Re Keview Technology (Bvi) Ltd.

HCCW001123/2001

HCCW 1123/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1123 OF 2001

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Coram: Hon Yuen J in Court

Date of hearing and decision: 24 April 2002

Date of reasons for decision: 21 May 2002

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REASONS FOR DECISION

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1.On 24 April 2002, I gave an order extending the powers of the Provisional Liquidators of Keview Technology (BVI) Limited ("the Company"). I indicated at the time that I would briefly set out the reasons for my order in writing, to be handed down in due course.

The Company

2.On 8 October 2001, a petition for the winding-up of the Company was presented by HSBC.

3.The Company is a BVI company with its principal place of management and business in Hong Kong. It is part of a group of 27 companies, the ultimate holding company of which is Kessel International Holdings Ltd ("Holdings"), the shares of which are listed on the Hong Kong Stock Exchange but which have been suspended from trading. The Company is in turn the holding company of Dongguan Kepo Electronics Ltd ("DK"), a wholly foreign-owned enterprise established in the PRC, which owns and operates a factory on the Mainland manufacturing electronics and telecommunications products.

4.Other companies in the group include Kessel Electronics (HK) Ltd ("Electronics"), Kepo Display Technology Ltd ("Display") and Kessel Telecom Ltd ("Telecom"), which carried on the business of manufacture, distribution and sale of electronics and telecommunications products. Prior to the presentation of this petition, these companies had gone into liquidation under the provisions of s.228A Companies Ordinance.

5.The companies in the group had entered into a number of cross-guarantees in favour of the Petitioner. As the guarantor of Electronics and Display, the Company became indebted to the Petitioner in a substantial sum. A statutory demand was served but no payment was forthcoming. The Company did not dispute that it was unable to pay its debts.

Appointment of provisional liquidators

6.The Petitioner, supported by the Company, applied for the appointment of provisional liquidators in an endeavour to avoid the threat of disruption of the factory and seizure of stock by unpaid employees and other creditors of DK on the mainland.

7.On 8 October 2001, I gave an order appointing Mr Gabriel Tam and Mr Jacky Muk of KPMG provisional liquidators of the Company. As in the normal course, the powers they were given were restricted.

Hearing of petition

8.The petition came before Deputy Judge Poon in January this year, when the Petitioner and the Provisional Liquidators asked for the hearing to be adjourned as a restructuring of the entire group was being proposed.

Application for extension of provisional liquidators' powers

9.The matter was then adjourned to 22 April, when I was asked to extend the powers of the Provisional Liquidators as part of a proposed restructuring exercise, and to further adjourn the hearing of the petition.

10.The application was made on behalf of the Petitioner and the Provisional Liquidators. As far as creditors were concerned, apart from the Petitioner and Deloitte Touche Tohmatsu, all other creditors of the Company are group companies, although some have been put in liquidation. On 24 April 2002, Deloittes also indicated its support, so that in fact, 100% of the creditors of the Company supported the application to further the restructuring proposal.

11.However, the Official Receiver has indicated his opposition to the application on the basis that it amounted to a corporate rescue plan, and it was submitted that the present legislation did not permit provisional liquidators to act, in effect, as provisional supervisors, proposals for provisional supervision not having been accepted by the legislature.

Considerations

12.I accept of course that it is not the role of the Court to legislate. That is the exclusive right and duty of the legislature. The duty of the Court is to see what, in the circumstances of each case, within the existing framework of the law, can be done which is just and fair to all the parties involved in a winding-up petition, in particular, creditors seeking to maximize recovery.

13.If the proposed restructuring would be in the best interests of the creditors, given the level of their support for the provisional liquidators' participation, and in the absence of any evidence of mismanagement by directors such as would require the Company to be wound-up without delay for investigations to be done, I see no reason why the Court should restrict the powers of provisional liquidators seeking to work out a rescue operation before the Court has to determine whether the Company should be wound-up. Having said that, each case should be considered on its own facts and I do not consider it appropriate to set out any hard and fast rules which may not be applicable in all circumstances.

14.However the above considerations would be consistent with what has been called the "rescue culture", what is in effect an attempt to maximize recovery for creditors by saving the company if it is a viable alternative to a minimized recovery on a winding-up.

15.Thus, in England, in cases where administration order proceedings provided by the Insolvency Act were not applicable (e.g. because insurance companies were involved), the powers of provisional liquidators have been extended so as to enable them to take part in negotiating schemes and rescues (Lightman and Moss, The Law of Receivers and Administrators paragraph 2-043; Moss and Philiips, Provisional liquidators: new uses for an old remedy, Insolvency Intelligence, Vol. 6 Issue 1).

Law

16.I turn now to the question whether our existing legal framework prohibits the extension of provisional liquidators' powers to carry out a "corporate rescue" role. Whilst it is true that applications for the appointment of provisional liquidators are usually made to preserve and protect assets as a matter of urgency, there is no statutory restriction on the powers of provisional liquidators. (To avoid misunderstanding, it is to be noted that in this Decision, I am not referring to those provisional liquidators appointed by the Official Receiver under the specific provisions of s.194(1A) CO).

17.Section 193(3) which governs the appointment and powers of provisional liquidators is couched in wide terms. It provides that "where a liquidator is provisionally appointed by the court, the court may limit and restrict his powers by the order appointing him". It is therefore within the Court's discretion whether to restrict the powers of provisional liquidators, and if so, to what extent. It has long been recognized that the Court's discretion is unfettered, although of course, its power must be exercised in a proper judicial manner (Re Highfield Commodities Ltd [1985] 1 WLR 149).

18.Accordingly, where the Court had restricted the provisional liquidators' powers when it appointed them, there is no statutory obstacle to the Court, by way of variation of the order, extending the powers of the provisional liquidators which it had appointed, if a change in circumstances so require.

19.It might be thought paradoxical to extend powers to provisional liquidators to attempt to save the company, when they were appointed upon the presentation of a petition to wind it up. However, the Court retains a discretion whether to order a company to be wound-up, and so long as the Petitioner did have locus to present the petition and intends to seek a winding-up order if the rescue attempt should fail, I do not see any jurisprudential objection to empowering provisional liquidators to proceed along rescue lines at least in a case such as the present.

20.It is not an abuse of the process for a petitioner to present a petition for the purposes of effecting a freeze on actions against the company, so that a scheme of arrangement can be worked out. In Re Esal (Commodities) Ltd [1985] BCLC 450, 459-460, Harman J said:-

"For my part I first thought that a petition presented for what authorities call a `by motive' that is not for its ostensible purpose but to gain some collateral advantage might well be characterised as an abuse. Counsel for [the petitioner] vigorously argued that that was wrong. He asserts that a creditor can perfectly properly present a petition against an insolvent company for the purpose of holding the ring, and to prevent any piecemeal disposal of assets. Such a course of action is likely to be in the interests of all the creditors and is a proper use of a class remedy. The fact that the petitioner does not intend to press for the winding-up order when the matter is called on, because it believes that an alternative remedy such as a scheme of arrangement will be better for the creditors generally, does not make the presentation of a petition with its consequent freeze on actions against the company improper or an abuse of process. The proper remedy, says counsel for [the petitioner] (Mr Potts QC) lies in r.37 of the Winding-Up Rules 1949 [r.33 Winding-Up Rules, Hong Kong] and the court's power to substitute another petitioner if at any hearing the original petitioner does not wish to press then for an order.

I entirely agree with and am convinced by counsel for the petitioner's argument. The fact that later the original petitioner's ability to seek adjournments of its petition gave [the petitioner] a tactical advantage in these proceedings, which it did, is a matter within the control of the court. It cannot constitute the petition an abuse of process. Thus I do not accept counsel for [a supporting creditor's] basic contention that the winding-up petition as presented was an abuse of process itself. It was presented, it is true, for a `by motive', but properly presented, because it was reasonably thought to be in the interests of all creditors, and was calculated to protect the class interest".

21.The development of a practice of presenting a winding-up petition and appointing provisional liquidators to mitigate the difficulties caused by the fact that administration procedures are not available to insurance companies has been approved by several judges in the English courts and has been described as "useful" by Harman J in Re English and American Insurance Co Ltd [1994] 1 BCLC 549, 550. It has also been followed in Hong Kong by Hartmann J in Re HIH Insurance (Asia) Ltd (unrep).

Facts

22.Coming then to the facts of the present case, the Court had before it a report from the Provisional Liquidators dated 15 January 2002. On 15 November 2001, Mr Tam and Mr Muk had also (together with a partner of KPMG's Bermudan practice) been appointed by the court of Bermuda provisional liquidators of Holdings, the Company's parent company.

23.Certain potential investors proposed a restructuring of certain key elements in the group, notably Holdings' listing status and DK's manufacturing operations.

24.It is clear in my view that on the facts of the present case, it would be in the interests of all creditors of the Company to support the Provisional Liquidators' participation in the proposed restructuring and to adjourn the petition for the restructuring. Mr Tam in his 2nd affirmation compared the returns to creditors on a winding-up with those upon restructuring. The Company's only substantial asset is its interest in DK to which the Company had advanced funds. However, DK has also been under threat from its other creditors on the Mainland. Some creditors of DK had obtained Mainland court orders for the sale of machinery, but a sale has been avoided by the advance of money to DK from one of the potential investors.

25.According to Mr Tam who has taken advice from PRC lawyers, it would appear that should the Provisional Liquidators attempt to recover some funds by way of a disposal of DK's assets, whether before or after bankruptcy proceedings of DK on the Mainland, little could be obtained for the creditors of the Company on account of deferred customs duty and deferred import value added tax that would become payable.

26.By comparison, should the proposed restructuring be realized, a sum of $40m would be made available by the investor to be shared by the creditors of Holdings and the creditors of the Company. In respect of this proposal, I was concerned that the Provisional Liquidators would be placed in a position of conflict of interests, as the proceeds would be divided between the creditors of Holdings and the creditors of the Company, and the Provisional Liquidators having duties to both groups as provisional liquidators. This concern was alleviated with the arrangement that on the part of the creditors of the Company, negotiations would be undertaken not by the Provisional Liquidators, but by a different set of liquidators, being the liquidators appointed for the Company's largest creditor, Electronics (in s.228A liquidation) , which itself has different creditors.

27.All creditors, including Deloittes which is not within the group, are of the view that the restructuring proposal represented the best prospect of a return for the creditors and that the Provisional Liquidators should pursue that offer.

28.Further, the restructuring agreement would not be binding on any creditor except by execution of a compromise as contemplated in the restructuring agreement.

29.In these circumstances, I gave the order extending the powers of the Provisional Liquidators and adjourned the petition to 29 July 2002 save that the Provisional Liquidators and any creditors are to have liberty to apply to restore the petition for hearing upon giving the Petitioner and the Official Receiver 7 days notice. This proviso is to protect the interests of any creditors who may have reason to change their positions during this period.

Representation:

Mr Jeremy Bartlett instructed by Allen & Overy for Petitioner and Provisional Liquidators

Miss Phyllis McKenna of Official Receiver's Office