Re Mei Cheong Ieong Hong (H.K.) Ltd.
Read the full judgment text of HCCW 375/1999 on BabelCite. This High Court CFI judgment was delivered on 8 November 1999.
1. On 28 April 1999, a petition was presented to wind up Mei Cheong Ieong Hong (H.K.) Limited ("the Company"). The petitioners are Standard Chartered Bank, Jade Riches Investment Limited, Union Bank of Hong Kong Limited, The Bank of East Asia Limited and Standard Chartered Asia Limited ("SCAL") respectively.
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HCCW000375A/1999 HCCW 375/1999 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING-UP) NO. 375 OF 1999 ____________
____________ Coram: The Hon. Mr. Justice Ribeiro in Court Date of Hearing: 8 November 1999 Date of Judgment: 8 November 1999 _______________ J U D G M E N T _______________ A. The petition and the debt 1. On 28 April 1999, a petition was presented to wind up Mei Cheong Ieong Hong (H.K.) Limited ("the Company"). The petitioners are Standard Chartered Bank, Jade Riches Investment Limited, Union Bank of Hong Kong Limited, The Bank of East Asia Limited and Standard Chartered Asia Limited ("SCAL") respectively. 2. All the petitioners, except Jade Riches Investment Limited, are lenders under a loan agreement dated 27 August 1988, as amended by subsequent supplemental agreements. Jade Riches is the assignee of the rights of the State Bank of South Australia, previously a member of the syndicate of lenders. SCAL is the agent of the syndicate, designated by the loan documentation. 3. The loan, which was in the sum of US$24.5 million, was made to the Company to help finance its participation in a joint venture hotel project in Guangzhou. This was a project to build and operate a hotel which came to be known as the Ramada Pearl Hotel, in joint venture with Guangzhou Guangxia Service Company ("GGSC"), a mainland enterprise. Until early this year, GGSC was apparently operated by or with the involvement of officers of the Peoples Liberation Army. 4. Construction was completed and the hotel commenced operating in October 1991. It is owned and operated by a mainland joint venture company called Guangzhou Kai Xuan Hotel Co. Ltd. ("the Joint Venture Company"). The Company and GGSC each own a 50% interest in the Joint Venture Company. This shareholding in the Joint Venture Company is the Company's only asset of any significance. 5. It appears that the joint venture did not proceed smoothly and that disputes broke out between the Company and GGSC. Such disputes and other matters led to defaults on the Company's part in relation to its obligations to the lenders. 6. On 19 May 1997, the lenders, through SCAL, demanded payment of $59,967,952.29 comprising principal and interest. As payment was not made, on 18 June 1997, the lenders declared an event of default under the loan agreement and invoked an acceleration clause whereby all instalment repayments of principal, all outstanding interest and default interest, together totalling $142,150,715.55, became immediately payable. 7. The Company made some relatively small repayments but did not make any substantial progress in discharging its indebtedness to the lenders. On 2 March 1999, the petitioners served on the Company a statutory demand for $159,204,504.89 comprising outstanding principal in the sum of $138,888,129.55 and $20,316,375.34 by way of interest. 8. This debt is not disputed and, although two further payments in the respective sums of US$99,985.00 and HK$399,920.00 were subsequently made in March and April 1999, the bulk of the indebtedness remains undischarged. B. The background to this hearing 9. When the petition was presented on 28 April 1999, the petitioners applied at the same time for the appointment of provisional liquidators. This was supported by an affirmation made on the same day by Mr Chan Chi Pui ("Mr Chan") of the Standard Chartered Bank. Mr Chan exhibited the Company's unaudited financial statements for the 6 months ended 30 June 1998 which indicated that the Company was then in dire straits, with net liabilities of $10.48 million, current liabilities of $194.65 million as against current assets of $47,589. He also explained that although the lenders had taken various forms of security, such security was, for various reasons, ineffective. 10. Mr Chan identified various concerns which had led to the application for provisional liquidators. First, it appeared that GGSC, had for some considerable time been diverting the hotel's operating income away from the account from which the Company was intending to discharge its indebtedness to the petitioners. The petitioners expressed concern at what they saw as the board's failure to confront GGSC in this regard and stated that they had lost confidence in its board following the apparent breakdown in relations with the Company's joint venture partner. Secondly, the petitioners were concerned at the board's failure to procure a Certificate of Investment once the Company and GGSC had completed their capital contributions. This was said to have regulatory, apparently exchange control, consequences. Thirdly, the board had caused the Company to apply to the Guandong Provincial Commission for Foreign Economic Relations and Trade ("the Guangdong Commission") for the dissolution of the joint venture. The petitioners regarded this as posing a risk to the hotel operation and so to the Company's only significant asset. 11. Mr Wong Chung Fat ("Mr Wong") filed an affirmation in response on the Company's behalf. He is its managing director, and holds over 33% of its shares. He is also one of the executive directors appointed to the board of the Joint Venture Company and its general manager, overseeing the hotel's operation and management. 12. Mr Wong stated that the difficulties which the Company had experienced in meeting its obligations to the petitioners were due to the conduct of GGSC and in particular, the wrongful exclusion of the Company from participating in the control of the hotel's operating revenues, resulting from the funds being diverted into an unauthorised account. Mr Wong claims that the Company did confront GGSC and indeed, that its application to the Guangdong Commission for dissolution of the joint venture lodged in March 1999 was part of an attempt to pressurize GGSC into releasing funds to repay the lenders. 13. Mr Wong sought to meet various concerns expressed by the lenders and complained that the lenders had themselves exacerbated the dispute with GGSC. I need not go into any of the details here. However, Mr Wong also sought to argue that the Company was either not insolvent or not in as bad a condition as the petitioners were alleging in that (i) the value of its interest in the hotel had been seriously understated, a more accurate valuation being in the region of HK$300 million; (ii) the hotel has been operating at a profit since 1992 with profits forecast to increase; and (iii) the Provincial Government had taken over from the PLA control of GGSC's interest in the joint venture so that a far more cooperative relationship with the joint venture partner could now be anticipated. He explained that the Company had liaised with GGSC under this new management and expected to be able to pay a lump sum of HK$4 million to $5 million with monthly repayments of not less than HK$1.2 million thereafter, depending on seasonal factors. He resisted appointment of provisional liquidators on the ground that, with its long experience of the joint venture and the parties involved, the Company was best placed to handle the difficulties in the best interests of all parties concerned. 14. On 19 May 1999, Le Pichon J adjourned the application for provisional liquidators sine die on the Company's undertaking to withdraw its application for dissolution. 15. Extensive further evidence was then filed on both sides in June 1999, with issue joined on some of the central matters relied on by Mr Wong. I will only touch on a few of these matters later in this judgment. On 7 July 1999, Le Pichon J gave directions and fixed today's hearing. At the same time, Silverdew Development Limited ("Silverdew") was given leave to file evidence out of time. Silverdew is a 50% shareholder in the Company and an opposing contributory for the purposes of the winding-up petition. C. The hearing today 16. The substantive hearing of the petition was called on before me today. The persons who had given notice of an intention to appear and their respective interests in the proceedings are as summarised below:-
17. It will be apparent that a total of about $195.23 million is claimed to be owed by the Company to these creditors. Of these, the petitioning creditors claim to be owed about $159.2 million or 81.5%. All the other creditors (who are also either contributories or related to contributories) oppose the making of a winding-up order, as do all the contributories. 18. Mr Anselmo Reyes appears for the petitioners. Ms Mairead Rattigan appears for the company and for the opposing creditors and contributories other than Silverdew. Silverdew is represented by Mr Neil Thomson. 19. At the commencement of the hearing, an application was made by Ms Rattigan and Mr Thomson on behalf of their clients for the hearing of the petition to be adjourned to enable proposals for a possible restructuring to be formulated and put forward. For reasons which I gave ex tempore, I dismissed the application and the hearing proceeded. I am therefore now concerned with deciding between, on the one hand, making a compulsory winding-up order and, on the other, either dismissing the petition or, as Mr Thomson submitted, staying it indefinitely or for a sufficiently long period to allow either the Company to trade itself back into financial health or, presumably, for some viable rescue plan to be devised and agreed by the parties. 20. Mr Reyes submitted that the present case falls into the class of cases where the petitioner is entitled to a winding-up order ex debito justitiae, the debt and its non-payment being admitted. He accepts that since there is opposition by certain creditors and contributories, the court has a discretion under s. 287 of the Companies Ordinance to have regard to their wishes and, if such regard is had, a duty to have regard to the value of each creditor's debt. However, Mr Reyes submits that all the submissions made in opposition provide no basis upon which the court's discretion may properly be exercised in favour of a dismissal or stay of the petition. He reminded me of the Court of Appeal's decision in Re Esquire (Electronics) Ltd [1996] 3 HKC 309 at 312E-H where Godfrey JA stated as follows:-
21. Ms Rattigan and Mr Thomson identified several issues which they urged upon the court as providing a basis for treating the case as exceptional and refusing the petitioners relief. 22. First, it was urged by both counsel that the Company should be given a chance to trade itself out of its difficulties because its underlying asset, the hotel, was of substantial value and indeed, probably more value than previous valuations had stated. 23. I have to confess that the exact purport of this argument is not clear to me. Presumably, if the Company has a highly valuable asset at its disposal, it would have either been able to put it up to the petitioners as security for their debt or to use it to re-finance that debt elsewhere. Plainly, despite great efforts to provide such security and to devise a scheme for restructuring its debt, the Company has failed to achieve this. 24. More importantly, in my view, the argument glosses over the real nature of the Company's only asset and in so doing, glosses over one of the fundamental sources of its present financial difficulties. The hotel may, in general terms, be described as an "underlying asset". However, the only asset actually held by the Company is a 50% shareholding in the Joint Venture Company in circumstances where there have evidently been such serious disputes arising between the Company and GGSC, its joint venture partner, that the Company has been excluded from any say over the application of the hotel's revenues. 25. The Company's auditors, focussing on the Company's assets and not on the underlying value of the hotel, severely qualified their audit report, giving an adverse opinion for the year ended 31 March 1997. They did so because, in the light of the dispute, they considered that full provision should be made, effectively wiping out the stated book value of the Company's investment in the joint venture. The auditors stated:-
26. In the audited financial statements for the period 1 April 1997 to 31 December 1997, the auditors went so far as to qualify their opinion on a going concern basis. They reported that the Company "has a capital deficiency at the balance sheet date of HK$9.8 million and has incurred losses for the period ended 31 December 1997" and stated:-
27. The Company's investment in the joint venture was stated in the same amount in its accounts for the year ended 31 December 1998 and again, the auditors qualified the accounts on a going concern basis. 28. Secondly, it was submitted that the evidence showed that the hotel was profitable and, that given time, it could hope to trade itself out of its present difficulties. In the first place, it appears to me at least questionable whether the evidence is that the hotel has been trading profitably. The petitioners have referred to the audited accounts for the Joint Venture Company (which operates the hotel) for the year ended 31 December 1997. These indicate that it suffered a net loss of RMB 6.85 million for that year and had negative retained earnings of RMB 85.75 million. Mr Wong sought to argue that the net loss figure was generated by debit items such as depreciation which, while having an impact on the accounts, did not prevent the Company from servicing its debt. Even if that is correct, the evidence appears to me to show that the level of income generated may not suffice to fund the servicing and repayment of the debt. In a draft proposal handed up to the Court this morning, it was suggested that profits be improved by converting the hotel into serviced apartments. Reference was also made in that document to persistent management problems requiring several changes of management. Accordingly, as a matter of fact, I am not satisfied that the hotel is or may in future be expected to generate a level of profits which would enable it to trade itself back to financial health. 29. Even if I am wrong in my understanding of the evidence and if some hope might be entertained of a return to solvency, this remains an argument which I would reject in principle. As the Court of Appeal stated in Re Esquire (Electronics) Ltd (supra), "it is of no avail to the company to say that, if only it is given time, it will be able to pay." 30. Thirdly, both Ms Rattigan and Mr Thomson urged me to take into account as a discretionary factor, the Company's assertion that since the Guangdong Provincial Government had taken over from the PLA control of GGSC's interest in the joint venture, the fundamental problems involving the soured relations between the Company and GGSC can now be rectified. In my view, this is essentially an argument similar to the previous argument which I have rejected. It amounts to submitting that, given time, the Company, freed from the impediments of the joint venture dispute, can be expected to trade itself back to financial health. It is therefore also an argument that I cannot in principle accept. 31. I might add, as a matter of completeness, that it is also an argument which does not appear to me to be made out on the evidence. The replacement of the PLA by the Provincial Government is alleged to have taken place at the beginning of this year. Even if some of the previous disputes have now been superseded, there is still no evidence before the Court that the new controllers of GGSC will cooperate in a relevant way, that is, in relation to the discharge of the Company's indebtedness to the petitioners in a manner commercially acceptable to all parties. Indeed, the recent affirmations tend to note that the changeover from the PLA-controlled regime has yet to be completed. Accordingly, I do not see this as a factor which should be given any weight on the basis of the evidence filed. 32. Fourthly, Ms Rattigan argued that the conduct of the petitioners had had an adverse effect on the relations between the joint venture partners and that this ought to be a factor taken into account in deciding whether to make a compulsory order. The conduct complained of appears to be the fact that the petitioners initially brought proceedings against Jia He United Development Co. Ltd. ("Jia He"), suing on a guarantee which it had provided, and then discontinued those proceedings in response to Jia He making such discontinuance a pre-condition of its participation in any re-structuring negotiations. 33. I have to confess that I remain unclear as to the gravamen of the complaint. In an earlier affidavit, Mr Wong criticised the petitioners for having proceeded against the guarantor before taking action against the Company, saying that this caused Jia He to suspect that the lenders were conspiring with the Company against its interests. However, the present complaint appears to be that the Company ought to be pursuing its guarantee claim against Jia He instead of petitioning for the Company's winding-up. 34. With respect, I cannot see any merit in this argument. I cannot see how the petitioners can be criticised for invoking the guarantee which was part of the security package accepted by all the parties, including the Company. It is evident that it did the lenders little good and in commercial negotiation with Jia He, they apparently agreed to discontinue the action while reserving their rights. Again, I cannot see how the Company has any basis for complaint. Similarly, it has never been open to a debtor to complain that a creditor is pursuing him instead of his guarantor where the debtor has admittedly defaulted. 35. Fifthly, Ms Rattigan and Mr Thomson both urged the Court not to make any winding-up order so as to enable substantial claims vested in the Company against GGSC to be pursued with Mr Wong at the helm. It was submitted that he was obviously the person best equipped to pursue these claims in the interests of all creditors. In support, Ms Rattigan cited In re L. H. F. Wools Ltd. [1970] 1 Ch 27 where, allowing the appeal from Plowman J, the English Court of Appeal stayed winding-up proceedings to enable a cross-claim against the petitioner which was actionable in Belgium, but not in England, to be pursued there. 36. I do not consider that this case is of any assistance to the Company (or to the opposing contributory). As Harman LJ pointed out, the ground of the appeal was:-
37. This was of particular importance, as Harman LJ pointed out as follows (at p. 38):-
38. It was, in other words, akin to a case where the petitioner's debt was disputed and a case in which the petitioner may have been motivated to render such cross-claim ineffective by displacing the company's management. Of course in the present case, there is no suggestion that the Company has any cross-claim against the petitioners or that any such motivation arises. 39. In any event, I am far from satisfied that the suggestion, made at this late stage, that the Company wishes to pursue its claims against GGSC should be given any credence. The claims in question date back to as early as 1992 and extend to a date no later than one in 1998. One is bound to ask: Why, if the Company is serious about its claims, said to involve losses to the Company totalling HK$97.5 million representing its share of the joint venture's losses, has the Company taken not a single step so far towards enforcing those claims? Conclusion 40. Having had regard to the wishes of the opposing creditors and contributories, I have come to the conclusion that none of the issues raised on their behalf and on behalf of the Company provides any foundation for resisting a compulsory winding-up order in the present case. The petitioners constitute the vast majority by value and their prima facie entitlement to a compulsory order ex debito justitiae must prevail. 41. I will accordingly make the usual compulsory winding-up order.
Representation: Mr. Anselmo Reyes instructed by M/s. Baker & McKenzie for the Petitioner Miss. Mairead Rattigan instructed by M/s. Yang & Yu for the Company Mr. Neil Thomson instructed by M/s. Richards Butler for the Opposing Contributory |
Cases cited in this judgment
Further hearings and rulings under HCCW 375/1999