Re Sally Aw Sian

HCB59/99

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H E A D N O T E

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Bankruptcy Ordinance - section 42 - restrictions on dispositions of property - whether analogous to section 182 of the Companies Ordinance

Discretion under section 42 - principles governing its exercise

HCB59/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY NO.59 OF 1999

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Coram : The Hon Mrs Justice Le Pichon in Chambers

Dates of Hearing : 25 and 26 January 1999

Decision Handed Down : 2 February 1999

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D E C I S I O N

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1. This is an application by Hong Kong Sunrise Holdings Limited ("Sunrise") for a validation order under section 42 of the Bankruptcy Ordinance, Cap.6. Sunrise entered into an agreement with Sally Aw Sian ("Miss Aw") on 11 December 1998 ("the Sunrise Transaction") for the purchase of a part of Miss Aw's holding of the shares in Sing Tao Holdings Limited ("Sing Tao"). This application is necessitated by the fact that an expedited petition for Miss Aw's bankruptcy was presented on 8 January 1999 and later the same day, on the ex parte application of Yosham Limited ("the Petitioning Creditor"), an interim receiver was appointed by the court in respect of Miss Aw's holding in Sing Tao shares and her interest under the Sunrise Transaction.

Background facts

2. Miss Aw is the chairman of Sing Tao and owns 50.04% of its issued share capital. That holding represents a significant part of her assets. Mr Ho Ying Chie ("Mr Ho") has apparently made various loans to Miss Aw. On 27 February 1997, Miss Aw executed a Deed acknowledging that Mr Ho had made her a US$ loan of US$13 million and a HK$ loan of approximately HK$169 million. These loans (which in the aggregate come to approximately HK$270 million) are unsecured. The Petitioning Creditor is the assignee of the benefit under the Deed of Acknowledgment. The Petitioning Creditor was unsuccessful in its attempts to press for repayment and on 16 December 1998, it served a statutory demand on Miss Aw.

3. Throughout 1998, Miss Aw attempted to dispose of her holding in Sing Tao. By 8 December 1998, negotiations between Miss Aw and Lazard Asia Investment Management Ltd. ("Lazard") had culminated in a draft agreement ready for execution ("the Lazard Proposal"). Miss Aw failed to attend the appointment for the signing of the Lazard Proposal and three days later, she entered into the Sunrise Transaction.

4. As noted above, the Petitioning Creditor served a statutory demand on Miss Aw on 16 December 1998. Miss Aw applied to set aside that statutory demand on 31 December 1998. It was in those circumstances that the expedited petition was presented and the ex parte application made for the appointment of an interim receiver on 8 January 1999.

5. On 18 January 1999, I gave directions in relation to Miss Aw's applications to set aside the statutory demand, to strike out the expedited petition and the Petitioning Creditor's application for the continuation of the interim receivership. Sunrise issued a summons and sought to intervene in the bankruptcy proceedings. That application was treated as an application under section 42 of Cap.6.

6. If Miss Aw were to succeed in her setting aside and/or striking out applications, she would be free to conclude the Sunrise Transaction and the need for a validation order will not arise. However, the setting aside/striking out applications are not due to be heard for some months. Sunrise therefore sought an early hearing date for its summons.

7. Sunrise's application under section 42 was opposed by the Petitioning Creditor. Approximately 96% of Miss Aw's holding or about 48% of the issued shares of Sing Tao has been pledged to banks. The amount outstanding to secured creditors is of the order of $110 million. These creditors are not at risk as they are more than adequately secured. Their breakeven point is apparently at $0.54 per share. Not surprisingly, these secured creditors adopt a neutral position as regards the present application. However, it would appear that two of them viz. Bankers Trust and Ing Barings (although the position is less clear in the case of the latter) have broken rank. By letters dated 25 January (the first day of this application), they wrote to Miss Aw threatening appropriate action if the amounts owing to them were not repaid within 7 days. As they have notice of the appointment of the Official Receiver as interim receiver, those letters should have been addressed to the Official Receiver, the equity of redemption being vested in him. Quite why they chose to send the letters when they did is a matter for speculation but if intended as a sabre-rattling exercise, suffice to say that it has failed to make any impact.

8. As regards Miss Aw's unsecured creditors, they are very much at risk. The Petitioning Creditor, who is an unsecured creditor, has an obvious interest in maximizing the value of Miss Aw's assets.

The Sunrise Transaction

9. Sunrise is a wholly owned subsidiary of China Enterprise Development Fund Limited ("CEDF"), a closed-end private investment fund listed on the Irish Stock Exchange. The Sunrise Transaction was jointly announced by Sing Tao and Sunrise on 19 December 1998. The essential terms are as follows :

(i) Sunrise to acquire 96,512,426 shares representing approximately 23% of Sing Tao's existing issued share capital for a total consideration of HK$115.81 million, i.e. at HK$1.20 per share;

(ii) Sunrise to purchase approximately 12.26% of the existing issued share capital of Sing Tao and procure third parties to purchase the balance representing 10.74% on completion;

(iii) If Sunrise should fail either to procure third parties to acquire that 10.74% or to complete the Sunrise Transaction for reasons other than the fault of Miss Aw, Miss Aw's recourse was limited to enforcing specific performance against Sunrise of its own purchase of 12.26% or calling off the entire transaction;

(iv) Miss Aw to grant to a management company to be named by Sunrise, an option to acquire an additional 10% of the issued share capital of Sing Tao exercisable in whole or in part at any time within two years of the date of grant of the option at an exercise price of HK$1.38 per share ("the Option");

(v) Miss Aw to retain her remaining shareholding representing approximately 17% of Sing Tao's issued capital if the option were to be exercised in full;

(vi) Miss Aw to remain as Chairman of the Board of Sing Tao; and

(vii) Sunrise to have the right to nominate two persons as executive directors and two persons as non-executive directors of Sing Tao to replace two existing executive directors and two existing non-executive directors.

10. The Sunrise Transaction is conditional upon the satisfaction of four conditions on or before the Condition Date, namely 26 January. The four conditions are set out in Clause 4 :

(a) Sunrise being satisfied with its due diligence review;

(b) receipt of confirmation from the Securities and Futures Commission ("SFC") that the sale and purchase of the 23% holding will not result in Sunrise or parties acting in concert with it being required to make a mandatory general offer for shares of Sing Tao pursuant to the Hong Kong Code on Takeovers and Mergers;

(c) Sing Tao's shares remaining listed on the Stock Exchange (save for temporary suspension of trading not exceeding five consecutive trading days) prior to completion and no notification being received from the Stock Exchange or the SFC that the listing will or may be withdrawn at, upon or as a result of, completion or otherwise in connection with the terms of the Sunrise Transaction; and

(d) the grant by Miss Aw of the Option to a company which will be owned by a new management team of Sing Tao and its subsidiaries.

11. Under Clause 4.3, the parties are at liberty to agree to extend the period during which the conditions have to be satisfied. The grant of the Option, a condition of the Sunrise Transaction, requires a validation order as would completion itself. Apart from that, as at the conclusion of the hearing in the afternoon of 26 January, the SFC letter had not been received, although leading counsel for Sunrise intimated that her client had been given to understand by the SFC, orally, that there were "no major obstacles".

Acquisition of 'control'

12. Pausing there, it would appear that the key to the Sunrise Transaction is the passing of board control from Miss Aw to the purchaser. As appears from the joint announcement, the present board consist of three executive directors and three non-executive directors. Under the Sunrise Agreement, Sunrise has the right to nominate four directors in total, two executive and two non-executive, to replace existing appointments. A new management team in whom the Option is to be vested will be installed. All this is achieved by acquiring a 23% stake. True it is that Miss Aw will be left with a 27% stake which is evidently greater than the 23% stake but the Option effectively 'disables' a significant part of Miss Aw's remaining holding for a period of two years, leaving Miss Aw with no more than a 17% holding that is unencumbered. There would not appear to be any need for the Option to be exercised save to ward off any hostile bid. In that eventuality, the exercise of the Option will take the holding up to 33%. Acquisition of a further 2% in the market will put Sunrise and the new management in a position to make a general offer.

The Consortium Agreement

13. On 11 January 1999, CEDF entered into a Consortium Agreement with the Investment Company of China ("ICC"). Under the Consortium Agreement, CEDF through Sunrise and ICC through Pacific Victory would acquire the 23% shareholding under the Sunrise Transaction in the following percentages :

Sunrise	11.87%
Pacific Victory	11.13%

14. The Consortium Agreement is said to be conditional upon the fulfillment of various conditions on or before 26 January 1999, including one to the effect that a validation order would be in place by that date although CEDF and ICC may agree to a later date for the fulfillment of that condition. The Consortium Agreement was announced on 12 January 1999.

The Investor Agreement

15. CEDF and ICC allegedly entered into an Investor Agreement on 18 January 1999 which provides for the periodic review of the performance of Sing Tao and maintenance of the level of shareholding in Sing Tao by CEDF through Sunrise and ICC through Pacific Victory at the ratio of 16:15.

16. Neither the Consortium Agreement, the Investor Agreement nor the Business Plan of CEDF and ICC relating to the future development of Sing Tao has been exhibited. They were withheld on the ground that they relate to internal arrangements which should remain confidential. The Petitioning Creditor was therefore denied the opportunity of verifying the accuracy of the statements made, in particular, concerning the terms of the Consortium and Investor Agreements. Sunrise's strategy is to be deprecated : it serves little purpose save to arouse suspicion and heighten the sense of mistrust that opposed applications inevitably engender. Further, such affidavit evidence is of little assistance to the court.

The Option

17. At the first hearing of Sunrise's summons at which a hearing date earlier than 26 January was sought, leading counsel for Sunrise informed the court that "the purchaser has obtained finance to purchase the extra 10%" and that this would have the effect of yielding a higher average share price. I understood this to mean that the necessary funding had been arranged for the Option to be exercised. However, it transpires that this is not the case at all. No evidence has been adduced to show when, if at all, the Option would be exercised. In fact, as at the date of the hearing, matters on this front have not progressed much beyond the information contained in the joint announcement made on 19 December 1998 save that a company incorporated in the British Virgin Island known as Oriental Tiger Investments Company is to be the management company. There is no evidence that this company will be able to raise the necessary funds or that the option will be exercised, whether in the immediate future or at all. In the circumstances, it is difficult to understand what basis there was for the statement made to the court or how it was that the statement came to be made.

The Lazard Proposal

18. The principal terms are :

(i) Miss Aw's entire shareholding in Sing Tao to be purchased at HK$1.25 per share yielding an aggregate amount of just under HK$262.5 million;

(ii) Miss Aw to be entitled to share in profits received by Lazard in the event of any sale within six years of the shares acquired at a price in excess of the "Trigger Price" at the date of completion ("the profit sharing arrangement");

(iii) Miss Aw to be appointed consultant to the Board for a period of six years at an annual fee of HK$9 million ("the consultancy arrangement");

(iv) an unsecured loan of just under HK$63 million ("the Lazard loan") to be made available to Miss Aw, repayable only after six years and in five equal annual instalments to the extent not offset by Miss Aw's share of the profits under the profit sharing arrangement;

(v) a general offer to be made to the public shareholders of Sing Tao at HK$1.25 per share.

The relevant principles

19. Section 42 of Cap.6 as amended came into effect on 1 April 1998. It provides, inter alia, as follows :

"42. Restrictions on dispositions of property

(1) Where a person is adjudged bankrupt, any disposition of property made by that person in the period to which this section applies is void except to the extent that it is or was made with the consent of the court, or is or was subsequently ratified by the court.

.......

(3) This section applies to the period beginning with the day of the presentation of the petition for the bankruptcy order and ending with the vesting of the bankrupt's estate in a trustee.

........."

20. It appears to be common ground between the parties that the principles applicable under section 182 of the Companies Ordinance (or under its English equivalent, i.e. section 227 of the Companies Act 1948, section 552 of the Companies Act 1985 and now section 127 of the Insolvency Act 1986) apply,mutatis mutandis, to the exercise of the court's discretion under section 42. This may have been based on In re Flint (A Bankrupt) [1993] Ch 319, a case concerning personal insolvency, where the Deputy Judge observed (at 328E-F) that :

"... section 284 is a new provision in personal insolvency and there do not yet appear to be reported cases offering guidelines for the exercise of the discretionary jurisdiction under that section. It is also clear, however, that the section is closely modelled on what used to be section 227 of the Companies Act 1948 and is now section 127 of the Insolvency Act 1986. Though the particular facts of the present case could never arise in the context of a corporate insolvency, in broad terms the similarities between corporate and personal insolvency in the context of dispositions of property after presentation of the winding up or bankruptcy petition, as the case may be, are far greater than any differences. It would therefore be legitimate to look for guidelines in cases concerning sections 227 of the Act of 1948 and 127 of the Act of 1986." (emphasis added)

21. Section 42 is identical to section 284 of the Insolvency Act 1986.

22. It should be noted that the dictum (appearing in italics above) in In re Flint has not met with universal approval. See, for example, Muir Hunter on Personal Insolvency at 3-154 where it is stated that the dictum is not correct. If so, it should not be assumed that the principles applicable under section 182 necessarily apply, although given that there are certain resemblances between section 42 of Cap.6 and section 182 of Cap.32, certain of the principles may well apply. I have therefore examined the authorities cited by counsel with that caveat in mind. The following appear to be particularly pertinent to the exercise of the discretion under section 42.

23. In In re Gray's Inn Construction Company Limited [1977] 1 WLR 711, Buckley LJ observed at 717D-H :

" It is a basic concept of our law governing the liquidation of insolvent estates, whether in bankruptcy or under the Companies Acts, that the free assets of the insolvent at the commencement of the liquidation shall be distributed rateably amongst the insolvent's unsecured creditors as at that date ... There may be occasions, however, when it would be beneficial, not only for the company but also for its unsecured creditors, that the company should be enabled to dispose of some of its property during the period after the petition has been presented but before a winding up order has been made. An obvious example is if the company has an opportunity by acting speedily to dispose of some piece of property at an exceptionally good price. Many applications for validation under the section relate to specific transactions of this kind or analogous kinds. It may sometimes be beneficial to the company and its creditors that the company should be enabled to complete a particular contract or project, or to continue to carry on its business generally in its ordinary course with a view to a sale of the business as a going concern. In any such case the court has power under section 227 of the Companies Act 1948 to validate the particular transaction, or the completion of the particular contract or project, or the continuance of the company's business in its ordinary course, as the case may be. In considering whether to make a validating order the court must always, in my opinion, do its best to ensure that the interests of the unsecured creditors will not be prejudiced. Where the application relates to a specific transaction this may be susceptible of positive proof. In a case of completion of a contract or project the proof may perhaps be less positive but nevertheless be cogent enough to satisfy the court that in the interests of the creditors the company should be enabled to proceed, or at any rate that proceeding in the manner proposed would not prejudice them in any respect. ..." (emphasis added)

24. To similar effect are observations made in In re Tramway Building & Construction Co. Ltd. [1988] 2 WLR 640 at 649H-650A:

"... The discretion should not be exercised so as to permit an unauthorised disposition to reduce the assets available for unsecured creditors. But, subject thereto, it should, in my judgment, be exercised so as to enable equity to be done as between the unsecured creditors, on the one hand, and the claimants under the unauthorised disposition, on the other hand. ..." (emphasis added)

25. In determining whether or not the disposition in respect of which a validation order is required, the Federal Court of Australia has held that :

"... the enquiry required ... is essentially a commercial or economic one, calling for a balancing of the anticipated net gains or losses from the transaction for which approval is sought. ..."

26. See Jardio Holdings Pty. Ltd. v. Dorcon Construction Pty. Ltd. [1984] 2 ACLC 574 at 579.

27. On the question of burden of proof, it appears to be common ground that the burden of proof is upon the party seeking a validation order. See In re Gray's Inn Construction Co. Ltd. (supra) (at 717H) and Re Pacific Coast Fisheries Pty. Ltd. [1980] 5 ACLR 354. As the Federal Court noted in Jardio Holdings (at 579),

"the disposition of the company's assets is presumed to be inimical to the interests of the company's general body of creditors"

although the presumption is not a conclusive one. The burden falls upon the applicant to displace that presumption.

28. Sunrise submitted that in the light of those authorities, the relevant test is whether the transaction reduces the value of the asset. Its submissions may be summarized as follows. As there is no suggestion that the transaction is at an undervalue, it follows that it cannot be detrimental to the debtor's estate. That is sufficient to discharge the burden of proof without any need to show that the transaction is not prejudicial to the unsecured creditors. Further, the court must also have regard to the claimant's interest since it must enable equity to be done as between the claimant and the unsecured creditors.

29. The applicable principles are elided in that formulation of the relevant test and requisite proof under section 42. It is plain from Tramway that the obligation to do equity as between the claimant and the unsecured creditors is subject to there being no prejudice to the unsecured creditors. Prejudice can result not only from selling at an undervalue but also by foregoing a more advantageous overall transaction. Accordingly, I do not agree that Sunrise's formulation encapsulates the relevant principles.

30. In my judgment, the principles distilled from those cases that apply under section 42 may be summarized as follows :

(1) there is a rebuttable presumption that the disposition is inimical to the interests of the debtor's general body of creditors;

(2) the burden is upon the applicant to displace or rebut the presumption;

(3) the overriding consideration is that the unsecured creditors should not be prejudiced; and

(4) the enquiry required is a commercial or economic one.

Application to the facts

Should regard be had to the Lazard Proposal?

31. A preliminary question which arises is whether in evaluating the Sunrise Transaction, the Lazard Proposal has any relevance. Leading counsel for Sunrise made much of the fact that the Lazard Proposal is nothing more than a proposal and that there is no certainty that if the court were to refuse to validate the Sunrise Transaction that a Lazard transaction would materialize. It was submitted that there is no alternative deal on the table and any comparison is entirely academic. It was further submitted that the Lazard Proposal is wholly uncertain and involves many contingencies such as shareholder approval. That is a process that takes time and there is no way to predict how the shareholders will vote.

32. In my judgment, it would be wrong in principle to disregard the Lazard Proposal in evaluating the benefits or otherwise of the Sunrise Transaction. It is not the case that the Lazard Proposal was in any sense preliminary in nature : in fact, as at 8 December 1998, all the terms had been agreed and a draft prepared ready for Miss Aw's signature. She failed to keep the appointment with her then financial advisers Jardine Fleming Securities Limited scheduled for 8 December. The appointment was refixed for 11 December. Instead of keeping the rescheduled appointment, Miss Aw, for reasons best known to herself, decided not to proceed with the Lazard Proposal and on the same day, entered into the Sunrise Transaction. Miss Aw has not filed any evidence to explain her decision and it is not a matter for this court to speculate one way or the other as to her reasons.

33. That Lazard continues to be interested is evident from its letters, dated 8 January 1999 to the Petitioning Creditor and dated 15 and 25 January 1999 to the Official Receiver as interim receiver appointed under the Order dated 8 January 1999. The letter of 8 January referred to Lazard's :

"continued interest to purchase the 50.04% block of shares of [Sing Tao] under essentially the same terms and conditions as previously disclosed to the Securities and Futures Commission."

34. The letter of 15 January stated that :

"The Lazard Asia Fund would like to express its continuing interest in acquiring [Miss Aw's] entire shareholding in [Sing Tao]."

35. The letter of 25 January stated that :

"...the economic terms and conditions would not be materially different from that which are embodied in the draft agreement dated 8 December 1998.

Further, our interest in the purchase of Ms. Aw's shares is not affected by the guilty verdict of the Hong Kong Standard staff.

Our intention was to sign the S&P in 8 December 1998 and to fully complete the transaction by 18 January 1999 or earlier which we had full confidence of meeting given that the SFC had already cleared the transaction to proceed."

36. It was suggested that these letters were written simply to sabotage the Sunrise Transaction. Whilst those statements of intention are not binding, there is no evidence that Lazard has not acted or is not acting in good faith. After all, it was Miss Aw who called off the Lazard deal by her refusal at the eleventh hour to execute it. In any event, irrespective of those letters, the Lazard Proposal reflects what a third party at arm's length was willing to pay for Miss Aw's controlling stake in Sing Tao. In that sense it is a relevant and useful point of reference. In those circumstances, it would be wrong to disregard and to dismiss the Lazard Proposal as irrelevant.

Comparison of potential proceeds under Sunrise and Lazard

37. It is relevant to mention that prior to this application, the task of comparing the Sunrise Transaction and Lazard Proposal had been undertaken by Koffman Financial Services Limited and Jardine Fleming respectively. These comparisons are referred to as "the Koffman comparison" and "the JF comparison" prepared on or about 30 December 1998 and 12 January 1998 respectively. Koffman were Miss Aw's financial advisers. Jardine Fleming were her advisers in the Lazard Proposal. Although Jardine Fleming apparently ceased to act for Miss Aw when she failed to sign the Lazard Proposal on 11 December, there is evidence to suggest that the JF comparison was prepared at her behest and was made available to Mr Charles Ho of the Petitioning Creditor with the consent of Miss Aw. Reference will be made to these comparisons in due course.

38. Exhibited to the 3rd Affidavit of Peter Jeva Au, a director of Sunrise, is a table ("the Sunrise Table") summarizing the potential proceeds that are available to the unsecured creditors of Miss Aw under the Sunrise Transaction and the Lazard Proposal, as perceived by Sunrise. This would suggest that even Sunrise recognizes the relevance of the Lazard Proposal. The Sunrise Table is reproduced below :

39. The Petitioning Creditor has exhibited a report prepared by CLSA Equity Markets Limited ("CLSA") dated 21 January 1999 as an independent opinion as to which of the two proposals is more favourable from a financial point of view with respect to the interests of Miss Aw and her creditors.

40. CLSA have prepared their table ("the CLSA Table") summarizing the potential proceeds which is reproduced below :

41. As is apparent from reading the tables, the sum of $110 million due to secured creditors has been taken into account in calculating the net proceeds available for unsecured creditors under the Sunrise Table but not under CLSA Table. Under the Sunrise Table, there is little difference in the potential proceeds to be realized whereas under the CLSA Table, as adjusted for secured creditors, the difference is significant : $109 million and $128 million respectively under Sunrise depending on whether the Option is exercised and $215 million under Lazard.

42. When the CLSA Table is compared with that produced by Mr Au, it is immediately apparent that the parties differ significantly on the value to be ascribed to the Lazard loan and how the remaining shareholding of either 27% or 17% is to be valued. There is also the question of whether future dividends should be factored into the equation. In this context, Miss Aw's intentions are relevant. These matters will be considered in turn.

the Lazard loan

43. In the Sunrise Table, in arriving at the total amount available under the Lazard Proposal, the Lazard loan payable on completion is cancelled out by treating Lazard as a new unsecured creditor of Miss Aw in a similar amount. It is to be noted that under the Lazard Proposal, Miss Aw is entitled to set off the amounts to which she is entitled under the profit sharing arrangement against this loan. Even assuming that the Trigger Price is never attained so that on a resale by Lazard within the next six years no distributable profits arise under the profit sharing arrangement, the loan is nevertheless not repayable until after the end of six years and even then, in five equal annual instalments. In other words, assuming (against the Lazard Proposal) that there are no profits against which the loan can be set off, it cannot be correct that the entire loan should be written off.

44. The Lazard loan can only be made if there is no bankruptcy order in place at the time of completion. If the loan is advanced and that appears to be the common assumption under both Tables, the whole of that sum would be available. Whilst for balance sheet purposes, it is the discounted present value of the loan that would be relevant and it stands to reason that this must be an amount considerably less than $63 million, from a cash flow point of view, a discount would not be appropriate. That approach (reflected in the CLSA Table) appears to me to be correct and the Sunrise approach flawed.

the value of the remaining shares

45. The Sunrise Table ascribes a value of HK$1.254 per share for the shares remaining in Miss Aw's hands after the Sunrise Transaction. On the evidence before me, if the court were to make a validation order in respect of the Sunrise Transaction, the question whether the Option would be exercised in the next two years remains at large and wholly uncertain. As explained above, there is simply no basis for 'averaging out' the share price under the Sunrise Transaction : the assumption that the Option would be exercised is wholly unfounded. In respect of the sale of the 23% stake, the consideration payable is not, as leading counsel for Sunrise repeatedly submitted, $1.254. That figure would only be correct if the Option were to be exercised contemporaneously on completion of the sale of the 23% holding. As noted above, there is no evidence that that is the case.

46. If (as is reasonable to assume) consideration was given for the grant of the Option, it necessarily constitutes part of the price payable for the block of shares representing 23% of the issued capital, namely, HK$115.8 million. Put differently, part of the price of HK$1.20 per share would be attributable to the Option. If so, the price per share for the 23% stake must in fact be less than HK$1.20. In turn, the per share value of the 17% unencumbered stake is likely to be less than $1.20. For one thing, any acquirer of this "significant minority interest" would not have the benefit of an option over another block of shares. Further, so long as the Option remains exercisable, it stands to reason that the 10% block subject to the Option would not have the same value per share as the 17% block that is not encumbered by the Option, but a lower value because of the encumbrance. In short, there is no rational basis for ascribing $1.254 or even $1.20 per share to shares forming the 27% stake remaining in Miss Aw's hands, absent the element of 'control' which, as explained above, appears to be the raison d'être of the Sunrise Transaction.

47. CLSA has opined that the options available for selling a minority interest are limited compared to the options available for selling a controlling interest and referred to three principal methods to implement a sale of a significant minority interest :

(i) a share placement/block trade to private and/or institution investors;

(ii) a direct sale to a strategic investor; or

(iii) a market sale on the Stock Exchange.

48. Share placements have historically been made at discounts to the market prices just prior to the placements and a sale in the market of a large block of shares is likely to create tremendous selling pressure on the shares which would inevitably depress the market price. Having regard to the selling volume of the shares over the six month period prior to the Sunrise Transaction, a sale on the market of a 17% stake (assuming the exercise of the Option) is likely to take from a maximum of 221 trading days to a minimum of 26 trading days. If the Option were not exercised, the periods would be even longer.

49. Realistically, the only method likely to yield a better price is if a placement could be made to a strategic investor. According to CLSA, whilst the sale of a controlling stake is likely to appeal to investors which require a controlling stake in order to implement expansion or reorganization plans for the target company, a significant minority interest would be less appealing. In the context of the present case, the 23% stake under the Sunrise Transaction is sufficient to give Sunrise control over the board without having to make a general offer. As explained above, it will also be strategically placed to stave off any hostile takeover in the next two years. For those reasons, it is considered that a strategic investor is unlikely to be found.

50. The CLSA Table therefore ascribes to the remaining interest the last closing share price prior to the date of the report, namely, HK$0.91 per share. Since that date, the shares have in fact been trading below that price. Prima facie, CLSA's approach cannot be said to be unfair or wrong in principle. Stripped of the 'control' element which is at the heart of the Sunrise Transaction, it is almost certain that those shares will not achieve a price remotely approaching $1.20 per share.

dividend distribution

51. The Sunrise Table ascribes an unquantified value to the dividends for the 27% and 17% blocks respectively. In this regard, it is pertinent to refer to the Koffman and JF comparisons. Both those comparisons contain references to dividends to be received in 1999 as a relevant item. The Koffman comparison provides for $55 million to be received as dividends in 1999 whereas the JF comparison refers to $50 million in the same time frame although it is qualified by a note to the effect that dividend distribution was subject to negotiation and that there was no assurance and was not very likely for the stated value to be realized.

52. Despite the qualifications, it would be reasonable to assume that there must have been some basis to warrant two sets of financial advisers making reference to dividend distribution. They do raise queries as to whether any 'understanding' exists between Miss Aw and Sunrise on dividend distribution if the Sunrise Transaction were to proceed. (It is to be noted that the joint announcement is silent on this issue.) It might also imply some understanding as to the Option and its exercise and is relevant to the question of Miss Aw's intentions with regard to the balance of the shares left in her hands. All these matters are interlinked but, at present, there is simply no explanation, much less any satisfactory explanation. It is a line of inquiry that could ultimately have a bearing on the question of good faith.

53. While it is possible that Sing Tao might declare dividends for 1999, the matter is entirely at large. There is no evidence and certainly no sufficient evidence that 1999 dividends in respect of Miss Aw's 27% would be of the order of $50 million to $55 million. Compared to the amount of dividends declared in the recent past, this would mean a surprising sixfold to tenfold increase in dividends to be declared. In my judgment, in terms of analyzing the potential proceeds, no meaningful value can be ascribed to future dividends in respect of Miss Aw's remaining shareholding.

Miss Aw's intentions

54. The Sunrise Transaction leaves at large what is to happen to the remaining block of shares. In this regard, Miss Aw's intentions are obviously pertinent. Miss Aw has chosen not to file any evidence herself. However, in the joint announcement made on 19 December 1998 in relation to the Sunrise Transaction, it is stated that :

"Miss Aw has decided to hold her remaining shares in the long term."

55. In this connection, it is necessary to digress a little to deal with the apparent involvement of the Aw Boon Haw Foundation ("the Foundation").

56. Several days after Miss Aw entered into the Sunrise Transaction, the Foundation entered into an agreement for sale and purchase of Tiger Balm Garden to a subsidiary of Cheung Kong Holdings Ltd. for $100 million. Completion is subject to a condition precedent that a permit by government be granted for the redevelopment of Tiger Balm Garden to the satisfaction of the purchaser. Completion under the agreement is 15 January 2001 or on the earlier satisfaction of certain conditions. The Foundation is a company limited by guarantee, being incorporated to further charitable purposes. Miss Aw is one of its directors.

57. It would appear that Miss Aw may have entered into some 'arrangement' or 'understanding' for the Foundation to apply the proceeds of $100 million from the sale of Tiger Balm Garden to purchase most, if not all, of her remaining shares. This appears from the Koffman and JF comparisons. The Koffman comparison stated that :

"arrangement has been made for the disposal of Foundation's property (estimated proceeds of $100 million) will be used to purchase some of Miss Aw's remaining shareholdings in Sing Tao at the higher of $1.38 per share or the average closing price of five trading days before completion of the purchase."

58. Koffman could only have derived that understanding from their client.

59. It is stated in the JF comparison that :

"3. Subsequent shareholding

The [Sunrise Transaction] has as an essential feature of the sale of some or all of Miss Aw's remaining shares for HK$100 million to the Foundation. At realistic prices, this will absorb all her remaining shares other than those covered by the option. She will therefore probably have no remaining holding; however, she will be perceived as being associated with the Foundation shareholding.

.......

Note (e) % of Sing Tao shares to be acquired by the Foundation depends upon the acquisition price (min.= HK$1.4/share) and subject to legal issues being resolved. We have assumed the Foundation will acquire Sing Tao shares one year after completion, following completion of the sale of the site (there is no assurance for the stated value to be realised)."

60. No such feature as referred to can be found in the Sunrise Agreement. Further, it is to be noted that at $1.38 per share, $100 million would be sufficient to acquire little more than a 17% stake.

61. Only Miss Aw is in a position to explain these matters. But in calculating the proceeds to be derived from the Sunrise Transaction, no account has been taken of any such 'arrangement' with the Foundation since it is not part of Sunrise's case that the 17% stake could realize $100 million, quite apart from legal difficulties involved since the Foundation is a charity and does not belong to Miss Aw.

conclusion

62. It follows from the analysis above that the Sunrise Table is seriously flawed and should be rejected. As is evident from the CLSA Table, the amount available to unsecured creditors under the Lazard Proposal is likely to exceed that available under the Sunrise Transaction by a very significant margin irrespective of whether or not the Option is exercised.

Other factors

uncertainties in the Lazard Proposal

63. I have already dealt with the point taken that if the court were to refuse to make the validation order, there is no certainty that a Lazard deal would necessarily come to fruition. The risk involved is therefore a factor to be taken into consideration.

64. Inherent in the Lazard Proposal is uncertainty concerning shareholder approval and whether it will be forthcoming. The profit sharing arrangement, the consultancy agreement and the Lazard loan constitute "special deals" for the purposes of rule 25 of the Takeovers Code. It would appear that the Executive (as defined in the Takeovers Code) has given his consent subject to shareholder approval. Miss Eu S.C. stressed the unpredictability and, therefore, uncertainty involved in a transaction that requires shareholder approval.

65. Koffman considered that independent shareholders' approval was likely given that the general offer extended to all shareholders. Jardine Fleming also considered that shareholder approval was likely having regard to the cash offer of $1.25 per share compared to the share price as at the date of the comparison which was $0.85 per share. It would appear that even Miss Aw's financial advisers do not consider that there is any real risk of shareholder approval not being forthcoming.

Sunrise's potential breach of contract claim

66. Sunrise's position is that if the Sunrise Transaction is not allowed to proceed before 15 February 1999, there will be a serious risk that Sunrise will rescind the agreement for breach of contract on the part of Miss Aw and Sunrise will commence legal proceedings for loss and damages suffered. If so, Sunrise will become a judgment creditor adding to Miss Aw's indebtedness to unsecured creditors.

67. It is difficult to see what loss Sunrise will suffer other than transaction costs which, in the present context, is unlikely to be of a significant amount. If it is paying over the odds for the shares, no monetary loss will arise. If, on the other hand, the shares are in fact worth more, there is every reason why the court should refuse to make a validation order.

68. It was submitted that as the Sunrise Transaction was entered into before the presentation of the petition, it should be allowed to proceed because bankruptcy does not invalidate that agreement which is a binding contract. In my judgment, once section 42 is brought into play, the existence of a prior contract does not alter the application of the relevant principles. In each case, the court must be satisfied that the disposition in question will not prejudice the unsecured creditors. That is the overriding consideration and the burden is upon the applicant to displace the presumption that the disposition is prima facie inimical to the interests of the unsecured creditors.

remuneration as chairman/consultant

69. Miss Aw's remuneration as chairman and director of Sing Tao is $9.2 million per annum which is comparable to the consultancy fees of $9 million per annum payable under the Lazard Proposal. But there are these differences : whereas a bankruptcy order would disqualify Miss Aw from office, it has no impact on the consultancy agreement and her entitlement to remuneration thereunder. Further, Miss Aw could be removed from office by ordinary resolution and her entitlement to remuneration would terminate in that event. From the perspective of unsecured creditors, fees to be derived under the consultancy agreement are, for those reasons, far more certain.

Should a validation order be made?

70. The Sunrise Transaction has the effect of splitting a controlling stake into two blocks of significant minority interest and in that process, inevitably, the premium on the controlling block of shares is lost.

71. In the result, in monetary terms, if one were to compare the Sunrise Transaction with the Lazard Proposal, it is indisputable that the Lazard Proposal is infinitely more advantageous from the perspective of Miss Aw's unsecured creditors, not to mention the minority shareholders of Sing Tao who would be able to offload shares trading as at 26 January at $0.80 per share at $1.25 under the general offer although this is not a factor to be taken into account in exercising my discretion under section 42. Under the Lazard Proposal, at completion, the entire benefit for the unsecured creditors will be realized. Under the Sunrise Transaction, at completion, the proceeds will cover what is due to the secured creditors with little to spare. Unsecured creditors stand to receive no immediate benefit and must await the realization of the remaining shareholding, a realization that is likely to be neither immediate nor easy. In this connection, it should be mentioned that Miss Eu S.C. invited the court to make a validation order conditional upon the Option being exercised within a stated period thereby improving the situation somewhat for the unsecured creditors. I do not consider it to be the role of the court in a section 42 application to rewrite the terms for the parties. I therefore decline to do so.

72. At the end of the day, the question is whether Sunrise has discharged its burden of proof. To be satisfied that the interests of the unsecured creditors will not be prejudiced by allowing the Sunrise Transaction to proceed, I have to be convinced that the certainty of the Sunrise Transaction is worth a 'discount', ranging from approximately a third to a half of what the unsecured creditors might otherwise receive. I am not. Although there is an element of risk that the Lazard Proposal may not come to fruition, the risk is not a significant one given the stage the Lazard Proposal had reached and the clear manifestations of intention on Lazard's part with knowledge of the present application. Sunrise's application for a validation order must, accordingly, be dismissed.

73. There is to be an order nisi for costs in favour of the Petitioning Creditor.

Representation:

Miss Audrey Eu, SC, inst'd by M/s Kwok & Yih, for the Intended Intervener

Mr Winston Poon, SC and Mr Godfrey Lam, inst'd by M/s Baker & McKenzie, for the Petitioner

Mr Keung Yui Fai (appearing on 25-1-99) of and Mr Jat Sew Tong (appearing on 26-1-99) inst'd by, M/s So, Keung, Yip & Sin, for the Debtor

Mr Brown for the Official Receiver