Re Hong Kong Pharmaceutical Holdings Ltd

HCMP 2317/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2317 OF 2006

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AND

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

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(Heard Together)

Before: Hon Kwan J in Court

Date of Hearing:  21 November 2006

Date of Judgment:  21 November 2006

Date of Handing Down of Reasons for Judgment:  21 November 2006

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REASONS  FOR  JUDGMENT

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1.Hong Kong Pharmaceutical Holdings Limited (“the Company”), acting by its provisional liquidators, presented a petition on 20 November 2006 for sanction of a scheme of arrangement with its creditors under section 166 of the Companies Ordinance, Cap. 32. As one of the conditions precedent to completion of the transactions contemplated in the scheme is the withdrawal of the winding-up petition against the Company in HCCW No. 1018 of 2004 and the discharge of the provisional liquidators, the summons issued by the petitioning creditor Goldon Investment Limited and a supporting creditor Umbrella Finance Company Limited (“Umbrella Finance”) seeking leave to withdraw the winding-up petition and other consequential directions was heard at the same time as the petition for sanction of the scheme of arrangement.  At the conclusion of the hearing, I sanctioned the scheme and gave leave to withdraw the winding-up petition.  These are the reasons for judgment.

2.The Company was incorporated in Bermuda and registered in Hong Kong under Part XI of Cap. 32 as an oversea company on 23 September 1997.  Until 3 October 2001, it was registered under the name of Nam Pei Hong International Holdings Limited.  The Company functioned as an investment holding company.  Its shares have been listed for trading on the Main Board of The Stock Exchange of Hong Kong Limited.  Trading in its shares has been suspended since 5 August 2004.

3.Provisional liquidators were appointed for the Company on 13 October 2004 on the application of Umbrella Finance.  After conducting a review of the Company’s business, the provisional liquidators came to the view that one of the ways to maximise recoveries for the creditors was by a restructuring which realizes value from the listed status of the Company’s shares and its business of wholesale and retail sale of traditional Chinese medicines, other medicines, health products and dried seafood which is primarily operated under the name of Nam Pei Hong Sum Yung Drugs Company Limited (“Nam Pei Hong”), an indirect wholly owned subsidiary of the Company.

4.On 7 September 2005, a restructuring agreement was entered into between, inter alia, the Company and the investor, Gain Alpha Finance Limited (“the Investor”), giving effect to the restructuring proposal.  By the proposal, the Investor is to acquire a controlling interest in the Company from the issue and allotment of new shares, in consideration of which the Investor will pay cash of HK$80.19 million, of which HK$45.5 million is to be distributed in accordance with the scheme and the balance of HK$34.69 million is to be provided as working capital for the restructured group of companies.  The claims of the scheme creditors will be compromised and discharged in full through the scheme, in consideration of the Company transferring to the scheme trust account on the effective date the cash consideration aforesaid of HK$45.5 million, net cash disposal proceeds of approximately HK$18.9 million, any cash held by the Company, all receivables owned by it, and the interests of the Company in the excluded subsidiaries.

5.Immediately following the completion, the restructured group of companies will principally comprise Nam Pei Hong, NPH Sino-Meditech Limited (which operates a Chinese medicine clinic) and Poo Yuk Loong Limited (which holds the lease of a number of Nam Pei Hong’s retail outlets).  The restructured group will be left with no liability at the Company level and Nam Pei Hong, NPH Sino-Meditech Limited and Poo Yuk Loong Limited will be left with manageable and serviceable trade debts.

6.The scheme of arrangement in Hong Kong is in addition to an identical scheme in Bermuda between the Company and its creditors.  This is to ensure that all creditors are bound, since the Company’s principal place of business is in Hong Kong and all known claims against the Company are in respect of debts incurred in Hong Kong.  The aggregate of the claims of scheme creditors as at 20 November 2006 was estimated at approximately HK$83 million odd.

7.On 14 March 2006, I made an order on the application of the provisional liquidators in HCMP No. 358 of 2006 for a scheme meeting of creditors to be held to consider the proposed scheme.

8.When the scheme meeting was held on 6 April 2006 pursuant to the order, theresolution proposed to the creditors was that the scheme be approved subject to the condition of a minimum return to the creditors of 40%.  The conditional approval was not mentioned in the scheme notified to the creditors in the notice convening the meeting or in any of other materials in the composite document sent to the creditors.  All the creditors present at the scheme meeting voted in favour.  Their total claims amounted to HK$77.8 million, which was 98% of the known liabilities of the Company as at 31 May 2006.  Notwithstanding the resolution was passed by the required statutory majority representing at least three-fourths in value of the scheme creditors present and voting, the resolution was not valid.  There was a divergence in the resolution as set out in the notice convening the meeting and the terms of the resolution put to vote at the meeting in that the underlying economic proposal was different, this difference was not a matter of mere machinery of the scheme.  This brings into play the principle in Re Moorgate Mercantile Holdings [1980] 1 WLR 227.  See also The Peninsular and Oriental Steam Navigation Co. v. Eller and Co., Thunder FZE [2006] EWCA Civ 432.

9.A special general meeting of the Company’s shareholders was held to consider the resolutions for the purpose of restructuring the share capital and implementing the restructuring proposal.  The special shareholders’ resolutions were not passed at the first special general meeting.  It was only at the second special general meeting of the shareholders on 21 August 2006 that all the ordinary and special resolutions were passed.

10.On 7 November 2006, the petition in HCMP No. 358 of 2006 to sanction the scheme came before me.  Having raised with counsel the question concerning the validity of the resolution, which goes to the jurisdiction of the court to sanction the scheme, I adjourned the petition sine die.

11.On 8 November 2006, the provisional liquidators issued fresh proceedings in HCMP No. 2317 of 2006, seeking leave to convene a new scheme meeting for the creditors, to consider and if thought fit, approving the scheme with or without modifications, on the condition that a minimum of 40 cents to the dollar be distributed to the scheme creditors under the scheme.  On 9 November 2006, I made an order giving leave to convene a new scheme meeting on 20 November 2006, approved the notice for convening the meeting, and gave directions for publication of the notice convening the meeting and the dispatch of the composite document to scheme creditors.  I considered it appropriate in the circumstances to expedite the proceedings and to abridge the customary notice period of 21 days for the scheme meeting to 7 clear days.

12.The notice of the new scheme meeting, the form of proxy, and the explanatory statement in the composite document stated clearly that the meeting was to consider and if thought fit, approving the scheme on the condition of a minimum return to scheme creditors of 40%.  The scheme in the composite document contained provisions necessitated by reason of the minimum 40% return.  Provision was made for the automatic termination of the scheme in the unlikely event that the 40% minimum return is not going to be met.  The cut-off date for the delivery of a notice of claim by a scheme creditor to the scheme administrator was brought forward to the business day immediately following the effective date of the scheme.  These provisions allow the scheme administrator to monitor likely returns to the scheme creditors prior to the effective date and, if the need should arise, unwind the scheme before transactions associated with the restructuring proposal become irreversibly effected.

13.Whilst a one-day gap between the effective date and the cut-off date is unusual, this is necessary in the circumstances.  I understand that no scheme creditors other than those already known have emerged in the two-year period during which the provisional liquidators have taken control.  Scheme creditors have been given ample opportunity to notify their claims to the Company.  Advertisements calling for notices of claims at least 14 days prior to the effective date have been published in Hong Kong on 24 October 2006, in addition to those required under the order made on 14 March 2006.  It does not appear that scheme creditors would be prejudiced by the shortened period between the effective date and the cut-off date.  I agree with Mr. Lee that it is unlikely any bona fide claims would emerge after the cut-off date.

14.Mr. Lee also referred me to Re Telewest Communications plc [2004] EWHC 924 (Ch) and [2004] EWHC 1466 (Ch) in which the court considered and approved a one-day lapse between the effective date of the schemes and the bar date of ancillary claims, to minimise the disruption to trading in the new shares, in view of “an extensive advertising programming to give notice of the bar date and its timing implications” and “the general publicity surrounding the problems and restructuring proposals for Telewest” ([2004] EWHC 924 at para. [56]).

15.The provisional liquidators have filed evidence giving a breakdown of the actual and estimated costs, and the total amounts to be paid into the scheme funds from the effective date.  The Investor has agreed to contribute up to HK$8 million to the restructuring costs pursuant to the restructuring agreement.  This will bring the total scheme funds as at the effective date to HK$74.4 million.  The provisional liquidators estimate that the net returns to scheme creditors will be approximately 40.2%, so the minimum return of 40% remains likely to be achieved.

16.The Investor has given an undertaking by counsel that it shall be bound by the terms of the scheme as revised and shall execute all documents and do such acts as would be necessary to give effect to the scheme.

17.On 3 November 2006, the Supreme Court of Bermuda granted sanction of the scheme and gave leave to Umbrella Finance to withdraw its petition to wind up the Company.

18.I am satisfied that the class of creditors voting at the scheme meeting, being all creditors who have wholly or partly unsecured claims excluding the Investor, was properly constituted.  The rights of preferential creditors are preserved in full by the scheme, as the scheme only affects the non-preferential part of the claims of such creditors.  Likewise, secured creditors were entitled to vote to the extent their claims are unsecured or may release their security interest and have their whole claim treated as unsecured.

19.Sufficient explanation of the scheme was given in the composite document.  The explanatory statement specifically drew the attention of creditors to the shortened period between the effective date and the cut-off date in various places.  The directions for the publication of notice of the meeting and the service of the composite documents were complied with on 10 November 2006.  The scheme meeting was properly convened.  The scheme was approved by the requisite statutory majority of creditors.  4 scheme creditors with claims representing total debts of HK$77,804,137.10 attended and voted at the scheme meeting on 20 November 2006 by proxy and all voted in favour of the scheme.

20.I am satisfied that the scheme is such that an intelligent and honest person, being a member of the class concerned and acting in his interest might reasonably approve.  The minimum return of 40% compares favourably with the likely return in a winding up, which is estimated at between nil to 4% return.

21.I have therefore given sanction to the scheme as sought in the petition.

22.It is estimated that the closing under the restructuring agreement will take place on 4 December 2006.  It would be appropriate to give leave to withdraw the winding-up petition and make consequential orders for the discharge of the provisional liquidators, following on the sanction of the scheme.  I have also given leave to withdraw the petition, provided that such withdrawal and dismissal of the petition shall take effect from and be conditional upon the issue of the closing notice under the restructuring agreement.  The scheme administrators are to report back to the court within 7 days of the issue of the closing notice.

Mr Thomas Lee, instructed by Messrs Clifford Chance, for the Petitioner and Gain Alpha Finance Limited, in HCMP No. 2317 of 2006

Mr Thomas Lee, instructed by Messrs Clifford Chance, for the Petitioner and a supporting creditor, Umbrella Finance Company Limited, in HCCW No. 1018 of 2004

Miss Dora Si, instructed by Messrs Willie Chang & Co., for the Petitioner in HCCW No. 1018 of 2004

The Official Receiver, attendance excused in HCCW No. 1018 of 2004