In Re Hong Kong (Link) Bicycles Ltd.
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HCCW000856/1998 HCCW856/98 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES WINDING-UP NO.856 OF 1998 -------------------
-------------------- Coram : The Hon Mrs Justice Le Pichon in Court Date of Hearing : 6 May 1999 Date of Judgment : 6 May 1999 Reasons Handed Down : 13 May 1999 --------------------- R E A S O N S --------------------- 1. The petition to wind up Hong Kong (Link) Bicycles Ltd. ("HKL") was presented on 13 November 1998 and first came on for hearing on 25 January 1999. Since then, there have been several adjournments. HKL applied for a further adjournment which was opposed by Credit Agricole Indosuez ("CAI"), one of the supporting creditors. Both the Petitioner, International Finance Company ("IFC") and the other supporting creditor, Bank of America Asia Ltd. ("BoA") adopt a neutral stance in that although they support the adjournment, they have no objection to a winding up order either. At the hearing, the Company's application for a further adjournment was refused and a winding up order made. The reasons appear below. The corporate structure 2. HKL is a wholly owned subsidiary (via Canda Co. Inc.) of Hong Kong Link International (Holdings) Ltd. which is wholly owned by Sze Chin Hung, Jerome and his wife, Rita Chan. HKL in turn owns 19.4% of the issued shares in Shenzhen China Bicycle Co. (Holdings) Ltd. ("SCBC") which is a joint stock limited company incorporated under the laws of the PRC and listed on the Shenzhen Stock Exchange. HKL, which is a Hong Kong incorporated company, has been the vehicle through which SCBC has carried on the major part of its international business activities. HKL also owns 100% of the shares in Bejka Trading Co. 3. Bejka was one of the vendors in the transaction known as "the Diamondback Sale" entered into on 8 December 1998, after the presentation of the petition. Inter alia, all Bejka's assets were sold and the proceeds transferred to SCBC, partly to repay a debt owed to SCBC and the balance as a loan to SCBC. SCBC has a number of wholly-owned subsidiaries including China Bicycle Co. (HK) Ltd. ("CBC(HK)") and Zoria Pte Ltd. ("Zoria"), a company incorporated in Singapore used as a special purpose for borrowings from Singapore. It is not disputed that SCBC, CBC(HK) and Zoria (together "the SCBC Group") has no shareholding interest directly or indirectly in HKL. HKL's Indebtedness 4. HKL is guarantor of various loans made to the SCBC Group to fund SCBC's business activities. It is also the guarantor of a bank loan made to Diamondback Deutschland GmbH ("DB Deutschland"). This is part of the Diamondback Group which is also owned by Mr Sze and his wife. 5. In addition to indirect indebtedness arising under guarantees, HKL is directly indebted to (a) ING Bank ("ING") in respect of a bank loan, (b) to the Petitioner under certain put options, (c) to HKL's employees and sundry creditors and (d) to SCBC, CBC(HK), Regal International Development Co. Ltd. and certain companies in which Mr Sze but not HKL has a direct or indirect equity interest (collectively "Related Parties"). Set out below is a summary of HKL's indebtedness. A. Indirect debts arising under guarantees
B. Direct debts
The Group's Debt Compromise Proposal ("DCP") 6. At the first hearing of the petition in January, HKL sought an adjournment on the basis that SCBC had put forward a restructuring plan with which HKL and the Related Parties were in agreement. A critical feature of the restructuring plan was the completion of the Diamondback Sale scheduled for the end of January 1999. The restructuring plan would extend to HKL's indebtedness to banks (direct or indirect), IFC and the Related Parties. The hearing was adjourned to 23 March to enable Pricewaterhouse Coopers ("PwC") to prepare a report on the restructuring plan, and if positive, would lead to a DCP to be put to the Group's non-domestic lenders. "Group" in this context refers to the SCBC Group, DB Deutschland and HKL in all of which Mr Sze has an indirect equity interest but as noted above the SCBC Group has no shareholding interest in HKL. Nor has DB Deutschland. PwC's report was positive and a DCP was sent to non-domestic lenders on 15 March 1999 ("DCP I"). The non-domestic lenders were given until 19 April to respond. 7. Set out below is a list of non-domestic lenders whose consent to DCP I was sought ("the non-domestic lenders").
a. UOB is a lender only as Syndicate member and unlike the other three Syndicate members had not made any independent loan. b. This does not include the amount of $4.8 million due to IFC from HKL under put options. 8. DCP I was conditional on the support of 100% of the non-domestic lenders. In view of the opposition of CAI, it was clear by the hearing on 22 March 1999 that DCP I could go no further. On 1 April 1999, a revised proposal ("DCP II") was sent to the non-domestic lenders. The terms were the same as in DCP I save that the support of only 90% in value of monies owed by the Group was sought. The non-domestic lenders were asked to respond by 9 April 1999 although DCP II was not to lapse until 19 April. 9. On 9 April 1999, DBS as lead bank for the Singapore Syndicate made a counter proposal which was repeated by all Singapore based non-domestic lenders on 12 April 1999. The 9 April fax from DBS stated :
The Singapore based non-domestic lenders together hold over 40% of the indebtedness owed to the non-domestic lenders whose consent to DCP II was sought. In view of their response, DCP II was clearly a dead letter. It had the effect of precipitating a further DCP on 29 April 1999 ("DCP III"), the closing date for which is 31 May 1999. 10. By letter dated 26 April 1999, the non-domestic lenders were advised by SCBC that DCP III would be presented to them during that week. The non-domestic lenders were advised that :
The letter dated 23 April 1999 from SCBC's solicitors reported on the winding up proceedings to date. Since DCP II had failed to attain the level of support required, Richards Butler opined that :
It then referred to an anticipated DCP III being released during the week of 26 April and advised SCBC in the following terms :
11. Pursuant to Richards Butler's advice, SCBC sent out the pro forma letter to each non-domestic lender requesting its return by noon on Friday, 30 April 1999 in view of the impending court hearing on 3 May 1999. 12. In the event, the petition could not be heard on 3 May. Instead, it was adjourned for three days and heard on 6 May. Notwithstanding the additional three days, there was no response from five of the non-domestic lenders (i.e. Nanyang, DBS, the Singapore Syndicate, the Bank of East Asia and ICBC as lender to SCBC) to the pro forma letter. Together they hold approximately 30% of the total indebtedness to the Group. Three of the non-domestic lenders whose debts total 18.4% of the indebtedness rejected DCP III and supported the making of a winding up order on 6 May. Plainly, if DCP III was contingent on the support of creditors holding at least 90% in value of the overall indebtedness, the position of these three non-domestic lenders (i.e., Chinese Merchants, China Mercantile and CAI) would have put paid to DCP III, rendering otiose any further adjournment. 13. Counsel for HKL submitted that the fact that DCP III did not achieve the 90% support sought did not mean that it could still not go forward. But the validity of that submission has to be examined in the light of the evidence. 14. In his 4th Affirmation, Mr Weerdenburg, an Associate Director of Managing Partners Limited, a specialist corporate recovery firm seconded to SCBC, stated as follows :
15. I do not consider that Mr Weerdenburg's evidence can be read as meaning that DCP III may still proceed although there is less than 90% support : it would render "at least 90%" meaningless. Further, it is also clear that "the HKL Scheme" will not get off the ground unless there is support for DCP III from non-domestic lenders who hold at least 90% of the overall indebtedness. The reason appears in Mr Weerdenburg's 3rd Affirmation where at para.6 he said :
The "level of support" referred to and sought for DCP II was again a 90% support. In the circumstances, I have the greatest difficulty in accepting HKL's submission that notwithstanding the express requirement of "at least 90%" support, something less (the extent of which remains at large) would somehow do. That the level of support required is infinitely 'elastic' is unsupported by the evidence. 16. Even assuming for th e sake of argument that a 90% level of support is not an inflexible requirement, the viability of DCP III and also that of the HKL Scheme would depend on the stance of the Singapore Syndicate and DBS one of the constituent members of the Syndicate but which is independently a non-domestic lender. From the perspective of the HKL Scheme, creditors other than employers of HKL and Related Parties form a separate class. Of that class, 37.873% in value support an adjournment whereas 24.306% are against it. DBS and the Singapore Syndicate which hold the remaining 37.821% have chosen to remain silent notwithstanding the very clear terms of both SCBC's letter of 26 April and Richard Butler's letter of 23 April. 17. There is evidence in the form of an affirmation of Wong Yu May, the General Manager of CAI, Guangzhou Branch, that he had spoken with a representative of DBS in its capacity as agent of the Singapore Syndicate on 5 May 1999 and was informed that the Singapore Syndicate is not prepared to accept DCP III. Mr Wong went on to say that he was also informed by the same representative that the Singapore Syndicate is not prepared to agree to an adjournment and therefore has not returned a letter to HKL to indicate support for an adjournment despite Mr Weerdenburg's request. Given that DCP III does not satisfy the terms and conditions expressly stated in DBS's fax of 9 April 1999, this is hardly surprising. 18. Mr Carolan, counsel for HKL, urged the court to attach little weight to that evidence for two reasons : first, the representative of DBS was not identified by name and second, it was hearsay. It is Mr Carolan's understanding on instructions that a communication was expected from the Singapore Syndicate on the very day of the hearing (6 May) which would be in the nature of a further counter proposal. Since a counter proposal necessarily implies a rejection of DCP III, it is not apparent why little weight should be attached to Mr Wong's evidence. 19. Each of the non-domestic lenders including the Singapore Syndicate was put on notice by the very clear terms of the letters from SCBC and Richards Butler of the importance of making its position known to the court. Completion of the pro forma letter would not have committed the relevant non-domestic lender to any binding acceptance of DCP III. Failure to do so is evidence, at a minimum, of an indifference to an adjournment. As explained above, the support of the Singapore Syndicate and DBS is critical to any HKL Scheme even assuming (in favour of HKL) that SCBC (through Mr Van Weerdenburg) did not mean what it said as to having to have "at least 90%" support before proceeding further with any HKL Scheme. 20. In view of the fact that specific support sought of 90% has not been achieved, what SCBC may or may not do in the circumstances in terms of proceeding with DCP III and the HKL Scheme is entirely speculative. The court is driven to conclude that it is being used as leverage in the brinkmanship bargaining that is and has been taking place between SCBC and some of the non-domestic lenders which is quite improper. It would not be appropriate to grant any further adjournment unless it would serve a useful purpose. The case for granting a further adjournment of the petition plainly has not been made out in that it does not have the necessary support. Accordingly, the application for an adjournment must be dismissed and HKL wound up.
Representation: Miss Mairead Rattigan, inst'd by M/s Clifford Chance, for the Petitioner Mr Paul Carolan, inst'd by M/s Richards Butler, for the Company Mr Robert Whitehead, inst'd by M/s Lui & Carey, for the Supporting Creditor (Credit Agricole Indosuez) Mr Thomas Mo, inst'd by M/s Herbert Smith, for the Supporting Creditor (Bank of America Asia Ltd.) (Not attending) for the Official Receiver |