Re Hong Kong Pharmaceutical Holdings Ltd
Read the full judgment text of HCCW 1018/2004 on BabelCite. This High Court CFI judgment was delivered on 21 September 2005.
1. This is a summons taken out by the provisional liquidators of Hong Kong Pharmaceutical Holdings Limited (“the Company”) on 21 June 2005, pursuant to section 193(3) of the Companies Ordinance, Cap. 32 and paragraph 7 of the order I made on 13 October 2004, by which the provisional liquidators were appointed.
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HCCW 1018/2004 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING-UP) NO. 1018 OF 2004 ____________
____________ Before: Hon. Kwan J. in Chambers (not open to public) Date of Hearing: 21 September 2005 Date of Decision: 21 September 2005 _______________ D E C I S I O N _______________ 1.This is a summons taken out by the provisional liquidators of Hong Kong Pharmaceutical Holdings Limited (“the Company”) on 21 June 2005, pursuant to section 193(3) of the Companies Ordinance, Cap. 32 and paragraph 7 of the order I made on 13 October 2004, by which the provisional liquidators were appointed. 2.The provisional liquidators seek an order that they have the sanction of the court to enter into a settlement agreement (“the Settlement Agreement”) between the Company, its wholly owned subsidiary, HK Pharmaceutical (PRC) Distribution Limited (“HKPD”), and various individuals known as “the Noteholders” in the Settlement Agreement. 3.The application was initially opposed by the petitioning creditor, Goldon Investment Limited, and the Official Receiver. The petitioning creditor has withdrawn its opposition on 12 September 2005 but the Official Receiver maintains his stance. 4.I will first summarise the transaction contemplated in the Settlement Agreement. On or about 13 August 2001, the Company entered into a share transfer agreement (“the Share Transfer Agreement”) with the Noteholders by which their 51% interest in Guizhou Ensure Chain Pharmacy Company Limited (“Ensure”), held through Joinbest Investment Limited (“Joinbest”), was transferred to the Company for HK$15,254,400.00, to be paid by the Company by a cash consideration of HK$3 million, and the issue of convertible notes with an aggregate principal amount of HK$12,254,400.00. 5.Ensure is a company incorporated in the People’s Republic of China and formed as a sino-foreign joint venture. Its main business is the retail of Chinese and western medicine in Guizhou province in the Mainland. 6.Joinbest is a company incorporated in the British Virgin Islands. 7.Pursuant to the Share Transfer Agreement, HKPD became the legal and beneficial owner of all the issued shares of Joinbest, and the convertible notes were issued by the Company to the Noteholders. 8.Each convertible note is convertible at HK$1.38 per share into a total of 8.88 million ordinary shares of the Company, and they have matured on 30 March 2005. The principal amount owing under the convertible notes to the Noteholders is HK$12.2 million odd. The Company does not have the financial resources to meet this obligation. 9.By the Settlement Agreement, it is proposed that the Company’s liability under the convertible notes is to be dealt with as follows:
In short, the above steps would result in an “unwinding” of the Share Transfer Agreement and place the respective parties in the position as if the original transaction had never occurred. 10.The provisional liquidators are of the view that the Settlement Agreement will be in the best interests of the Company and its creditors, whether looked at on a purely financial basis, or from a risk or operational perspective. They have given reasons why it seems unlikely there would be any purchaser of the Company’s 51% interest in Ensure, apart from the Noteholders. I have no reason to question the provisional liquidators’ assessment that it is unlikely there would be any other purchaser for this asset. 11.The provisional liquidators have the support of the 3 main creditors of the Company, whose debts make up approximately 95% of the total liabilities of the Company. They are Umbrella Finance Company Limited, the petitioning creditor, and, for obvious reasons, the Noteholders. 12.I should also mention that on 25 August 2005, the Stock Exchange of Hong Kong Limited gave conditional approval of the resumption of trading in the shares of the Company, upon completion of the restructuring as detailed in the resumption proposal submitted to the Listing Division. On 7 September 2005, the provisional liquidators signed the Debt Restructuring Agreement with an investor (“the Investor”), by which the Investor is to obtain majority control of the shares in the Company upon the consideration stated, and subject to the satisfaction of certain conditions precedent. The winding-up petition of the Company has been adjourned to a date in January 2006 for the Company to take necessary steps to implement the restructuring by a scheme of arrangement. 13.The principal operations of the Company and its subsidiaries comprise 3 business units:
14.The restructuring by the scheme of arrangement will not include the businesses of Ensure and Hua Xin. The Investor is not interested in taking over the Company’s interest in Ensure. It is the understanding of the provisional liquidators that the Investor will be negotiating with Ensure to enter into a supply arrangement to sell the products of the Company through the pharmacy network of Ensure. 15.The Official Receiver is opposed to this application for sanction for two main reasons:
16.Under the order I made on the appointment of provisional liquidators, it was provided in paragraph 4 that the provisional liquidators would have, inter alia, these powers:
17.Under paragraph 4(g), the provisional liquidators would only have power to enter into a discussion for sale of any of the assets of the Company and to enter into a non-binding agreement. Under paragraph 4(h), the provisional liquidators are empowered to enter into a compromise or arrangement, including a compromise or arrangement under section 166, provided that any such compromise or arrangement is not to be binding on the creditors until approved by the court. 18.Under section 193(3), the court may limit and restrict the powers of the provisional liquidators by the order appointing them. In paragraph 7 of the order on appointment, the provisional liquidators are given liberty to apply generally. 19.I turn to the first ground of opposition raised by the Official Receiver. Should the provisional liquidators be required to implement the Settlement Agreement by a scheme of arrangement and comply with the requirement under section 166? 20.The Official Receiver submitted that the Settlement Agreement involves a compromise with a class of creditors, namely the Noteholders, and thus fall within the wording of section 166. Hence, the compromise should be implemented by a scheme of arrangement under the procedure provided in that section. 21.Section 166(1) provides as follows:
22.I am satisfied that the Settlement Agreement does involve a compromise or arrangement within the meaning of section 166. Under normal circumstances, the principles enunciated by Plowman J in Re Trix Ltd [1970] 1 WLR 1421 should apply and they may be stated as follows: the proper way to distribute the assets of a company other than strictly in accordance with creditors’ rights is by a scheme of arrangement under section 166 which binds all creditors, and not by an agreement of compromise under section 199(1)(e), which would deprive non-assenting creditors of the court’s protection and prevent them from expressing their views. See Re Bank of Credit and Commerce International SA (No. 2) [1992] BCC 715 at 731B to G, and Re SinoAmerican, supra at 522D to H. 23.If I am concerned here with liquidators and not provisional liquidators, I have no doubt that this would be within the letter of section 199(1)(e) for the court to approve the compromise in the Settlement Agreement by the powers in that provision (see Bank of Hindustan, China & Japan Ltd v Eastern Financial Association Ltd (1869) LR 2 PC 489; Re Commercial Bank Corporation of India and the East (1869) LR 8 Eq 241). Whether the court should do so under the compromise provision in section 199(1)(e), instead of under section 166, is another matter. 24.It is not in dispute that where special circumstances are shown, the court has a residual discretion to sanction compromise and not insist on the procedure in section 166 to be followed. In Re Bank of Credit and Commerce, this discretion was exercised as it was not practicable to hold creditors’ meetings, let alone class meetings, to ascertain the wishes of creditors, due to the sheer number of creditors worldwide and that a substantial portion of them had given no or incomplete addresses. Similarly, in the case of Taylor, Noter [1992] BCC 440, cited in the Bank of Credit and Commerce, it was not practicable for a creditors’ meeting to be held, as assets of the companies and of the sequestered estate were so confused that it was not possible to identify the assets of each and it was practically impossible to determine who the true debtors were. 25.In the present case, it is not impracticable to hold a creditors’ meeting. Nevertheless, it was submitted by the provisional liquidators that special circumstances do exist and that the court should not insist on the adoption of the procedure in section 166. 26.Firstly, there is an overwhelming majority of creditors in favour of the Settlement Agreement. Their debts make up 95% of the total indebtedness. I should say this in itself is not a compelling factor, as in Re SinoAmerican,it was also represented to the court that 95% of the creditors supported the proposed transaction. The court must be satisfied that the consent of the creditors is informed or true consent, and that they were “properly, accurately and fairly informed prior to taking a decision” (at 523A). 27.Secondly, the Settlement Agreement was not a wholesale disposal of the Company’s assets, unlike the situation in Re SinoAmerican. It involves merely a single asset of the Company and the compromise is with just one group of creditors. 28.Thirdly, in the event that the 51% interest of the Company in Ensure is not disposed of by way of the Settlement Agreement, it would be dealt with as part of the main scheme of arrangement for the Company. HKPD would be liquidated by the scheme administrators and the interest of Ensure transferred to the scheme fund to be distributed to the general body of creditors. However, as it is unlikely there would be any buyer interested other than the Noteholders, the 51% interest in Ensure is unlikely to be sold, or if sold, would be for a substantially lower price. The end result might be that the scheme administrators would have to sell the 51% interest in Ensure back to the Noteholders, and the same result as what is contemplated in the Settlement Agreement would be achieved, although there would be significant delay, there would be no assurance the same terms as offered in the Settlement Agreement would be obtained by the scheme administrators, and there would be no reduction in the liabilities of the Company by HK$12.2 million being the claims of the Noteholders. To insist on following the procedure under section 166 would only lead to unnecessary costs, significant delay, and a probably less advantageous outcome for the unsecured creditors. The provisional liquidators are concerned that if the offer in the Settlement Agreement is not taken, they might not have a comparable offer again. 29.The Official Receiver contended that there is no evidence that the creditors who support the settlement agreement were properly, accurately and fairly informed before making the decision. Here, we are concerned with only 3 creditors. The situation is distinguishable from Re SinoAmerican. Leaving aside the Noteholders, I think it can safely be assumed that a substantial financial institution like Umbrella Finance Company limited can be trusted to look after its own interest. The same can be said for the petitioning creditor, which has been advised by solicitors throughout. 30.Taking all the matters advanced by the provisional liquidators into consideration, I think there is sufficient reason to justify a departure from the general rule in Re Trix Ltd. 31.I turn to consider whether sanction should be given to the compromise in the Settlement Agreement. 32.The Official Receiver submitted that there is no credible evidence to substantiate the value of Ensure and whether it is profitable. There is no fair valuation of the Company’s interest in Ensure, and this would be placing an unjustified burden on the court to grant sanction. 33.Before the court are the audited accounts of Ensure as at 31 March 2003 and the unaudited management accounts as at 31 March 2004. The audited accounts of 2003 recorded a net loss of HK$2,672,000.00. The unaudited management accounts of 2004 recorded a net profit of HK$882,000.00. No dividend has ever been paid by Ensure to the Company. On the basis of the 2004 net profits being maintained, it would take in excess of 10 years for the Company to break even on its investment of HK$15 million. The provisional liquidators form the view that the profitability of Ensure is too small to justify the investment made by the Company. I see no reason to disagree. 34.What has made it particularly difficult to attract buyers for this asset is the lack of control of the Company over the operations and business of Ensure. All the assets of Ensure are in the Mainland. Even from the time immediately after the Share Transfer Agreement, the management of Ensure was reluctant to provide full financial information about its operations and assets to the Company. The provisional liquidators have had similar difficulties with obtaining financial information from Ensure’s management. Ensure had refused to allow access to the former auditors of the Company to its books and records for the purpose of performing an audit. So the consolidated financial statements of the Company for the last two years have not been prepared, this has caused difficulty for the Company in its attempt to comply with the requirement of the Stock Exchange for the re-listing of its shares. 35.There are special circumstances here as to make it not feasible for a proper valuation of the Company’s interest in Ensure to be obtained. It does not appear to me the risk that this asset might be disposed of at an undervalue would be particularly high. I can see positive benefits in the Settlement Agreement for unsecured creditors. The net gain to them under the Settlement Agreement would be in the region of HK$10 million, as a cash consideration of HK$3 million would be paid and there would be reduction in the liabilities of the Company to the extent of HK$12.2 million. If the restructuring in the resumption proposal and the Settlement Agreement are both implemented, the provisional liquidators have estimated the return to unsecured creditors in the region of 60%. If only the restructuring in the resumption proposal is implemented, it is estimated that the return to unsecured creditors would be in the vicinity of 47.2%. The provisional liquidators regard the Settlement Agreement as a very good deal for the Company and its creditors. It is unlikely that any other buyer would be found for this asset in these particular circumstances. 36.I am persuaded that it would be appropriate to exercise my discretion to sanction the compromise in the Settlement Agreement. I make an order in terms of paragraph 1 of the summons issued by the provisional liquidators. I order both the provisional liquidators’ costs and the Official Receiver’s costs of this application are to be paid out of the assets of the Company. The Official Receiver’s costs are assessed on a gross sum basis at HK$20,000.00.
Mr Willie Chang of Messrs Willie Chang & Co., for the Petitioner Mr Jose Maurellet instructed by Messrs Clifford Chance, for the Provisional Liquidators Ms Polly Yip for the Official Receiver |
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