The Bank of New York Mellon, London Branch v. Xj International Holdings Co Ltd

HCCW 187/2024

[2024] HKCFI 1378

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) NO 187 OF 2024

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BETWEEN

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DECISION

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Introduction

1.This is the application of XJ International Holdings Co Ltd (“the Company”) by summons dated 6 May 2024 for a validation order pursuant to section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap 32 (“Ordinance”).

2.On 27 March 2024, The Bank of New York Mellon, London Branch (“the Petitioner”), the trustee of the US $350 million zero-coupon convertible bonds guaranteed by the Company (“the Bonds”) presented a winding up petition (“the Petition”). This occurred after the issuer (a wholly-owned subsidiary of the Company) failed to redeem the Bonds on 2 March 2024 upon the exercise of the bondholders’ put options under the relevant transaction documents.

3.The validation order the Company seeks relates to 2 matters, namely:

(1) the transfers of any or all of issued and fully paid shares in the Company since the date of the Petition shall not be void by virtue of section 182 of the Ordinance; and

(2) notwithstanding the presentation of the Petition, the payment or other disposition of property made since the date of presentation of the Petition in the ordinary course of business of the Company including payments made into or out of bank accounts of the Company, shall not be void by virtue of section 182 of the Ordinance.

4.As regards (1) above, it is common ground that an application for the validation of transfer of fully paid shares will be unobjectionable and should be straightforward: see Re Belgravia Properties Ltd [2015] 1 HKLRD 509 at §9.

5.The Petitioner has no objection to the substance of §1 of the summons but, with a view to clarity, has proposed the addition of certain amendments (shown in italics below) to the terms of the order to be made such that §1 would read as follows:

“ Notwithstanding the presentation of the Petition filed herein, the transfer of any or all of issued and fully paid shares in the Company since the date of the presentation Petition shall not be void by virtue of section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) in the event of an order for the winding up of the Company being made.”

6.The Petitioner opposes §2 of the summons which seeks to validate dispositions in the ordinary course of business.

7.The applicable principles differ depending on whether the company is solvent or insolvent. A convenient summary may be found in the recent decision of Cheng J in Re Alco Holdings Limited [2024] HKCFI 73 at §§10-12:

“ 10. In the case of a solvent company with an active and ongoing business, a validation order would normally readily be made: Emagist Entertainment Ltd [2012] 5 HKLRD 703, [2012] HKCU 2245 at [4] to [5].

11. In the case of an insolvent company which is trading, it may be beneficial for the company and its creditors that the company should be permitted to carry on its business in the ordinary course pending the making of a winding-up order against it. The court must consider where the interests of the unsecured creditors lie. In general, the court will be more disposed to the making of a validation order in respect of an insolvent company where it is satisfied that the carrying on of the business is likely to generate net cash or net assets for the benefit of the creditors, and thus to reduce any deficiency that might otherwise exist on the winding up of the company: Re Century Group Ltd, unreported, HCCW 59/2004, 18th March 2004 at [6] to [9].

12. Where there are doubts as to the solvency of the company, the court will not sanction the proposed transactions unless it is satisfied by affirmative evidence that they would be beneficial and advantageous for the company: Re First Dragon Fashion (Hong Kong) Ltd [2010] 4 HKLRD 592, [2010] HKCU 1613 at [14].”

8.Mr Du Jinsong, counsel for the Company, maintains that the Company is balance sheet solvent on the basis that it is actively trading and making a profit. The basis for that view appears to be the Interim Results Announcement for the 6 months ended 29 February 2024 made by the Company dated 30 April 2024 (“the Announcement”) and extracts from the 2023 Annual Return of the Company.

9.The Court was taken to various entries in the Interim Condensed Financial Information of 29 February 2024 (“ICFI”) (which forms part of the Announcement) and references to accounting concepts.

10.As the Court had difficulty in understanding how they demonstrated the Company’s solvency given the Company’s failure to redeem the Bonds, Mr Du referred to the entry “Cash and cash equivalents” under Current Assets[1] showing an amount in excess of RMB 2.5 billion. In other words, the Group had ample funds at its disposal.

11.In response to the Court’s enquiry as to why the Company defaulted on the Bonds if it had those funds at its disposal, Mr Du stated that it is because the Company takes the view that it has a bona fide defence based on substantial grounds to the Petition debt.

12.Ms Rachel Lam SC and Ms Jasmine Cheung, counsel for the Petitioner, submits that the Company’s solvency is at best doubtful and it is unable to meet its debts as they fall due:

(A) The evidence adduced by the Company suggests that the Company and its subsidiaries (“the Group”) is balance sheet solvent on a consolidated basis. The following matters emerge from the Announcement and in particular from Note 1 to the ICFI:

(1) The Group has net current liabilities of approximately RMB 5.3 billion as of 31 August 2023 (audited), and of approximately RMB 6.5 billion as of 29 February 2024 (unaudited)[2]. That effectively counters the Company’s submission[3] that its current assets are ample, demonstrating solvency. Moreover, the numbers recorded show a downward trend.

(2) There is a net cash outflow (i.e. cash used) of over RMB 52 million for the Group’s operating activities and over RMB 381 million for its investing activities[4].

(3) Despite the cash flow being positive for financing activities, it has not factored in the amount payable under the put option which on 2 March 2024 had an aggregate principal amount of just over USD 315 million[5].

(4) Note 1 of the ICFI acknowledges that the matters mentioned in (1) to (3) above “indicated the existence of material uncertainties which may cast significant doubt on the Group’s ability to continue as a going concern.[6]”

(5) It then refers to the Group implementing 6 plans and measures (described in (i) to (vi) of Note 1) to improve the Group’s liquidity and cash flows to sustain the Group as a going concern. That notwithstanding, the Company acknowledges that “significant uncertainties exist as to whether the Group will be able to implement the plans and measures as described above.[7]”

(B) On 22 February 2024, the Company made a voluntary announcement that it had difficulty redeeming all of the Bonds on 2 March 2024 in view of its financial conditions and was:

“ seeking external financing resources and exploring different options to meet its potential financial commitments under the Convertible Bonds as well as preparing for discussions with the holders of the Convertible Bonds for feasible solutions...”

13.Given the matters set out in §12 above, I agree that the solvency of the Group is hardly a foregone conclusion. In these circumstances, the Court has to proceed on the basis that there is considerable doubt concerning the Company’s solvency.

14.In support of the summons, there is the affirmation of Lou Qunwei (“Lou 1^st”) (an executive director since 26 April 2024 and a senior vice president since March 2017 of the Company) filed on 6 May 2024. However, it provides no particulars or evidence of the contemplated dispositions other than a passing reference to the freezing of Company’s bank accounts upon presentation of the Petition and the Company’s consequent inability to pay staff salaries, rentals, MPFs etc. Nor is there any explanation of why the Company should continue trading.

15.This is particularly unsatisfactory given the Petitioner’s solicitors’ request for details of the contemplated asset disposals on 6 and 8 May 2024 which went unanswered.

16.The Company appears to take the view that the Court should pay no heed to risk warnings such as those contained in Note 1. However, the Company cited no authority in support of its proposition.

17.Further, the Company’s suggestion that the Court should narrow the scope of §2 of the summons without the Company formulating the relief it now seeks is novel and deserves to be dismissed out of hand.

18.In so far as the Company’s complaint regarding the absence of any evidence filed by the Petitioner in opposition to the Company’s application and that the Court should disregard its submissions, that is simply wrong.

19.To accede to §2 of the summons is tantamount to giving carte blanche to the Company to continue trading, an outcome that cannot be entertained given the uncertainties described in §12 (A) (4) and (5) above, not to mention the total absence of particulars of the contemplated dispositions.

20.Accordingly:

(1) with respect to §1 of the summons, I make an order in terms of the proposed order set out in §5 above;

(2) §2 of the summons is dismissed; and

(3) the costs of this hearing be to the Petitioner, with certificate for 2 counsel.

Ms Rachel Lam SC and Ms Jasmine Cheung, instructed by Alien Overy Shearman Sterling, for the petitioner

Mr Du Jinsong, instructed by Chan King Wong and Co, for the company

The Official Receiver was absent