creditors might take action there). The Court will not act in vain and will not sanction a scheme which will not be substantially effective and achieve its core purpose.”

37.In offshore jurisdiction such as Cayman Islands, Bermuda and the BVI, the international effectiveness of the scheme is often a real issue if the company does not have any assets or creditors within the jurisdiction.  By contrast, for schemes involving foreign companies whose shares are listed on SEHK, when they come to our court for sanction, their utility or international effectiveness is normally not a matter of real concern.  This is because the company would only seek the sanction of the scheme from our court when there are sufficient creditors who would be bound by the scheme.  These include (1) creditors who are subject to the in personam jurisdiction of the Hong Kong court; (2) creditors whose debts are governed by Hong Kong law; and (3) creditors whose debts are governed by foreign laws but have attended and voted at the scheme meeting or will participate in the scheme.  The third type of creditors has been described as exception to the Gibbs rule[32].  It seems to me that by taking part in the scheme meeting or participating in the scheme, these creditors have submitted to the jurisdiction of the court and, therefore, are bound by the scheme. They cannot seek to enforce their debts against the company or its assets, whether within or outside Hong Kong. 

38.In the present case, the utility issue is satisfied.  About 67% of the unsecured claims held by the Creditors are due and payable in Hong Kong and/or are governed by Hong Kong laws.  Although 33% of the unsecured claims held by 5 creditors are governed by PRC law, all of them have attended the Scheme Meeting and voted for the Scheme.  There is therefore no creditor whose claims will not be compromised and discharged under the Scheme. 

39.As a winding-up order has been made against the Company, it is incumbent upon the Company to apply for a permanent stay of the winding-up order under s.209 of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap. 32), which will be heard before this Court on 25 September 2023.

Mr Justin Ho and Mr Cedric Yeung, instructed by Michael Li & Co., for the Liquidators