Re Legend International Resorts Ltd

HCCW 1139/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1139 OF 2004

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Before: Hon Kwan J in Court

Date of Hearing: 8 June 2006

Date of Judgment: 8 June 2006

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J U D G M E N T

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1.This is a hearing of the petition presented by Morgan Stanley Emerging Markets Inc (“MSEMI”) to wind up Legend International Resorts Limited (“the Company”) on 2 November 2004.  Two grounds are relied on in the petition - the Company is unable to pay its debts (under section 177(1)(d) of the Companies Ordinance, Cap. 32) and that it is just and equitable that the Company be wound up (section 177(1)(f)).

2.The Company was incorporated in Hong Kong.  Its business is to own and operate a casino in Subic Bay in the Philippines.

3.The debt in the petition is US$5,236,020.54 with interest.  MSEMI purchased the debt from the original lender.  Since the presentation of the petition, it has purchased further debts owed by the Company.  The total debts acquired are in the region of US$60 million.  MSEMI is a wholly owned subsidiary of Morgan Stanley, a major investment bank in the United States.

4.This petition has the support of 2 other creditors, Philippine Asset Investment (SPV-AMC) Inc. (“PAII”) and Asset Pool A (SPV-AMC) Inc. (“APA Inc”).  PAII is a wholly owned subsidiary of MSEMI and APA Inc. is a wholly owned subsidiary of Avenue Asia Special Situations Fund III, L.P.  Unlike MSEMI, these creditors have also purchased debts owed by the Company from the original lenders.  The combined indebtedness to PAII and APA Inc. is about US$83.76 million odd.

5.No creditor has filed any notice to oppose the petition.  It is not in dispute that the Company is hopelessly insolvent.

6.According to a schedule submitted by MSEMI to the Court of Appeal at a hearing in February 2006, the debts claimed by MSEMI, PAII and APA Inc. together accounted for 95.8% of the Company’s debts to financial creditors and 79.7% of the total debts of the Company, based on figures provided by the Company regarding its liabilities in a rehabilitation plan (“the Rehab Plan”) annexed to its petition for corporate rehabilitation filed in the Philippine Court on 5 November 2004.

7.The Company does not recognise PAII and APA Inc. as creditors, and have issued proceedings in the Philippines to challenge their status.

8.I have said that this petition was presented by MSEMI on the ground of insolvency and on the just and equitable ground.  In support of the just and equitable ground, the allegation relied on in the petition is that the business and affairs of the Company are being conducted in a manner detrimental to its creditors and third parties dealing with the Company. I think it is right to say that insolvency is the main, if not the only, ground relied on by MSEMI.  I do not propose to deal with the just and equitable ground.

9.For the background of the Company, the matters giving rise to this petition, and related proceedings in the Philippines, Malaysia and England, I refer to a decision I gave in these proceedings on 6 June 2005, paragraphs 6 to 38, and the judgment of the Court of Appeal on the appeal from my decision given on 1 March 2006, paragraphs 3 to 12.  I shall not repeat them.

10.This petition is resisted by the Company on three broad grounds:

(1) the Company has raised a bona fide dispute on substantial grounds that MSEMI is not a creditor of the Company in that it is not an “Eligible Transferee” within the meaning of the Facility Agreement dated 22 July 1997;

(2) there is a Stay Order made on 9 November 2004 by the Philippine Court in the rehabilitation proceedings and this has the effect of staying enforcement of all claims against the Company by court action or otherwise; and

(3) this court should exercise its discretion against making a winding-up order for 2 reasons: (a) to allow the Company to go through with its plan for rehabilitation in the Philippine Court; and (b) MSEMI is a “delinquent” petitioner that has allied itself with the Philippine Amusement and Gaming Corporation (“Pagcor”) and Pagcor has engaged in “unlawful” conduct recently in forcibly closing the Company’s casino and seizing the assets of the Company under various writs of attachment.

Disputed debt

11.The approach of the court on hearing a creditor’s petition to wind up a company was neatly summarised by the English Court of Appeal in these terms in Alipour v. Ary [1997] 1 WLR 534 at 546B to C:

“(1)  A creditor’s petition based on a disputed debt will normally be dismissed.  (2) It will not be dismissed if the petitioning creditor has a good arguable case that he is a creditor and the effect of dismissal would be to deprive the petitioner of a remedy or otherwise injustice would result or for some other sufficient reason the petition should proceed.  (3) On a contributory’s petition where the locus standi of the petitioner is disputed, the court will consider all the circumstances, including the likelihood of damage to the company if the petition is not dismissed, in determining whether to require the petitioner to seek the determination of the dispute outside the petition.”

12.I have held against the Company it has raised a bona fide dispute on substantial grounds regarding MSEMI’s locus standi as a creditor in its application to strike out the petition (paragraphs 39 to 57 of my decision).  My decision was upheld by the Court of Appeal (paragraphs 17 to 22 and 51 of the judgment).  The same arguments raised by the Company before the Court of Appeal were raised before me at this hearing.

13.The point at issue is a question of construction of the Facility Agreement, whether MSEMI would qualify as an “Eligible Transferee”, which was defined to mean “any bank, deposit taking company or other financial institution, wherever incorporated, duly authorised to carry on its business and to participate in the Facility.”  MSEMI is not a bank or deposit taking company.  MSEMI claims it comes within “other financial institution, wherever incorporated, duly authorised to carry on its business and to participate in the Facility”, on a proper construction of the Facility Agreement.  The Company contends that “other financial institution” in this context should be confined to an entity whose business is analogous to that of a bank, and a substantial proportion of whose business would involve the making of loans.

14.Mr. Barlow submitted for the Company that the central issue as to MSEMI’s claim to be a creditor of the Company is not suitable for summary determination in these winding-up proceedings.  He said there should be a full trial with discovery and cross-examination of deponents of affirmations.  This could either be in the winding-up proceedings (he gave as examples Bateman Television Ltd v. Coleridge Finance Co Ltd. [1971] NZLR 929 and Brinds Ltd & Ors v. Offshore Oil N.L. & Ors (1986) 2 BCC 98,916), or in a separate action commenced by writ.  He submitted it would be wrong to determine the issue summarily on the evidence adduced on affidavit, and without expert evidence.  I gather he had made the same complaints when the Company applied for leave to the Court of Appeal to appeal to the Court of Final Appeal (see Reasons for Judgment of the Court of Appeal handed down on 3 May 2006, paragraphs 7 and 8).

15.In this regard, I can do no better than to express my agreement with the observations of Gibbs J in Re Q.B.S. Pty Ltd [1967] Qd. R. 218 at 225, which were approved by the Privy Council in Brinds, supra. at 98,921:

“It seems to me that in every case it becomes necessary for the court to exercise its discretion as to how far it will allow the question whether or not the dispute is bona fide to be explored.  In some cases it may be very easy to decide this question on the petition and affidavits in reply.  In other cases however it may be difficult to determine whether or not the dispute is bona fide without determining the merits of the dispute itself.  In some such cases convenience may require that the court decide the question whether or not a debt exists, but in other such cases it may appear better to allow that question to be determined in other proceedings before the petition for winding up is heard.”

16.In forming a view if the present dispute raised on a matter of construction is a bona fide dispute on substantial grounds, it does not appear to me necessary to embark on a full trial, with cross-examination of deponents and with discovery.  As for the complaint that I had wrongfully refused leave to the Company to adduce expert evidence on banking in the directions I gave on 13 March 2006, this complaint is without merit.

17.The Company took out its summons to strike out the petition on 16 December 2004.  The application was heard on 21 April 2005.  Between those dates, rounds of evidence were filed on both sides.  The evidence filed was voluminous and there was no restriction as to adducing expert evidence.  The Company adduced an affidavit from a Queen’s Counsel filed in proceedings in Malaysia, as an expert on English law, on the basis that the Facility Agreement is governed by English law.  Not only did Queen’s Counsel depose to his understanding of the law, he also deposed to his understanding of how banks in syndicated loans had dealt with purchasers of distressed assets.

18.After my decision rejecting the strike out application was handed down on 6 June 2005, the petition came before me for directions on 20 June 2005 and on 12 September 2005.  On each occasion, I gave directions for further evidence to be filed.  There was no application for filing of any additional expert evidence by the Company.  On 12 September 2005, I gave leave to set down the petition for substantive hearing with 2 days reserved.  Hearing dates on 4 and 5 January 2006 were given.  These dates were later vacated by consent, pending the outcome of the appeal from my decision heard by the Court of Appeal on 7 February 2006.  After the Court of Appeal gave judgment on 1 March 2006, the petition was restored before me on 13 March 2006.  It was then that the Company applied for the first time to adduce expert evidence on banking and the debt market with directions for experts to attend court and be cross-examined.  No indication was given as to the additional expert proposed to be engaged by the Company, the gist of the expert evidence to be adduced or the precise issues to be addressed.

19.I refused leave as I considered this application to be made too late in the day and without sufficient basis.  The Company was alive all the time to the possibility of adducing expert evidence in banking, as it had relied heavily on a judgment of Steel J in The Argo Fund Ltd v Essar Steel Ltd ([2004] EWHC 128 (Comm)) given in January 2004.  It has already adduced expert evidence from the Queen’s Counsel I mentioned.  It would not be right to further delay the resolution of the petition for winding up, which was presented in November 2004.

20.I now turn to the substantive issue raised in dispute.

21.In my earlier decision, I saw no reason to confine the meaning of “other financial institution” in the way as suggested by the Company.  The decision was reached on the basis of the materials placed before me.  I considered the Facility Agreement, the affidavit evidence, and other documents adduced on affidavit.  At that hearing, reliance was placed by each party on different judgments in proceedings in England in The Argo Fund Ltd v Essar Steel Ltd.  Mr. Barlow relied heavily on the judgment of Steel J in dismissing the application for summary judgment, whereas Mr Crystal, QC for MSEMI relied on the judgment of Aikens J given in favour of the transferee of the debt after a full trial ([2005] EWHC 600 (Comm)).

22.I should also mention that since then, the English Court of Appeal has on 14 March 2006 dismissed an appeal from the judgment of Aikens J ([2006] EWCA Civ 241).  The Court of Appeal gave an even broader interpretation than Aikens J to the term “other financial institution” in the expression of “a bank or other financial institution” in the agreement (paragraph 51 of the judgment).  I note in an earlier letter of the Company’s London solicitors dated 22 September 2005 they would appear to have accepted that the outcome in the Argo Fund appeal might affect the Company’s decision whether to proceed with an action the Company brought against MSEMI and another in the Commercial Court in London in January 2005 for a declaration there was no effective transfer of the debt to MSEMI, as “if as a result of the Court of Appeal’s decision these proceedings become moot, there will be no need to continue with the proceedings or file any evidence”.  Apparently having regard to the judgment of the English Court of Appeal, the Company has on 28 April 2006 discontinued its action in the Commercial Court.  This discontinuation came two days after the hearing and dismissal of the Company’s application to our Court of Appeal for leave to appeal to the Court of Final Appeal, on the basis of an alleged abuse of process to allow the petition to proceed when the Company has commenced an ordinary action in England to try and determine the issue in dispute.

23.In the hearing of the petition before me, Mr. Barlow has taken a different stance.  Not only are the judgments of Aikens J and of the English Court of Appeal irrelevant, but the complaint was made that I should not have relied on these judgments in any way, as to do so would be to “transplant” or “transpose” findings of fact and evidence from the Argo Fund case to the present proceedings.  Mr Barlow pointed out the difference in wording of the definition of “Transferee” in the Argo Fund agreement and the definition of “Eligible Transferee” in our Facility Agreement.  Incidentally, the line he took is contrary to the views of the Queen’s Counsel who had provided an affidavit for the Company as mentioned earlier; in the opinion of the latter, “the Argo Fund, is for all practical purposes, indistinguishable from the present situation”.

24.I was alive to the fact that the definition of the relevant expressions in the two agreements are not identical when I made my earlier decision (paragraphs 46 and 55 of my decision).  I do not consider I have relied on the judgment of Aikens J in any way that was inappropriate, just as Mr Barlow has continued to rely on passages in the judgment of Steel J to support his interpretation of the agreement.  What I did was to look at the reasoning and approach adopted by Aikens J, which I regarded as helpful, as the judge was concerned with the construction of an agreement which bore similarities to the agreement before me.  I then asked myself similar questions as the judge had done, having regard to the evidence before me on the law of the state of Delaware, where MSEMI was incorporated, and the status and business activities of MSEMI (paragraph 55 of my decision). I concluded that “there is no justification for reading into the definition a further qualification like ‘a substantial proportion of whose business is the provision of finance in the primary lending market’”.

25.In the Court of Appeal, Rogers VP set out his conclusions at paragraphs 21 and 22 of the judgment:

“21.  In my view, the assistance to be derived from the reasoning in that case as regard this case is the importance of considering the terms of the particular contract and the significance of the provision.  It was emphasised that the definition in the present contract was that the Transferee should be a bank, deposit taking company or other financial institution and it was said that the words financial institution should be restricted to an entity which was similar to a bank or deposit taking company.  In my view, the words financial institution should still be given their ordinary meaning.  There is no apparent reason emerging from a consideration of the Facility Agreement why the financial institution involved should be restricted to a bank or deposit taking company.  It would have to be an entity which was capable of lending money of the appropriate amount.  Over and above that I see no warrant for restricting the term Eligible Transferee any further.

22.  On the evidence filed in this case, it is clear that the petitioner does lend money in the ordinary course of its business and although it is primarily involved with buying distressed debt in the secondary debt market, it is capable of and does lend money.  The fact that it is not entitled under the law of the state of its incorporation, namely Delaware, to conduct banking business, does not prevent it from lending money and on the basis of the evidence and arguments that have been presented to-date, I have no doubt that the petitioner does come within the definition of Eligible Transferee.”

26.I have considered again the submissions made by Mr Barlow on the proper construction of “Eligible Transferee”.  I am not persuaded his construction is a correct one.  I hold that the Company has failed to raise a bona fide dispute on substantial grounds on the locus standi of MSEMI as a creditor of the Company.

The Stay Order

27.The point regarding the Stay Order may be dealt with shortly.

28.I do not think Mr Barlow has contended that this court has no jurisdiction to make a winding-up order because of the Stay Order by the Philippine Court in the rehabilitation proceedings in November 2004.  He did not submit that the Stay Order has any extra-territorial effect.  I think Mr Crystal must be right that this order is confined to proceedings in the Philippines, and as a matter of jurisdiction, a winding-up petition is not an “enforcement of [a claim]”.  Even if the Stay Order is still effective, I should have regard to the purpose it is to serve, which is to impose a moratorium and give some form of interim protection to enable a company to propose and implement a rehabilitation plan, and that brings me to the next point concerning the status of the rehabilitation proceedings in the Philippines.

The rehabilitation proceedings in the Philippines

29.Mr Barlow made lengthy written submissions regarding the rehabilitation proceedings.  In his verbal submissions, he conceded that if the basis of this petition is really founded on insolvency and not the just and equitable ground, the discretion of court in refusing winding-up relief would be much narrower, as he accepted that in the absence of exceptional and convincing grounds raised by a company, the discretion will be exercised in favour of the unpaid petitioning creditor, who has a right ex debito justitiae to a winding-up order, as between him and the company.

30.I do not propose to go into the submissions here at length, except to state the following.

31.It is wholly unnecessary to go into the matter as to who was at fault which had led to the delay in the rehabilitation proceedings with very little achieved in a period of 20 months.  Rogers VP has opined that the Rehab Plan is now no longer viable (paragraph 46 of his judgment).  I respectfully agree.  The Rehab Plan does not have the support of MSEMI, PAII or APA Inc.  In April 2006, the Philippine Court granted an application of APA Inc. to disqualify the rehabilitation receiver on account of conflict of interest.  No rehabilitation receiver has been appointed in replacement up to now. The 18-month period laid down by the Interim Rules in the rehabilitation procedure for approving or disapproving the Rehab Plan expired in May 2006.  This time bar is non-extendable.

32.In this state of affairs, it would not be right to delay the granting of a winding-up order.  The Company has been given more than adequate opportunity to attempt to propose and implement a workable rehabilitation plan that would have the support of a sufficient number of creditors.  Enough is enough.

If winding-up relief should be denied on any other ground

33.Complaint was made by the Company of action recently taken by Pagcor in enforcing certain writs of attachment, which the Company alleged have lapsed and that Pagcor’s action is unlawful.  I gather that MSEMI is equally concerned about the action of Pagcor and will seek a regulatory order from this court, if a winding-up order is made, so that a liquidator may be appointed without the need to hold first meetings of creditors and contributories and that the liquidator may take very urgent action before the expiry of the time limit to challenge Pagcor’s execution of the writs of attachment, to prevent Pagcor from obtaining a preference over the other creditors.

34.I am unable to understand in these circumstances how MSEMI could be said to be colluding with Pagcor or should take the blame in any way for Pagcor’s actions, if such actions were indeed wrongful as alleged.

Orders

35.I make a winding-up order against the Company.  MSEMI’s costs are to be paid out of the assets of the Company.  I grant a certificate for two counsel.

Mr Michael Crystal, QC and Mr Jeremy Bartlett, instructed by Messrs White & Case, for the Petitioner

Mr Barrie Barlow and Mr William Wong, instructed by Messrs Richards Butler, for the Company

Ms Phyllis McKenna, for the Official Receiver