Re Universal Dockyard Ltd

HCMP 413/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 413 OF 2000

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Coram: Hon Kwan J in Chambers

Date of Hearing: 3 April 2003

Date of Decision: 3 April 2003

Date of Handing Down of Reasons for Decision: 10 April 2003

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REASONS  FOR  DECISION

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The application

1.This is a summons issued by Showa Leasing (Hong Kong) Limited ("Showa") on 13 December 2002 against Universal Dockyard Limited ("the Company") and Mr Matthew O'Driscoll, who is the Scheme Administrator of a Scheme of Arrangement ("the Scheme") in respect of UDL Holdings Limited ("UDL Holdings") and its subsidiaries including the Company sanctioned by the court on 18 April 2000. The Scheme came into effect on 28 April 2000. The application is made under section 166 of the Companies Ordinance, Cap. 32 and the inherent jurisdiction of the court.

2.Showa seeks the following orders in the summons:

(1) that time be extended for six months from the date of the order or such other period as the court thinks just, for Showa to "realise its security as a secured creditor under [the Scheme], (in particular clauses 9 to 11 thereof)"; and

(2) that the Company through its director or proper officer, do forthwith disclose in writing to Showa's solicitors pursuant to each of the mortgages (in particular clauses 5(i), 5(s) and 7.01 thereof) over the five vessels in question full information regarding (a) each vessel's employment position, exact location, and engagements; and (b) particulars of all towages and salvages, with copies of all charters and other contracts concerning each vessel.

3.At the conclusion of the hearing, I dismissed the application for an order in (1) and granted an order as sought in (2). These are the reasons for my decision.

The background facts

4.Between 1994 and 1996, Showa had advanced to the Company a series of loans, which were secured by mortgages of vessels and by a guarantee from UDL Holdings. The Company defaulted in payment of the loans in 1998. Some of the vessels mortgaged to Showa were then sold to reduce the indebtedness of the Company. By July 1999, there remained five vessels still mortgaged to Showa. They had been removed out of Hong Kong waters by the Company without the consent of Showa, in breach of certain provisions of the mortgages.

5.Under clause 5(i) of each of the mortgages, the Company agreed to allow Showa to go on board the vessel and view the state of repair at all reasonable times. Under clause 5(s), the Company was obliged to supply to Showa, on request, "full information regarding the Vessels, their employment position and engagements, particulars of all towages and salvages and copies of all charters and other contracts concerning the Vessels". Clause 6(c) provided that any breach of any of the agreements, covenants or obligations in the mortgages would constitute an event of default and if any event of default should have occurred, clause 7.03 provided that the security should be enforceable by Showa.

6.Of the five vessels moved out of Hong Kong waters, Showa last inspected two of the vessels in Zhongshan in April 1999. The last information provided by the Company regarding the exact location of vessels was by its letter dated 28 July 1999, in which two vessels were stated to be with a named ship repairer in Zhongshan and three vessels were stated to be with a named ship repairer in Jurong, Singapore. Showa was further informed that the Company would cease all its obligations regarding the vessels with effect from 1 August 1999 and Showa should make its own arrangement immediately to repossess the vessels and arrange for berthing, security, insurance, etc. In response to this, Showa demanded a return of the vessels in China and Singapore within 14 days by its letter dated 13 August 1999. The demand was not complied with, the Company stated in its reply dated 23 August 1999 that because of its own financial difficulties, it had stopped performing its duties regarding berthing, security and insurance and Showa should make necessary arrangements in these matters to preserve the value of the vessels and its own interest as the mortgagee.

7.In April 2000, the Scheme was sanctioned by the court and became effective on 28 April 2000. Clauses 8 to 11 of the Scheme deal with the sale of encumbered assets. Under the provisions in clause 9, a secured creditor is required, within two years of the Scheme becoming effective, to realise his security and inform the Scheme Administrator of the amount received on realisation, and if the proceeds of sale are insufficient to discharge the secured debt, the secured creditor shall be entitled in respect of the balance as a Scheme creditor, as if admitted to proof as an unsecured creditor under the Scheme. Alternatively, also within two years of the Scheme becoming effective, a secured creditor may notify the Scheme Administrator of his intention to accept the security in partial satisfaction of the secured debt and the amount assessed by an independent surveyor of such security shall be treated as having extinguished or pro tanto reduced the secured debt and the secured creditor shall be entitled in respect of the balance as a Scheme creditor, as if admitted to proof as an unsecured creditor under the Scheme.

8.On 11 July 2000, Showa filed a notice of claim with the Scheme Administrator in the sum of HK$10,553,796.51.

9.Since then, Showa has received little information from the Scheme Administrator on the progress or status of the Scheme, nor has the Company provided information on the exact location, status or condition of the five vessels despite repeated requests for information from Showa and its solicitors in 2001 and 2002. Showa had thought at one time that the Scheme Administrator would take steps to locate the vessels, but this has not happened to date.

10.Showa is unable to find a buyer for the vessels if an inspection of the vessels cannot be given, notwithstanding that it has received inquiries from several potential buyers. The Scheme Administrator's stance, as stated in his letter dated 12 June 2002, is that the vessels are encumbered assets and not included as Scheme assets, so Showa should liaise with the Company in this respect.

11.On 25 April 2001, Showa received a fax from the Company stating that it was liasing with underwriters to renew the insurance of the vessels and asking Showa about the outstanding amount for each of the vessels under mortgage so that the vessels would be insured for a proper sum. Showa's manager telephoned the writer of the letter seeking information about the exact location of the five vessels as Showa would like to inspect them and was told there would be a reply within a few days after checking. Despite repeated telephone calls to the Company and a follow-up letter of Showa dated 21 May 2001, no reply was given by Company in 2001.

12.In May 2002, Showa engaged solicitors to seek information regarding the vessels from the Company. The Company replied on 25 May 2002 referring to the provisions in the Scheme without providing any information on any vessel. When the Company was again pressed for information, it replied in its letter dated 6 June 2002 that it had "lost track of the latest status" of the vessels and instead required Showa to provide the Company with an update of the vessel status.

13.In another letter of the Company dated 27 June 2002, it attached a schedule of the "last known location" of the vessels (without stating when that was) by country, being China and Thailand, as opposed to their employment position and exact location. No information was provided as regards engagement, towages, salvages, charters and other contracts or if any of the vessels been employed since 1999. The information provided was so vague as to be illusory.

14.Finally, in the letter of the Company dated 9 July 2002, it stated that the two vessels in China were located in Zhongshan and the other three vessels in Thailand were located in Map Ta Phut, and that the exact location of the vessels "will require further efforts to ascertain". It was claimed that the Company could not locate the information requested because the registered office of the Company was re-possessed by the landlord on 19 June 2002, which was long after Showa had requested for information in April and May 2001 and after letters were sent by Showa's solicitors to the Company on 8 and 21 May 2002.

15.As the Company has failed to co-operate, Showa sought to ascertain the attitude of the Scheme Administrator to an application to the court for an extension of time to realise its security. The Scheme Administrator replied by a letter of his solicitors dated 7 August 2002 that it is not within his power to grant an extension of time in the absence of express power under the Scheme but if Showa should apply to court for such extension, the Scheme Administrator would have no objection. The Scheme Administrator did not make submissions at the hearing in order to save costs.

The application for extension of time

16.At the outset of the hearing, I have tried to ascertain from Mr Chua, who appeared for Showa, as to the purpose of seeking an extension of time "to realise its security as a secured creditor", as stated in paragraph 1 of the summons. If that is indeed the purpose of the application, it does not seem to me that any extension is required to be sought.

17.The wording of clauses 10 and 11 of the Scheme is clear. I have already set out the gist of the provisions in clause 9 in an earlier paragraph. Clause 10 provided that if any secured creditor has not prior to the expiry of two years after the effective date of the Scheme realised his security or notified the Scheme Administrator of his intention to accept his security in partial satisfaction of his secured debt, the Scheme Administrator shall appoint an independent surveyor to assess the open market value of such security as at the date of valuation and the amount as so assessed shall be treated as having extinguished or as the case may be pro tanto reduced the secured debt and the secured creditor shall be entitled in respect of the balance (if any) of the secured debt as a Scheme creditor, as if he had been admitted to proof as an unsecured creditor under the Scheme for the amount of that balance. Clause 11 provided that save for manifest error, the open market value as so assessed shall be "conclusive and binding" on the secured creditor and on the Scheme Administrator and if any encumbered asset is subsequently sold by the secured creditor for a sum below its open market value as so assessed, the secured creditor shall have no claim against the Company or any Scheme participating subsidiary or the Scheme Administrator for the amount of the shortfall.

18.There can be no doubt that a secured creditor is entitled to realise his security at any time outside the two-year period of the Scheme becoming effective, see also the broad terms of the Scheme as summarised by Le Pichon J (as she then was) in sanctioning the Scheme in Re UDL Holdings Ltd. (No. 3) [2000] 3 HKC405 at 409D to F. What is to happen in this instance is that the Scheme Administrator is obliged to appoint an independent surveyor to assess the open market value of the five vessels and the Scheme Administrator would need to obtain information from the Company on the exact location of the vessels for an inspection to be carried out and a valuation given. The only possible disadvantage that may be suffered by Showa in not being able to realise its security within the two-year period is that in the event that the vessels should be sold at a price lower than the valuation, it would have no claim in respect of the shortfall save as if it had been admitted to proof as an unsecured creditor under the Scheme.

19.Mr Chua was not able to explain to my satisfaction the purpose for the application, if Showa is not seeking an extension of time "to realise its security as a secured creditor" but is seeking an extension of the two-year time limit provided in clause 9(b) to realise the security and to inform the Scheme Administrator of the amount realised with the consequence provided in clause 9(c) that in respect of the deficit Showa shall be entitled as a Scheme creditor as if admitted to proof as an unsecured creditor.

20.Leaving aside the purpose of the application, if the application is to extend the time limit in clause 9(b) so that the consequence provided in clauses 10 and 11 would not apply, I do not think I can entertain the application as I would have no jurisdiction to extend time in this situation. The position is governed by the decision of the Privy Council, on appeal from Bermuda, in Kempe and Anr. (Joint Liquidators of Mentor Insurance Ltd.) v Ambassador Insurance (in Liquidation) [1998] 1 WLR 271. The statutory provision in Bermuda corresponds to section 166 of Cap. 32. Lord Hoffmann took the view that there is no inherent jurisdiction to extend a time limit laid down in a scheme of arrangement and that the reliance on the dicta in Reg. v Bloomsbury and Marylebone County Court, Ex parte Villerwest Ltd. [1976] 1 WLR 362 at 365 (that the court has inherent jurisdiction "to enlarge any time which a judge has ordered", a case also relied on by Mr Chua before me) is misplaced. He had this to say at 276C to G:

"It is true that the sanction of the court is necessary for the scheme to become binding and that it takes effect when the order expressing that sanction is delivered to the registrar. But this is not enough to enable one to say that the court (rather than the liquidators who proposed the scheme or the creditors who agreed to it) has by its order made the scheme. ... Under section 99 [equivalent to section 166 of Cap. 32] it is for the liquidators to propose the scheme, for the creditors by the necessary majority to agree to it and for the court to sanction it. It is the statute which gives binding force to the scheme when there has been a combination of these three acts ...

It is of course true that the sanction of the court is by no means a formality. Furthermore, in giving its sanction, the court has an inherent jurisdiction to correct any obvious mistakes in the document which sets out the scheme. But it cannot alter the substance of the scheme and impose upon the creditors an arrangement to which they did not agree. The question of whether the time limits in the scheme are fixed or flexible is in their Lordships' opinion one of substance. Mr Crystal accepts that if there is jurisdiction to enlarge the period for filing an appeal against the rejection of a claim, there must also have been jurisdiction to extend the final filing deadline for filing the original claims. But their Lordships think that this would have been a material alteration, detracting from the certainty and expedition which were the chief objects of the scheme."

21.I have no power to alter the substance of the Scheme in the manner as sought. As for Mr Chua's reliance on the decision of the Court of Final Appeal in Kensland Realty Ltd. v Whale View Investment Ltd. & Anr. [2002] 1 HKLRD 87, I do not think the court would have power to give effect to the principle that a person is not permitted to take advantage of his own wrong by extending the time limit in a particular provision in the Scheme (i.e. clause 9(b)) that would have the consequence of contradicting other provisions in the Scheme (i.e. clauses 10 and 11).

22.For the above reasons, I have dismissed the application for extension of time in paragraph 1 of the summons.

The application for disclosure of information

23.Full information regarding the vessels is sought against the Company to enable Showa to enforce its rights in the security under the mortgages.

24.On behalf of the Company, Mr Tsang submitted that Showa is barred from making this application to the court by virtue of the bar to proceedings provision in clause 1 of the Scheme, which reads as follows:

"Save as provided in Part 3 of this Scheme of Arrangement, during the period in which this Scheme of Arrangement is effective, no Creditor shall be entitled to ... take any step or proceedings against the Company ... or their properties or assets for the purpose of enforcing or recovering by way of execution or otherwise, any Claim or Secured Debt ... provided that nothing in this Scheme of Arrangement shall prevent any Secured Creditor from realising its security ..."

25.I reject the submission of Mr Tsang. The present application is made for the purpose of enforcing Showa's right to realise its security under the mortgages, it comes within the proviso in clause 1.

26.On the evidence before me, which I have summarized above, I am satisfied that the information sought by Showa has been repeatedly denied by the Company without any merit or valid justification. I have therefore made an order for disclosure as sought in paragraph 2 of the summons.

Order for costs

27.As Showa has succeeded only on part of its summons, I have ordered the Company to pay half of Showa's costs of and occasioned by this application within 14 days hereof, and these costs have been assessed on a gross sum basis at HK$62,500.00.

Representation:

Mr Chua Guan Hock, instructed by Messrs Fred Kan & Co., for the Applicant.

Mr Tsang Wai Kwan of Messrs Tsang & Lee, for the 1st Respondent.

Messrs Clifford Chance, for the 2nd Respondent, attendance excused.