Re Peace Mark Production Ltd
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HCCW 533/2008 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES WINDING UP PROCEEDINGS NO. 533 OF 2008 ----------------------
---------------------- Before: Deputy High Court Judge To in Chambers - Open to Public Dates of Hearing: 11 and 13 November 2008 Date of Decision: 13 November 2008 ------------------------ D E C I S I O N ---------------------- Background 1.This is an application by the provisional liquidators of Peace Mark (Holdings) Limited (“PM Holdings”) for a validation order under section 182 of the Companies Ordinance, Cap 32 in respect of the sale of certain assets of PM Holdings, including those of one of its subsidiaries, Peace Mark Production Limited (“PM Production”). 2.On 10 September 2008, ABN AMRO Bank NV (“ABN”) presented petitions for the winding up of PM Holdings and one of its subsidiaries, Peace Mark Limited (“PM Limited”). On the same day, Mr Sutton and Mr Fok, both of Ferrier Hodgson Limited, were appointed provisional liquidators of PM Holdings and PM Limited (“Provisional Liquidators”) pursuant to the order of Madam Justice Kwan. 3.PM Holdings is the parent company with a group of over 207 subsidiaries (“Group”). It was incorporated in Bermuda on 24 December 1991. Through its immediate subsidiary incorporated in the British Virgin Islands, Peace Mark (BVI) Ltd (“PM (BVI)”), it holds four lines of subsidiaries, including Peace Mark Distribution & Marketing Limited (“PM Marketing”) and PM Production. An important subsidiary under PM Marketing is PM Limited which was incorporated in Hong Kong on 24 May 1983. It performs the Group’s treasury functions. In addition to the four lines of subsidiaries under PM (BVI), PM Holdings has a direct and wholly owned subsidiary, A-A United Limited (“A-A United”) which owns Sincere Watch (Hong Kong) Limited and its subsidiaries (“Sincere Group”). The Sincere Group is the Group’s most valuable asset and operates as an independent business within the Group. 4.On 22 June 2007, PM Holdings entered into a HK$1,200 million term and revolving facility agreement between PM Holdings as borrower and ABN as agent and 26 financial institutions (“Syndicated Loan”). It also entered into various bilateral facilities arrangements in favour of its subsidiaries either as borrower or as guarantor guaranteeing the relevant subsidiaries’ obligations under various agreements entered into by them with third party lenders. In addition, on various dates, PM Holdings as borrower entered into various trade finance facilities with third party lenders. PM Holdings is insolvent owing creditors over HK$5 billion. PM Limited is also insolvent, owing creditors over US$202.4 million. 5.On 1 February 2008, A-A United as borrower entered into a US$500 million term facility agreement with the Singapore branch of ABN as agent and a number of financial institutions (“Bridge Loan”). The Bridge Loan is secured over the assets of the Group. The lenders of the Bridge Loan are ABN, the Hong Kong branch of BNP Paribas (“BNP”) and the Hong Kong branch of ING Bank NV (“ING”). ABN, BNP and ING are also lenders under the Syndicated Loan. PM Holdings and PM Limited are guarantors of the Bridge Loan. 6.PM Production holds a number of subsidiary companies, including Master Dynamic Limited (“Master Dynamic”), a company incorporated in the British Virgin Islands. Master Dynamic in turn holds 51% of the issued share capital of Tianjin Seagull Watch Co Ltd (“Tianjin Seagull”), a joint venture company incorporated in the People’s Republic of China (“PRC”). The Tianjin Government of the PRC and the general manager of Tianjin Seagull respectively own 40% and 9% of the remaining issued share capital of Tianjin Seagull. Tianjin Seagull is a profitable and stand-alone business. 7.CorporActive Fund Limited (“Fund”) which is managed by Somerley Limited (“Somerley”) is a creditor of PM Production. The Fund acquired 9.9% of the issued share capital of Master Dynamic from PM Production on 28 March 2008 under a sale and purchase agreement which gave the Fund a put option to sell the shares back to PM Production at the consideration of US$2,388,000 within 36 months after completion of the share transfer. The consideration was guaranteed by PM Holdings. On 3 September 2008, the Fund exercised the put option, but both PM Production and PM Holdings defaulted in payment of the consideration. 8.Since taking over the Group, the Provisional Liquidators have serious doubt about the integrity of the senior management of PM Holdings and PM Limited such that they considered the ongoing control of the Group should not continue to be entrusted to the original management. Hence, the Provisional Liquidators took control of the Group and took over the responsibility of management of day to day business operations. They took steps to protect and preserve the Sincere Group and pursued an investor process in relation to a sale of the assets or a strategic investment in the Group. In the course of their investigation into the debts of the Group, they became concerned over the legitimacy of both sales and trade receivables relating to the Group’s wholesale and distribution business. They thought the Group had partially financed its acquisitions and loss making businesses via a trade finance “money go-round” utilizing sales of non-existent goods to corporate entities controlled by parties with close ties to the management of the Group that actually carry on little, if any, legitimate business. It appears that the Group’s operations are substantially smaller and less profitable than reported in its reports. 9.The Provisional Liquidators obtained nine offers from potential investors interested in the acquisition of various parts of the Group. One of the offers was from New Flow Group Limited (“NFG”), a subsidiary of Chow Tai Fook Jewellery Company Limited. NFG offered to purchase part of the Group (“Target Group”) for HK$600 million. After deducting some inter-companies debts between the Target Group and the non-Target Group, the net consideration is HK$505 million. The Target Group includes: (i) the luxury and mid-market timepiece distribution and retail businesses which are located primarily in the PRC, Hong Kong, Macau and Taiwan; (ii) Master Dynamic’s interest in Tianjin Seagull; (iii) Milus International SA and Shanghai Gold Time Precision Instrument Co Ltd, but not the Sincere Group. Those businesses are highly distressed and more than half of them are unprofitable. The assets of those businesses comprise primarily of retail inventories and receivables. Given the nature of those assets and the diverse and numerous geographical locations of the various retail stores, those assets are extremely vulnerable to dissipation. The control of the joint venture businesses and their assets are in the hands of the joint venture partners. It is extremely difficult for the Provisional Liquidators to enforce legal rights against the joint venture partners. The joint ventures are reliant on funding from the Group to make payments for rent, wages and suppliers. Such funding has not been available since mid-August 2008. The Provisional Liquidators are particularly concerned that without a strategic investor who is urgently willing and able to provide emergency working capital, the retail business, other than the Sincere Group, will lose all of their value within 7 to 14 days. 10.The Provisional Liquidators considered it in the best interest of creditors to accept NFG’s offer. Their reasons are summarised as follows:
11.The Provisional Liquidators recommended NFG’s offer to then informal steering committee of PM Holdings at a meeting on 2 October 2008. The steering committee at that time comprised ofABN, ING,BNP and Bank of America Limited (“BOA”), who together are owed HK$2,298,972,865 representing approximately 43.1% of the debt owed by the Group to financial creditors. Except BNP, the other banks gave written confirmation to endorse the offer by NFG. On 3 October 2008, the Provisional Liquidators entered into an agreement for the sale of the Target Group to NFG (“Asset Sale”) pursuant to the terms in a debt restructuring agreement (“DRA”) to be entered into by the Provisional Liquidators, PM Holdings, PM (BVI) and NFG and the transfer or release of certain inter-companies debts within the Group as part of the terms of the DRA. Completion of the DRA will take place on 14 November 2008. 12.On 6 October 2008, the Provisional Liquidators made an urgent application to this Court to sanction the Asset Sale as part of an application made pursuant to section 182 of the Companies Ordinance in respect of PM Holdings and PM Limited. Having considered submission made on behalf of the Provisional Liquidators, I was satisfied that the Group was in a distressed state and short of working capital necessary to maintain the retail businesses in the Target Group. For reasons as given by the Provisional Liquidators in paragraph 10 above, I was satisfied that unless a strategic investor who would be willing and able to urgently provide emergency working capital, the retail business in the Target Group would lose all of their value within 7 to 14 days. I considered the Asset Sale to be in the best interest of the general body of creditors. I therefore sanctioned the Asset Sale and made an order that in the event of an order to wind up PM Holdings being made on the petition, the disposition of the assets by virtue of and/or arising from the DRA shall not be avoided by virtue of section 182 of the Companies Ordinance. A similar order was made in respect of PM Limited. 13.On 22 October 2008, the Provisional Liquidators applied to vary the two validation orders to permit them to amend the DRA to overcome certain technical difficulties which might affect the completion of the DRA. By that time, the Hong Kong branch of Deutsche Bank AG (“Deutsche Bank”) and Wells Fargo Bank (“Wells Fargo”) also joined the steering committee. The variation was supported by all the members of the new steering committee, except Wells Fargo. The position of Wells Fargo was that it did not object to the variation but as it was not a Syndicate Lender affected by the arrangement, it did not consider it appropriate to support the variation. In view of the above, I made the variation to the two validation orders. The winding up petition of PM Production 14.I now return to the Fund’s investment in Master Dynamic on 28 March 2008, about six months prior to the winding up petition against PM Holdings. It should be recalled that on 3 September 2008, the Fund exercised the put option to sell the shares in Master Dynamic back to PM Production but PM Production defaulted in payment of the consideration and PM Holdings defaulted on its guarantee. 15.Those default events took place just shortly before the winding up petition was filed against PM Holdings. The Fund must by then have knowledge of the insolvency of PM Holdings. Indeed around the end of September 2008, Mr Cheung and other representatives of Somerley had discussion with the Provisional Liquidators in broad terms about the prospect of selling PM Production’s shares in Master Dynamic. But the Fund was not consulted to approve the Asset Sale to NFG. Following the public announcement of the Asset Sale published on 1 November 2008, the Fund petitioned for the winding up of PM Production on 5 November 2008. 16.The petitioning debt of the Fund is the re-purchase price of US$2,388,000 which is equivalent to HK$18.6 million. According to the Provisional Liquidators, the key liabilities of PM Production are its debts to PM Limited for HK$32.2 million, PM (BVI) for HK$109.8 million and the Syndicate Lenders for HK$1,200 million. The amount owing under the Bridge Loan is excluded on the assumption that it is fully secured. Thus, the total unsecured debt owed by PM Production is over HK$1,300 million, while the petitioning debt constituted 1.4% of the total unsecured indebtedness. The application for validation order in respect of PM Production 17.Presumably because of the Fund’s petition, the Provisional Liquidators saw it fit to apply for a validation order specifically to cater for the event of a winding up order being made against PM Production. An urgent application was hence made on 11 November 2008 and heard at 4:15 pm on that day. The Fund objected to the application and asked for an adjournment to enable it to consider the application. But the Asset Sale to NFG was due to be completed on 14 November 2008. In view of the urgency, I adjourned the application for argument to 13 November 2008 at 2:30 pm. I granted leave to the Fund to serve its draft affidavit in opposition on the Provisional Liquidators before 6 pm on 12 November 2008, to be sworn and filed on 13 November 2008, and for the Provisional Liquidators to file and serve their affidavit in reply, if any, by 10 am on 13 November 2008. 18.For the same reasons as given in paragraphs 10 and 12 above, had the application for validation order in respect of PM Production been made ex parte, I would have considered the Provisional Liquidators’ application entirely proper and appropriate. However, Mr Maurellet, counsel for the Fund, contends that the Provisional Liquidators representing the creditors of PM Holdings and PM Limited are in a position of conflict with the creditors of PM Production. He suggests that the desirable course is for the Provisional Liquidators to buyout the Fund’s debt and then they can proceed with the Asset Sale in whatever manner they desire. 19.Besides the issue of conflict of interest, the Fund’s objections to the application for validation order are: (1) insufficient time to consider the documents; (2) the package approach in the proposed Asset Sale to NFG which has the effect of under-valuing the assets of PM Production and rendering a fair and objective allocation of the proceeds of Asset Sale by specific companies in the Group impossible; (3) lack of transparency, fairness and scrutiny; and (4) disputes on the unsecured guaranteed claims against PM Production. 20.On behalf of the Provisional Liquidators, Mr Lam denies that the Provisional Liquidators are in a position involving any conflict of interest. He argues that the question at that stage of the proceedings is whether to proceed with the Asset Sale and not one of distribution of the proceeds of the sale. The question of valuation of the assets to be sold and disputes of other unsecured creditors’ entitlement to the proceeds of sale could be deferred for argument later. 21.I concur with the approach of Mr Lam. I shall first decide whether the Provisional Liquidators in representing the interest of creditors of PM Holdings and PM Limited are in a position of conflict with the creditors of PM Production. I shall then decide whether, in the light of that finding, there is any substantial dispute as to the valuation of PM Production’s interest in Master Dynamic or Tianjin Seagull or as to the unsecured guaranteed claims and, if there is, whether in the light of the totality of circumstances it is in the best interest of all the creditors, including those of PM Holdings, PM Limited and PM Production, that the Asset Sale should be halted to permit these disputes to be resolved. Whether the Provisional Liquidators are in a position of conflict of interest 22.Mr Maurellet argues that what is good from point of view of the creditors of PM Holdings and PM Limited may not be good for the creditors of PM Production. He argues that in proceeding with the Asset Sale, the Provisional Liquidators are taking away the Fund’s chicken for the benefit of the creditors of PM Holdings and PM Limited in exchange for a food coupon redeemable at a future date. 23.The key liabilities of PM Production are its debts to PM Limited for HK$32.2 million; PM (BVI) for HK$109.8 million and the Syndicate Lenders for HK$1,200 million. Thus, PM Limited and PM Holdings, through PM (BVI) are as much a creditor of PM Production as the Fund. The debts due to PM Holdings and PM Limited are 7.6 times in value of that due to the Fund. It must be as much in the interest of the Provisional Liquidators to actualise as much as possible from the sale of PM Production’s interest in Master Dynamic or Tianjin Seagull as it is in the interest of the Fund. Their interest cannot hardly be any different from that of the Fund’s. In fact, if a holding company is to be wound up together with its subsidiary, it is invariably the court’s practice to appoint the same person as the provisional liquidator of both the holding company and its subsidiary. 24.Mr Maurellet argues by way of his chicken and coupon argument that the Provisional Liquidators might sacrifice the interest of the minority creditors in favour of the majority creditors whom they represent. He argues that Tianjin Seagull is a stand-alone and profitable business. Thus, by packaging it for sale with distressed assets, the Provisional Liquidators are sacrificing the interest of the Fund in favour of the majority creditors. Be that as it may, the assets of PM Production have to be sold to satisfy the debts owing to the Fund as well as owing to PM Holdings and PM Limited. The Asset Sale is not solely for the benefit of creditors of PM Holdings and PM Limited. The reality of the situation is that once liquidation process is in place, every creditor is to receive a coupon. The question facing the Court at this stage of the proceedings is not about distribution but about preservation of assets. It is in every creditor’s interest that the assets of the Group be preserved and in this case by way of sale in view of the risk of dissipation due to lack of capital funding. The Fund’s right to dispute the valuation of PM Production’s interest in Master Dynamic or Tianjin Seagull is not affected whether the Asset Sale is to proceed or not. On the contrary, if the Asset Sale is halted, substantial assets will be at risk of dissipation. I am satisfied that the Provisional Liquidators are not in any position of conflict with the interests of the creditors of PM Production, including the Fund. I consider the suggestion of buying out the Fund’s debt is a blatant breach of the pari passu principle of distribution in the case of a company winding up. Insufficient time to consider the application 25.The Fund’s complaint is that the first time it received any information about the terms of the proposed Asset Sale was via the public announcement published on 1 November 2008by the Provisional Liquidators on behalf of PM Holdings. The papers relating to the validation orders made on 6 and 21 October 2008 in the winding up proceedings against PM Holdings and PM Limited were only provided to the Fund’s solicitors, Messrs Richards Butler, at 4:05 pm on 10 November 2008. The papers in relation to the present application was only given to Messrs Richards Butler at their meeting with the Provisional Liquidators between 3:00 pm and 3:45 pm on 11 November 2008. Hence, the Fund only had an unreasonably short period of time to consider the papers given by the Provisional Liquidators in relation to the application for validation order. The Fund complains about being ambushed by the Provisional Liquidators within the past 48 hours. 26.Prior to the filing of the winding up petition against PM Production, the Fund was a minor creditor of one of the subsidiaries of the Group. The debt owed by PM Production to the Fund arose as a result of PM Production’s failure to complete the put option is US$2,388,000 or about HK$18.6 million, which is only 1.4% of the total debts of PM Production. Compared with the total indebtedness of PM Holdings of over HK$5 billion, it is only 0.37% of the total indebtedness of PM Holdings. It was only until 5 November 2008 that the Fund’s presence assumed some significance when it petitioned for the winding up of PM Production. Thus, until then, the Provisional Liquidators’ decision not to consult the Fund about the proposed Asset Sale to NFG was perfectly understandable. The Provisional Liquidators sought the views and consent of the steering committee, which is the consultative body representing the interests of all creditors. The steering committee includes not only the Syndicate Lenders but also other banks with no interest in the Syndicated Loan or the Bridge Loan. The Provisional Liquidators convened an all-bank meeting and informed the bank creditors of NFG’s offer and the process leading up to it. Given the situation the Group was in, the negotiation of the proposed Asset Sale was highly confidential. I agree with the Provisional Liquidators that it would be highly unusual in this type of situation to consult with each and every creditor. I do not consider the Provisional Liquidators have acted unfairly or with impropriety. 27.The DRA was due to be completed on 14 November 2008. Failure to complete the DRA as schedule will expose significant assets of the Group worth HK$505 million, except perhaps those of Tianjin Seagull, to serious risk of dissipation. The Provisional Liquidators have acted with propriety in negotiating the Asset Sale. The majority of the creditors have given their consent to the Asset Sale. Having regard to the serious risk of dissipation of significant assets of the Group, it was necessary in the interest of the general body of creditors, including the Fund, to work under the time frame available. I do not think it fair to describe the Fund as having been ambushed by the Provisional Liquidators within the past 48 hours. I note the limited time which the Fund was given to object to the Provisional Liquidators’ application for validation order. I shall be more relaxed in the burden of proof required of the Fund. I shall keep an open mind. If meritorious objection is shown, I shall in the interest of justice refrain from granting the validation order. Lack of transparency, fairness and scrutiny 28.In addition to the shortness of time available to the Fund to object to the application for validation order, the Fund is concerned about lack of transparency, fairness and scrutiny in relation to the Asset Sale and applications for validation orders of the same by the Court. The Fund complains that while the DRA was entered on 3 October 2008 and validation orders in respect of PM Holdings and PM Limited were obtained on 6 and 22 October 2008, these were not made the subject of a public announcement until 31 October 2008. The Fund considers the delay in making the announcement a breach of rule 13.09(1) of the Listing Rules of the Hong Kong Stock Exchange (“Stock Exchange”) which required PM Holdings to keep the Stock Exchange and other holders of its listed securities informed as soon as reasonably practicable of any information relating to the Group which is necessary to enable them and the public to appraise the situation of the Group or which might reasonably be expected would materially affect the price of and market activity in the securities. To this complaint, the Provisional Liquidators’ answer is that they had submitted the draft announcement to the Stock Exchange on 10 October 2008 and the publication of the announcement was delayed to allow time for the Provisional Liquidators to respond to the Stock Exchange’s enquiries on the announcement and various matters affecting the Group generally. I agree with the Provisional Liquidators that there is nothing sinister in the delay which is beyond the control of the Provisional Liquidators. Furthermore, as the trading of shares in PM Holdings had been suspended since 18 August 2008, there is no real prejudice to the Fund or shareholders of the PM Holdings occasioned by the delay. 29.The Fund is also concerned about a material error in the announcement and the failure to make disclosure of all material terms of the DRA. The material error in the announcement referred to by the Fund is that the sale and purchase of shares in Master Dynamic under the DRA was referred to as the shares of Tianjin Seagull. It should be recalled that under the DRA what was being sold was not the shares in Tianjin Seagull but the shares of Master Dynamic held by PM Production. 30.There is no dispute that around the end of September 2008, representatives of the Provisional Liquidators met with those of Somerley and discussed in broad terms the prospect of selling PM Production’s shares in Master Dynamic as a package with other assets of PM Holdings and that NFG had indicated that it did not want to consider purchasing the Fund’s share in Master Dynamic. Thus, the Fund must know that what was being sold was the shares of Master Dynamic held by PM Production and not the shares in Tianjin Seagull. In any event, the Fund has not shown how it could have been misled and prejudiced by the error in the announcement. 31.The Fund then complains that while the bank creditors of the Group were provided with information concerning the progress in selling PM Production’s shareholding in Master Dynamic, despite repeated requests by the Fund, the Fund was not provided with any information until after the conclusion of the negotiation with NFG and even then it was only informed by the Provisional Liquidators that a deal had been done with NFG which would not include the stake in Master Dynamic held by the Fund and the Provisional Liquidators provided no details. 32.The above facts are not disputed by the Provisional Liquidators. They do not dispute that the Fund was not consulted to approve the Asset Sale. They admit that they did not provide the Fund with any documents concerning the Asset Sale until it became necessary following the Fund’s petition for the winding up of PM Production on 5 November 2008. They admit that they convened an all-bank meeting and informed the bank creditors of the offer of NFG and the progress leading up to it. They explain the disparity in treatment between the banks and the Fund on the basis that the information was disclosed to the banks in their capacity as members of the steering committee which is the consultative body representing the interests of all creditors. That body includes not only the Syndicate Lenders but also other banks with no interest in the Syndicated Loan or the Bridge Loan being BOA, Deutsche Bank and Wells Fargo. 33.Another important reason advanced by the Provisional Liquidators is that the negotiation with NFG was highly confidential and took place in a competitive process. It would be unusual for matters of this nature to be discussed among the general body of creditors. The steering committee was consulted as its members are bound by confidentiality obligations. Furthermore, the Provisional Liquidators were required to provide the Syndicate Lenders with the sale documentation in order to procure the Syndicate Lenders to release MP Holdings’ and MP Limited’s guarantees as part of the terms of the sale to NFG. 34.The Provisional Liquidators have management of the Group in the place of their directors. It is their duty to act in the best interest of the general body of creditors as a whole. That duty does not obliged them to consult each and every creditor in the management of the affairs of the Group placed under their control. In fact, it is impracticable for them to do so and it is impossible for them to act only on the unanimous decision of all the creditors whose interests may not be the same. It would be sufficient if their act has been approved by the steering committee representing the interest of the general body of creditors and where necessary with the sanction of the Court. 35.In the present case, the Fund’s petitioning debt is HK$18.6 million as compared with PM Production’s total indebtedness of over HK$1,300 million. This means that the Fund’s petitioning debt is only about 1.4% of the total indebtedness of PM Production. The Provisional Liquidators properly consulted the steering committee which approved the Asset Sale. The Syndicate Lenders alone, whose debts comprise over 89.4% of the PM Production’s debt, have already approved the Asset Sale to NFG and released the guarantees. Whatever view the Fund may take as to the Asset Sale could weigh little in the Provisional Liquidators’ decision. Given the time frame within which the Provisional Liquidators have to act and the confidential nature of the negotiation, I do not think the Provisional Liquidators could be criticised for choosing not to consult the Fund before striking the deal with NFG. Indeed, if the Provisional Liquidators were to engage in a consultation process of the type suggested by the Fund, the Asset Sale to NFG will most likely never happen within the time frame which NFG required, lest the assets would have been dissipated, and the Provisional Liquidators would have acted contrary to the interests of the creditors of the Group as a whole. I do not think there is any substance in the Fund’s complaint of lack of transparency, fairness and scrutiny, or that it has been ambushed by the Provisional Liquidators. Whether there is any substantial dispute as to the valuation of PM Production’s interest in Master Dynamic or Tianjin Seagull 36.The major objection of the Fund is the package approach in the proposed Asset Sale to NFG. There is no dispute that Tianjin Seagull is a stand-alone and profitable business. It is operating normally and is soundly and independently financed. On the other hand, most of the businesses in the Target Group are in financial difficulties or suffering loss. The net profits of Tianjin Seagull for 2005, 2006 and 2007 were RMB 24.1 million, RMB 22.8 million and RMB 33.8 million respectively. The Fund regards Tianjin Seagull as the “crown jewel” among the Group and contends that the crude packaging of assets for sale at one global price is fundamentally flawed and prejudicial to the creditors of PM Production by selling this “crown jewel” together with other distressed assets of the Group. Another objection of the Fund is that a fair and objective allocation of the proceeds of the proposed Asset Sale to specific companies in the Group will be impossible. 37.The Fund argues that Tianjin Seagull, being a profitable and stand-alone business, should be valued and sold separately and that the conventional valuation yardstick such as price-earning ratio should apply to the valuation of Tianjin Seagull rather than a global price together with other distressed assets of the Group. Based on a forecast profit of RMB60 million for 2008 and a price-earning ratio of 9, the Fund attributes a value of RMB540 million or HK$615.6 million for Tianjin Seagull and PM Production’s interest for its 45.951% interest in Tianjin Seagull at RMB248 million or HK$283 million. Hence, the Fund argues that compared with the NFG’s offer of HK$505 million for the Target Group, Tianjian Seagull has been grossly under-valued. 38.The Fund purchased 9.9% of the issued share capital of Master Dynamic which holds 51% of Tianjin Seagull. If indeed Tianjin Seagull commands such a high valuation as contended by the Fund, the Fund would be better off holding onto its shareholding in Master Dynamic which represents 5.049% (i.e. 51% x 9.9%) interest in Tianjin Seagull. On the Fund’s valuation, that interest would be worth HK$31 million (HK$615.6 million x 5.049%), which is almost double the petitioning debt. This demonstrates the fallacy of the Fund’s valuation. 39.On the other hand, by way of rough comparison, the Fund’s valuation is grossly out of line with the offers received by the Provisional Liquidators. Xinyu Hengdeli Finance Ltd offered HK$381.1 million for the luxury and mid-market businesses, the PRC manufacturing and wholesale business together with 51% interest in Tianjin Seagull. Tourneau Acquisition Holdings Inc offered to purchase the luxury and mid-market businesses, the wholesale and manufacturing businesses, the Sincere Group and Tianjin Seagull with HK$50 million attributed to Tianjin Seagull. 40.I shall now analyse the Fund’s valuation more critically. The price-earning ratio of 9 adopted by the Fund is a discounted ratio taken from the valuation table extracted from Bloomberg as at 12 November 2008 which show that the average price-earning ratio of publicly listed watch manufacturers is 13.17. A discount by 30% to take account of the fact that Tianjin Seagull is not a listed company may not be unreasonable in a free economy. However, Tianjin Seagull is a joint enterprise in the PRC which is a controlled economy. There are special legal provisions in the PRC which restrict transferability of investments in the joint enterprises and provide an option to the state-owned party to purchase the investments. Those provisions may adversely affect the valuation. Besides, I note from the audited accounts of Tianjin Seagull for 2007 that the audited net asset value of Tianjin Seagull was RMB143.2 million, which was only 4.24 times its profit for that year (i.e. RMB143.2 million ¸ RMB33.8 million). For the above reasons, I doubt if the price-earning ratio of 9 adopted by the Fund is appropriate. 41.The Fund’s forecast of Tianjin Seagull’s profit for 2008 of RMB60 million is based on the consolidated profit and loss statement prepared by the Provisional Liquidators which showed a profit of RMB16.8 million for three months ending 30 June 2008. However, there is a rider to that statement to the effect that the results for the period are materially affected by an amount for other income. In other words, the actual profit was well below that figure. The forecast suggested by the Fund is grossly out of line with the actual profits for 2005, 2006 and 2007 of RMB24.1 million, RMB22.8 million and RMB33.8 million respectively. 42.In the un-audited management account prepared by PM Holdings as at 31 March 2008, it attributed a value of HK$60.7 million to its investments in subsidiaries. Of that, HK$3.3 million is attributed to PM Holdings’ shares in Master Dynamic. In the un-audited management account of Master Dynamic as at 31 March 2008, it indicated that its key asset is its 51% interest in Tianjin Seagull and its subsidiaries, to which Master Dynamic attributed a value of HK$86 million. This valuation was prepared by the Group prior to the takeover by the Provisional Liquidators and is therefore the most optimistic valuation one could attribute to Master Dynamic’s 51% in Tianjin Seagull or HK$168.6 million for the entire valuation of Tianjin Seagull. 43.On the other hand, according to the Provisional Liquidators, the consolidated spreadsheet for the Group as at 31 March 2008 show that Tianjin Seagull’s net profit for the six months after it was acquired by the Group on 1 October 2007 was only HK$2 million, giving an annual profit projection of HK$4 million for 2008. This estimated annual profit is also grossly out of line with the past performance of Tianjin Seagull. But, as pointed out by the Provisional Liquidators, the economic conditions around the world have changed dramatically in the past few months and there is a broad consensus that the world is already in what will be a long and painful economic recession. Taking into account the recent financial tsunami, it would be unrealistically optimistic if Tianjin Seagull could retain profit at its 2007 level. Probably the 2007 valuation of RMB 143.2 million or HK$163.2 million in the audited accounts of Tianjin Seagull has provided a cap for the valuation of 2008. There has been in general a 50% reduction in most of the shares quoted in the Hong Kong as well as the PRC stock exchanges from their levels in early 2008. Since the profit projection of HK$4 million for 2008 is based on actual performance data from the nearest six months since 1 October 2007, it may be more reflective of the profit capability of Tianjin Seagull. Using a multiplier of 9 or 4.24, the valuation of Tianjin Seagull would be between HK$36 million and HK$16.96 million. PM Production’s interest in Tianjin Seagull would be between HK$16.54 million and HK$7.79 million. This valuation is probably closer to reality. 44.The Provisional Liquidators dispute the valuation of the shares in Master Dynamic and Tianjin Seagull by the Fund, but have not put forward their own valuation. They consider it unnecessary as it will be an issue to be determined at the second stage of the proceedings when the proceeds of sale will be distributed. I am not in any position to make any valuation of the asset value of Tianjin Seagull. However, having regard to the objective data available and having considered counsel’s submission, I am far from being convinced that a valuation of RMB540 million for Tianjin Seagull and of RMB248 million for PM Production’s interest in Tianjin Seagull is at all realistic. Given the economic conditions we now find ourselves to be in, the valuation of between HK$16.54 million and HK$7.79 million by Master Dynamic’s 51% interest in Tianjin Seagull based on the actual profits of the first six months after acquisition or HK$50 million by Tourneau Acquisition Holdings Inc are closer to market reality. I note the limited time the Fund has in considering and preparing its case, but on the facts available and as I analysed them, I do not think the Fund could with more time advance its case much further. 45.The Fund’s suggestion of a stand-alone sale of Tianjin Seagull is also unrealistic. The Provisional Liquidators have not received any stand-alone offers to purchase Tianjin Seagull, nor has the Fund come forward with any prospective buyers. In the course of negotiating the Asset Sale, NFG has indicated unequivocally that it will not purchase the Fund’s share in Master Dynamic. Besides, Tianjin Seagull is a joint venture company. While 51% of its shareholdings are held by Master Dynamic, 40% are owned by the Tianjin Government and the remaining 9% by its employees. The articles of association of Tianjin Seagull provide that consent from both the Tianjin Government and the employee shareholders to any sale of its shares are required and the approval of the relevant local authorities must also be obtained. Thus, apart from the difficulties of finding a willing purchaser who will be prepared to participate in a joint venture with the Tianjin Government, the purchaser has to be acceptable to the Tianjin Government as well. All these make it extremely difficult to sell Tianjin Seagull on a stand-alone basis. The lack of any stand-alone offer for Tianjin Seagull amply demonstrates that it is by no means freely marketable. NFG’s willingness to assume the risk that such consent and approval may not be forthcoming makes its offer all the more attractive in the pressing circumstances of the case. For that reason NFG’s offer is just too good to miss. 46.The Provisional Liquidators have taken over control of the Group. They are in the best position to make an accurate evaluation of the assets of the Group. Unless they are shown to be demonstrably wrong or to have failed to take into account relevant factors in their valuation or have taken irrelevant factors into account, their decision ought to be given greatest weight. They have not been shown to have so erred. I am not satisfied that the Fund has shown any substantial dispute as to the valuation of PM Production’s interest in Master Dynamic or Tianjin Seagull. Whether there is any substantial dispute on the unsecured guaranteed claims against PM Production 47.The Fund also proposes to challenge the admissibility of the unsecured guaranteed claims of PM Production in respect of the liabilities of other members of the Group on the basis that prima facie, the guarantees were given under circumstances where there could have been no reasonable possibility that the guarantees could be honoured, were given without any or sufficient commercial benefit to PM Production and were ultra vires. 48.The Provisional Liquidators criticised the lack of factual basis of the challenge. Given the lack of time for the Fund to formulate its objections, I am prepared to be more relaxed with the evidence. But an interesting point is that the guarantee given by PM Holdings to the Fund was made around the same time as the guarantees under the Bridge Loan which the Fund now complains of. The Fund must therefore necessarily draw into question the veracity of the guarantee obtained by it from PM Holdings. Furthermore, the Provisional Liquidators had at an early stage obtained legal advice in relation to the guarantees and have been unequivocally advised that there are no grounds for questioning the guarantees based on the information known to the Provisional Liquidators. In the circumstances, in view of the total lack of factual basis of the challenge, I am not satisfied that there is any substantial dispute on the unsecured guaranteed claims against PM Production. Whether the Asset Sale should be halted to resolve the dispute on valuation of Tianjin Seagull or the dispute on the unsecured guaranteed claims 49.What the Provisional Liquidators are seeking is an order to validate the sale of, among other things, PM Production’s shares in Master Dynamic. They are not seeking immediate distribution of the proceeds of sale. Indeed, they have undertaking not to do so without giving the Fund 21 days notice of their intention to distribute the proceeds of the Asset Sale. Thus, having found that there is no substantial dispute as to the valuation of PM Production’s interest in Master Dynamic and Tianjin Seagull and as to the other unsecured guaranteed claims against PM Production, there is no need to consider the second question whether the Asset Sale should be halted in order to allow the parties to resolve those disputes. 50.But, assuming that there were substantial disputes on either or both of these two issues, the issue for the second question is whether there is any prejudice to the Fund if the Asset Sale is to be allowed to proceed as scheduled. The most important consideration is whether as a result of or subsequent to the Asset Sale a fair and objective allocation of the proceeds of the Asset Sale to specific companies in the Group or that the Fund’s dispute on the unsecured guaranteed claims against PM Production will no longer be possible. I consider the Fund’s concern on those issues have been over-emphasised. As I have said, at this stage of the proceedings the Provisional Liquidators are not seeking immediate distribution of the proceeds of the Asset Sale. Opportunities will be available at the second stage of the proceedings for the Fund as well as all creditors to challenge the valuation of the shares in Master Dynamic and Tianjin Seagull as well as the entitlement of any other creditors. In the meantime, the Provisional Liquidators will place the proceeds of the Asset Sale into an escrow account pending a further detailed review and analysis of the appropriate allocation of the sale proceeds. The Provisional Liquidators will also allocate the proceeds in accordance with the legal rights of all creditors, including, where necessary, by taking account specific entity priority. Thus, the dispute as to the valuation of PM Production’s interest in Master Dynamic and Tianjin Seagull can be resolved after the Asset Sale without any prejudice to the Fund. Likewise, even if the challenge made against the unsecured guaranteed claims were justified, at the highest, that means there is a possibility that the petitioning debt may not be as insignificant as 1.4% of the total indebtedness of PM Production. It may be higher, but still insignificant because of the size of the undisputed Syndicate Loan. But whatever the situation, this challenge proposed by the Fund need not be resolved at this stage or at least should not stand as an obstacle to the Asset Sale. It can be resolved at a later stage and without prejudice to the Fund at all. 51.Furthermore, at the hearing of the application for validation order, the Provisional Liquidators undertake to the Fund that they will not distribute any proceeds from the Asset Sale without giving the Fund 21 days prior notice of their intention to distribute the same and how and when they intend to do so. Their undertaking is sufficient to enable the Fund to bring timely objection to the valuation of the shares in Master Dynamic or the unsecured guaranteed claims if it wishes to do so after proper consideration of its position in the meantime. In my view, the interest of the Fund is properly and adequately protected. If indeed the Fund would be successful in its challenge to the valuation or in its challenge to the unsecured guaranteed claims, it will be entitled to a larger share in the distribution. There will be no prejudice if the Asset Sale is to proceed as scheduled. On the contrary, to refuse to grant the Provisional Liquidators’ application for validation order will result in all creditors of the Group, including the Fund, losing the benefit of actualising a good value for assets of doubtful value and running the very obvious risk of never ever recovering any value for the Target Group save Master Dynamic’s investment in Tianjin Seagull. Substantial assets of the Group will be dissipated through lack of working capital to maintain the Target Group. 52.Given the urgency of the situation and the risk of dissipation of assets if the Asset Sale will not be completed as scheduled, I do not consider it justified to halt the Asset Sale in order to allow time for the Fund to consider the Asset Sale by reason only of its doubtful valuation or challenge to the unsecured guaranteed claims or unjustified concern about impossibility of a fair distribution. If the Provisional Liquidators’ valuation is correct, PM Holdings as well as PM Production will receive a much greater return from the Asset Sale than they would otherwise be able to obtain by the stand-alone sale of Master Dynamic. The Fund’s right to participate in the dividends of the Asset Sale is protected. There could be no prejudice to the Fund if the Asset Sale is allowed to proceed. On balance, I consider it appropriate to grant the validation order. Conclusion 53.For the above reasons, I grant the validation order in respect of PM Production. There is no real cause for the Fund to object to the application. It appears that the Fund’s motive of obstructing the Asset Sale is to extract a more than pari passu distribution in its favour in respect of its petitioning debt which is not permissible. It is only appropriate that the costs of the application should be paid by the Fund rather than from the assets of the PM Production. Accordingly, I make an order nisi that the Fund shall pay the Provisional Liquidators the costs of the application for validation order.
Mr. Douglas Lam, instructed by Messrs Lovells, for the Provisional Liquidators Mr. Maurellet, instructed by Messrs Richards Butler, for the Petitioner Attendance of the Official Receiver is dispensed with |