Re Zhu Kuan (Hong Kong) Co Ltd
Read the full judgment text of HCMP 1286/2007 on BabelCite. This High Court CFI judgment was delivered on 30 October 2007.
1. On 10 October 2007, the liquidators of Zhu Kuan (Hong Kong) Company Limited (“ZKHK”) and Zhu Kuan Group Company Limited (“ZKG”) (collectively “the Companies”) presented these petitions on behalf of the Companies pursuant to section 166 of the Companies Ordinance, Cap. 32, seeking sanction of the schemes of arrangement between each company and its creditors. The schemes are to resolve the protracted liquidations of the Companies.
Cites 3 cases
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HCMP 1286/2007 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 1286 OF 2007 ______________________
______________________ HCMP 1287/2007 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 1287 OF 2007 ______________________
______________________ HCCW 874/2003 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING-UP) NO. 874 OF 2003 ______________________
______________________ HCCW 875/2003 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING-UP) NO. 875 OF 2003 ______________________
______________________ (Heard together) Before : Hon Kwan J in Court Date of Hearing : 30 October 2007 Date of Judgment : 30 October 2007 Date of Handing Down of Reasons for Judgment : 2 November 2007 _______________________________ REASONS FOR JUDGMENT _______________________________ 1.On 10 October 2007, the liquidators of Zhu Kuan (Hong Kong) Company Limited (“ZKHK”) and Zhu Kuan Group Company Limited (“ZKG”) (collectively “the Companies”) presented these petitions on behalf of the Companies pursuant to section 166 of the Companies Ordinance, Cap. 32, seeking sanction of the schemes of arrangement between each company and its creditors. The schemes are to resolve the protracted liquidations of the Companies. 2.The schemes are inter-conditional. If one scheme fails for whatever reason, then both shall fail irrespective of whether they were approved by the requisite majority of scheme creditors or sanctioned by the court. Further, pursuant to the schemes, the ZKHK scheme creditors and the ZKG scheme creditors are combined or consolidated into one pool for dividend purposes. The ZKG scheme is identical to the ZKHK scheme save that closing of the ZKG scheme requires additional steps to be undertaken in Macau. 3.At the same time as the Companies seek sanction to the schemes of arrangement, they have applied to stay permanently all further proceedings in the winding up of each of the Companies in HCCW Nos. 874 and 875 of 2003, under section 209 of Cap. 32. The background 4.ZKHK was incorporated in Hong Kong on 19 May 1992 as a private company. Its present authorised and issued share capital is HK$50 million divided into 50 million ordinary shares of HK$1.00 each. 49,950,000 of these shares are owned by ZKG, and 50,000 are owned by Yu Jianhua. 5.ZKG was incorporated in Macau. It began operations on 13 February 1988 as a private company limited by shares. It present authorised and issued share capital is 3 million patacas, held in the following quotas: (1) one quota in the nominal value of 2.1 million patacas subscribed by the shareholder “Zhu Kuan Company of the Zhuhai Special Economic Zone”; and (2) one quota in the nominal value of 900,000 patacas subscribed by the shareholder “Zhu Kuan Investment and Development Company of the Zhuhai Special Economic Zone”. 6.ZKHK and ZKG were established as “window companies” for the commercial activities of the Zhuhai Municipal Government (“ZMG”) of the People’s Republic of China (“the PRC”). Until 1997, ZMG used the Companies to procure billions of dollars of loans from financiers, which the Companies then loaned to ZMG on an unsecured basis for transactions and investments. 7.The Companies defaulted on the financial obligations they owed to their international financial creditors from November 1998. The total liabilities of the Companies at the time were about HK$8 billion. 8.With the assistance and support of ZMG, the Companies entered into discussions with their creditors for a restructuring of their debts. The proposals considered at the time provided for restructuring of the Companies on a group or consolidated basis. The assets of the Companies and all their subsidiaries (“the Group”) were to be realized and on a consolidated basis, and the unsecured creditors of the Companies would participate in the proposed distribution on a rateable basis without distinction between the different companies in the Group and their respective assets and liabilities. The creditors considered this approach appropriate and necessary as it reflected the nature of the financial affairs of the Group, in particular the existence of many substantial guarantees between the Companies, which meant that many of the major unsecured creditors were creditors of both the Companies. 9.The restructuring negotiations subsequently broke down. On 12 August 2003, Standard Chartered Bank (Hong Kong) Limited (“SCBHK”) presented petitions to wind up the Companies. Provisional liquidators were appointed for the Companies on 13 August 2003. 10.The provisional liquidators took steps to assist SCBHK with the winding up of ZKG in Macau. On 2 June 2004, the court in Macau appointed a liquidator of ZKG. 11.On 4 October 2004, the court in Hong Kong ordered the Companies to be wound up. On 21 March 2005, an order was made for the appointment of the liquidators of the Companies with a committee of inspection for each. 12.The liquidators and the Macau liquidator have worked closely. The ZKG scheme will be followed by a scheme of arrangement or application in Macau. The assignment of the Companies’ indebtedness 13.In mid August 2004, ZMG re-commenced discussions with the provisional liquidators and the creditors for the restructuring of the Companies. 14.On 31 December 2005, a Framework Agreement was executed pursuant to which Bank of China Group Investment Limited (“BOCGI”), Bank of China Limited Macau branch (“BOC Macau”) and Bank of China (Hong Kong) Limited (“BOCHK”) agreed to sell and/or assign all of the indebtedness of the Companies owed to them to Sun Kian Ip Holding Company Limited (“Sun Kian Ip”), Guoyuan Investment Limited (“Guoyuan”) and Sei Pou Real Estate Development Limited (“Sei Pou”) (collectively “the Assignees”). 15.On 25 January 2006, the Assignees entered into a Sale and Purchase Agreement in furtherance of the Framework Agreement pursuant to which the indebtedness owed to Shiny Way Holding Inc (an entity controlled by BOCGI) was assigned to Sei Pou, the indebtedness owed to BOCHK was assigned to Guoyuan and the indebtedness owed to BOC Macau was assigned to Sun Kian Ip. The sale to Sei Pou was completed on 25 January 2006, the sale to Guoyuan was completed on 21 July 2006 and the sale to Sun Kian Ip was completed at the end of February 2007. The restructuring 16.On 25 January 2006, the Assignees, the liquidators, a company incorporated in the PRC and wholly owned by ZMG for the purpose of the restructuring (known in Chinese 珠海市國源投資有限公司; “the Investor”) and SCBHK (on its own behalf and as a member of the committee of inspection of each of the Companies) executed a memorandum containing outline terms for a proposed restructuring of the Companies (“the Memorandum”). 17.In furtherance of the Memorandum, on 16 October 2006, the Companies, the liquidators, the Investor, the Assignees and ten secured financial creditors of the Companies (“the Secured Financial Creditors”) executed a restructuring agreement (“the Restructuring Agreement”), which set out the restructuring arrangements to discharge the entire indebtedness of the Companies. The arrangements include the schemes. 18.In summary, the arrangements involve:
19.In addition, during January 2006, each Assignee entered into an exchange arrangement by which they agreed to transfer or assign their rights to receive any distribution under the schemes to the Investor in exchange for the Investor procuring to transfer the Exchange Property (as defined in the Restructuring Agreement) to the Assignees and the Investor agreed to waive those rights to claim any distribution under the schemes. The schemes 20.Upon satisfaction of all the conditions precedent to the schemes, all liabilities under both the ZKHK scheme and the ZKG scheme shall be compromised and discharged in full in consideration for the scheme creditors receiving distributions paid in accordance with the schemes. 21.The schemes provide for the establishment of a creditors committee, the initial members of which will be SCBHK and Sei Pou. All distributions to scheme creditors shall be made from the scheme funds, which shall comprise all assets, chose in action and other property of the Companies in the possession of and available to the liquidators, including the Restructuring Proceeds and 40% of any realisation from the Companies’ four claims against third parties not related to ZMG (“the Retained Claims”), after deducting associated costs and expenses (“the scheme funds”). 22.The scheme funds are to be distributed in this order:
23.The liquidators’ current estimate indicates that the pro rata distribution to all other scheme creditors will represent approximately 18% of their claims as at the date of the winding-up orders. 24.Although the schemes will constitute separate legal obligations of ZKHK and ZKG, the collection and realisation of the Companies’ assets, the payment of the scheme expenses, the payment of the Redemption Monies and the payment of any and all other distributions shall be made on a combined basis with the scheme creditors of each company ranking equally with the other. 25.The Retained Claims will not form part of the schemes and any realisations thereof will not be aggregated with the general pool of assets to be distributed to the scheme creditors. The Companies, Top Ease Limited (a subsidiary of ZKHK), the Investor, the liquidators and the scheme administrators shall execute a Management Agreement that shall describe and formalise the terms upon which the scheme administrators will be granted exclusive rights and powers to control and conduct all matters relating to the Retained Claims and to provide that net realisations in respect of the Retained Claims shall be distributed to the scheme creditors and the Investors in the proportion of 40% and 60% respectively. 26.The liquidators believe the schemes will have these advantages:
27.The liquidators also pointed out two disadvantages of the schemes. Firstly, the scheme creditors will be barred from issuing proceedings against the Companies during the scheme period. However, on the basis of the information available to the liquidators, this will have little practical effect on the scheme creditors. Secondly, if the schemes should fail for whatever reason, the costs and expenses incurred by the liquidators in the preparation and implementation of the schemes shall be paid as liquidation expenses, which shall reduce any final dividend to the scheme creditors. Additionally, under each scheme, the costs and expenses of the liquidators and the former provisional liquidators are proposed to be paid on a full time cost basis irrespective of whether such costs have been subject to a court taxation. The creditors of the Companies 28.The total indebtedness due by ZKHK as at the date of the winding-up order is HK$3,074,233,337.00. The total indebtedness due by ZKG as at the date of the winding-up order is HK$7,595,016,602.00. The liquidators have adjudicated all of the claims of creditors of each company as are known or identified. 29.The Net Indebtedness of the Companies (all indebtedness due to Secured Financial Creditors as at the date of the winding-up orders by each company after deduction of any realisation of the existing security and the Redemption Monies) is estimated at HK$4,192,374,567.00. 30.As at 16 October 2006, Secured Financial Creditors holding not less than 82% of the total indebtedness of ZKHK and 72% of the total indebtedness of ZKG have indicated their “in principle” agreement to vote in favour of the schemes and in any Macau application or Macau scheme. 31.In view of problems associated with the security held by certain creditors and the realisation of their underlying security, certain liabilities have been excluded from the schemes with the consent of these creditors. They are Banco Tai Fung S.A.R.L. (“Banco Tai Fung”) and Guangdong Development Bank Macau branch (“GDB Macau”) and ZMG. Moreover, all claims of ZMG and its associates against any of the companies in the Group are excluded from the schemes, and none of ZMG and its subsidiaries and associates shall be permitted to prove and receive any distribution from the schemes. Banco Tai Fung, GDB Macau and ZMG will not be scheme creditors. 32.To safeguard the interests of the scheme creditors, the Investor has agreed to indemnify and hold harmless the scheme creditors from any loss or damage arising as a result of any act by Banco Tai Fung or GDB Macau, and to increase the amount of the Restructuring Proceeds by the same amount as that paid to Banco Tai Fung and GDB Macau if they should become entitled to and any payment is made to them which reduces the amount available to the scheme creditors. The scheme meetings 33.As all the scheme creditors have the same rights in the winding up of the Companies, a single meeting was called for each scheme. 34.Leave was given by this court on 1 August 2007 to the Companies to convene a meeting of the scheme creditors for each company and directions were given for publication of a notice of the scheme meeting in Hong Kong and Macau, and despatch of the notice and scheme document to all scheme creditors. The directions were duly complied with. 35.Following the granting of leave to convene the scheme meetings, a minor modification was made to the scheme document to clarify the definition of “scheme liability” to ensure that creditors whose claims had not been adjudicated by the liquidators were also subject to the schemes. The liquidators notified all scheme creditors of the proposed modification by letter on 5 September 2007. 36.On 10 September 2007, the scheme meetings were convened. In respect of ZKHK, the scheme was approved by 100% in number of the scheme creditors who were present and voted; such scheme creditors represented 100% in value of the scheme liabilities due to the scheme creditors who were present and voted. For ZKG, the scheme was approved by over 96% in number of the scheme creditors who were present and voted; such scheme creditors represented 99% in value of the scheme liabilities due to the scheme creditors who were present and voted. 37.Thus, both schemes have been approved by the requisite statutory majority, being a simple majority in number of creditors representing over 3/4 in value of the scheme creditors. Sanction of the schemes 38.The scheme meetings were duly notified and properly convened. The class of creditors had been properly constituted. I am satisfied that the creditors have been given sufficient explanation of the schemes and their effects, to enable them to make a reasonable judgment how to vote at the scheme meetings. I am further satisfied that the schemes of arrangement are such that an intelligent and honest man, being a member of the class concerned and acting in respect of his interest, might reasonably approve. 39.I have therefore exercised my discretion to sanction the scheme for each company and made an order in terms of the draft order submitted in each petition. Stay of the winding-up proceedings 40.The Companies seek an order that conditional upon the schemes becoming effective, all further proceedings in the winding up of each company be permanently stayed. Such an order is one of the conditions precedent that must be satisfied before closing can occur under the Restructuring Agreement. This was a requirement of ZMG, primarily because the Companies will continue to retain both assets and liabilities after the closing of the Restructuring Agreement. It has not been possible to transfer all the assets of the Companies to the Investor. 41.The assets to be retained in the Companies include primarily land and property in the PRC which are not subject to any security, amounts due by companies ultimately controlled by ZMG, and interests in subsidiaries. The liabilities due by the Companies which will not be discharged by the schemes include the amount due to GDB Macau (after deduction of the value of the security held by GDB Macau, ZKG does not owe anything to GDB Macau), the amount due to Banco Tai Fung (Banco Tai Fung has confirmed to the liquidators they will withdraw their proof of debt submitted in the winding up of ZKG), and the amounts due to entities ultimately controlled by ZMG (these are claims due to other PRC government entities that will be unable to accept a compromise or discharge of the relevant debts). 42.In the negotiations with the liquidators, ZMG had taken the position that a permanent stay of the liquidations of the Companies must be a term of the Restructuring Agreement and this was not negotiable. Without this term, there would not have been an agreement with ZMG, which agreement underpinned the restructuring arrangements. 43.The liquidators recognised that it would be necessary to finalise their investigations into the affairs of the Companies in order to confirm if the unsecured creditors would realise greater value under the continuance of the liquidations or under the Restructuring Agreement. The investigations they have conducted so far involved, inter alia, considering claims that might be available to the liquidators or the Companies to recover value for the creditors. Potential claims included repayment of inter-company debts (all of which are against PRC entities controlled by ZMG) and claims to recover certain assets located in the PRC (all of which are against entities incorporated in the PRC or in other foreign jurisdictions such as the British Virgin Islands). 44.The liquidators have also considered the conduct of the directors and officers in relation to the affairs of the Companies and in particular in relation to the disposal of assets and transactions entered into prior to the winding up. 45.The liquidators have concluded that a restructuring would be preferable to a winding up and the pursuit of the available legal claims, as the claims would need to be brought in Zhuhai or Macau. Such litigation would be expensive, protracted, difficult to prove, and even if ultimately successful, it would be difficult to enforce the judgments against persons and companies associated with ZMG. Hence the liquidators have recommended to creditors that they accept a settlement with ZMG. They seek a permanent stay of the winding-up proceedings, conditional upon the closing of the Restructuring Agreement. They confirm that no further investigation would need to be carried out and there are no outstanding matters aside from the conditions which need to be satisfied following the sanction of the schemes. 46.In considering whether to stay winding up proceedings permanently, the court has to take into account not only whether what is proposed is for the benefit of the creditors, but also whether the stay would be conducive or detrimental to commercial morality and to the interests of the public at large (In re Telescriptor Syndicate, Ltd. [1903] 2 Ch 174). Even though the entire body of creditors would favour a stay because they can obtain positive benefits out of this, if the court is of the view that it is not in the public interest, it would not do so irrespective of the wishes of the creditors (Re Sharp Brave Co. Ltd. [1999] 4 HKC 79; Re Asean Interests Ltd. [2005] 4 HKLRD 665). The court has to be satisfied that it is right to stay the winding-up proceedings and if there were matters on which the court has doubts it should not grant the stay (Re Lowston Ltd. [1991] BCLC 570). 47.I am satisfied that the proposed stay of the winding-up proceedings would be for the benefit of the creditors. They have consented to the terms of the schemes, which included a provision for the stay applications to be made to the court. 48.Mr. Sheppard submitted on behalf of the liquidators that the court has been fully apprised at regular intervals of the history, background and progress of the negotiations, which took several years, and the eventual settlement embodied in the Restructuring Agreement. He pointed out that there are no material matters which have not been fully disclosed to the court on behalf of all the parties interested in or involved in the Companies. Cross-border issues, involving three jurisdictions, vast sums of money and many assets and a miscellany of interested parties, have complicated the negotiations leading to the schemes. The schemes are the culmination of considerable endeavour and constitute not just a viable solution but also the optimum remedy of the matters in the best interests of the creditors. The failure of the schemes, if a permanent stay of the winding-up proceedings were refused, could lead to the liquidations continuing for many years, with little likely recovery for the creditors, and protracted and expensive litigation in several jurisdictions. This would hardly be in the public interest. 49.Miss Chan for the petitioning creditor in the winding-up proceedings, SCBHK, supported the stay applications. 50.The liquidators filed four interim returns of directors (Form D2) pursuant to section 3(3) of the Companies (Reports on Conduct of Directors) Regulations, Cap. 32J, the last of which was on 16 July 2007, in which they indicated that they would be in a position to file a final report on the conduct of the directors in December 2007. On 29 October 2007, the liquidators filed a final return in Form D2 for each company, stating, inter alia, that as at the date of the return, they have not become aware of any matters which would require them to make a report on the conduct of directors under section 168I(3) of Cap. 32. 51.The Official Receiver informed the court by letter on 29 October 2007 that he would have no objection to the stay applications, having considered the final Form D2. 52.I consider it appropriate in all the circumstances to exercise my discretion to grant a stay of the winding-up proceedings for each company, conditional upon the schemes becoming effective to the satisfaction of the liquidators as the scheme administrators. The draft orders submitted have been approved with amendments. I have ordered the liquidators to be released upon the permanent stay taking effect. The liquidators’ costs in this application are to be paid by the Companies in accordance with the provisions of the schemes and the petitioning creditor’s costs are to be paid by the company concerned.
Mr Andrew Sheppard, instructed by Messrs White and Case, for the Liquidators in HCMP Nos. 1286 and 1287 of 2007 and instructed by Messrs Lovells, for the Liquidators in HCCW Nos. 874 and 875 of 2003 Miss Linda Chan, instructed by Messrs Baker and McKenzie, for the Petitioners in HCCW Nos. 874 and 875 of 2003 The Official Receiver, attendance excused |
Cases cited in this judgment
Further hearings and rulings under HCMP 1286/2007