Re Ecm Real Estate a.G.(in Liquidation)
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HCCW 277/2011 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES WINDING-UP PROCEEDINGS NO 277 OF 2011 ____________
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_____________ D E C I S I O N _____________ Background 1.This is an application for an order under section 209A of the Companies Ordinance (“the Ordinance”) that the winding up of ECM Real Estate Investments A.G. (“the Company”) be conducted as if the winding up were a creditors’ voluntary winding up. 2.The Company is incorporated in the Grand-Duchy of Luxembourg with its “centre of main interests” (within the meaning of European Insolvency Regulation 1346/2000) in Prague. 3.The Company had issued certain Euro-denominated bonds and went into financial difficulties as a result of the global financial crisis that started in 2008. In October 2010 it defaulted on an annual interest payment under the bonds. The bondholders declared an event of default and delivered an acceleration notice. 4.In May 2011, the Company filed a petition to commence insolvency proceedings in the Czech Republic. The Municipal Court in Prague issued a decision on declaration of insolvency of the Company, appointing an insolvency trustee and constituting an interim creditors committee. 5.On 20 July 2011, the creditors of the Company with admitted claims voted that the Company should be declared bankrupt. This signalled the commencement of the liquidation process in the Czech Republic. The interim creditors committee became the creditors committee proper. 6.A petition was presented by the representative of the bondholders to the Court of First Instance in Hong Kong for the winding up of the Company on the ground that it was insolvent. On 14 November 2011, a winding up order was made on that petition. The Official Receiver became provisional liquidators at the same time. 7.On 15 December 2011, on the application of the Official Receiver, Harris J made an order under section 227A of the Ordinance for the winding up of the Company to be specially regulated by the Court. By that order, the court appointed the present liquidators of the Company as its joint and several liquidators, dispensed with the summoning of the first meetings of creditors and contributories pursuant to sections 194 and 206 of the Ordinance for the purpose of considering the appointment of a liquidator and a committee of inspection, and ordered that there should not be a committee of inspection in the winding up. 8.The decision was made to seek the winding up of the Company in Hong Kong because it has assets here. In particular, the Company holds 1,335 shares or 26.7% of the issued share capital of China East Investments Limited (“CEI”), a company incorporated under the laws of Hong Kong. The Company indirectly owns, through a wholly owned subsidiary, another 500 shares or 10% of the issued share capital of CEI. The Company has also advanced shareholders’ loans in the aggregate amount of approximately US$36 million to CEI. CEI is the owner of, among other things, the entire issued share capital of a wholly foreign-owned enterprise established in Tianjin under the laws of Mainland China, which in turn owns a real estate project in Beijing. 9.Depending on the outcome of a dispute with a co-shareholder, the shares in and the loans advanced to CEI have an estimated value of between US$36 million and US$43 million. In the absence of an order under section 209A, if sums of this magnitude are realised by the liquidators for the CEI assets, substantial ad valorem fees will have to be paid to the Official Receiver under Table B of Schedule 3 to the Companies (Fees and Percentages) Order (Cap 32C). The fees payable are estimated to be in the region of HK$4 million. 10.There is no dispute that the principal, if not the sole, reason for seeking a section 209A order in this case, as indeed in most previous cases that have come before the courts, is to avoid having to pay such fees, which would represent a considerable saving and increase the dividends to creditors. In the Law Reform Commission’s Report on the winding-up provisions of the Companies Ordinance published in July 1999, it was stated at paragraph 14.12:
11.After twice obtaining extensions of time from the Court under section 209A, the liquidators took out a summons on 24 May 2012 for an order that the winding up of the Company be conducted as if the winding up were a creditor’s voluntary winding up. 12.There were developments in the ongoing insolvency proceedings in the Czech Republic which resulted in a prior hearing of this summons being adjourned in September 2012. It is unnecessary to delve into those developments. Suffice it to say that a re-organisation plan that had been put forward in Prague at one stage to rehabilitate the Company was subsequently withdrawn, and the Company is now in bankruptcy liquidation in the Czech Republic. The liquidators’ application for an order under section 209A has since been restored and now falls for determination. 13.There are two novel jurisdictional issues that arise which need to be resolved before the merits of the application can be considered. First, does the Court have jurisdiction to make the order sought under section 209A given that the Company is a foreign company and thus an unregistered company within the meaning of the Ordinance? Secondly, does the Court have jurisdiction to make the order sought given that a regulating order has been made under section 227A? This is apparently the first case in which an application has been made under section 209A in relation to an unregistered company and a winding up subject to a regulating order. 14.In her report to the Court, the Official Receiver doubts whether the Court has jurisdiction to grant the order sought in light of section 327(2) of the Ordinance, but states that subject to the liquidators satisfying the Court as regards its jurisdiction and the merits of the application, she “has no objection in principle” to the application. At the hearing, Mr Joseph Hui, of the Official Receiver’s Office, appeared and submitted that the Court has no jurisdiction. Jurisdiction to make order under section 209A in respect of unregistered company 15.Section 209A(1) of the Ordinance provides:
16.The Company is of course not a “company” within the meaning of the Ordinance (as “company” is defined in section 2). In order to invoke section 209A, the liquidators have to rely on section 327(1) of the Ordinance. 17.Section 327(1) provides:
18.“Unregistered company” is defined in section 326(1), which provides:
It is not in dispute that the Company is an unregistered company. 19.In essence, Ms Ismail, on behalf of the liquidators, submits that:
20.The main obstacle to the liquidators’ argument is section 327(2), which provides as follows:
21.Ms Ismail does not, and accepts that she cannot, contend that because an order made under section 209A only directs that the winding up be conducted “as if” it were a creditors’ voluntary winding up, the winding up after a section 209A order is made would still retain its nature as a compulsory winding up and would not therefore be caught by section 327(2). 22.That concession is in my view rightly made. In Re Conso Electronics (Far East) Ltd (in liquidation) [1996] 1 HKLR 1, the company was wound up by the court and an order was later made under section 209A for the winding up to continue as if it were a creditors’ voluntary winding up. The liquidators were then replaced. The former liquidators, whose professional fee note was rejected by the new liquidators, applied under section 200(5) of the Ordinance for an order that the court reverse the new liquidators’ decision. The Court of Appeal held that there was no jurisdiction to entertain the summons because an application under section 200(5) could be made only in relation to a company the affairs of which were being wound up by the court, but by virtue of the order under section 209A, the affairs of the company were being wound up voluntarily. 23.After examining the legislative history of section 209A and the relevant provisions in the Companies Ordinance, Godfrey JA accepted the new liquidators’ contention that a section 209A order “brings an end to the compulsory winding up by converting it from a compulsory winding up into a creditors’ voluntary winding up” and concluded that, “by the s 209A order, the compulsory winding up is indeed for all purposes converted into a creditors’ voluntary winding up” (see p 333B & I). It follows that, once an order is made under section 209A, the company is to be regarded for all purposes as being wound up voluntarily. 24.Ms Ismail submits however that section 327(2) does not bar section 209A from being applied to an unregistered company because section 327(2) is, on its true construction, only concerned with the initial mode of putting the company into liquidation, and not with the winding up as a continuing process. She submits, therefore, that while section 327(2) prevents an unregistered company from commencing liquidation in Hong Kong by way of voluntary winding up, it does not prevent an unregistered company, after it has been ordered to be compulsorily wound up by the Court, from continuing its liquidation as a voluntary winding up. 25.When section 327 was enacted in Hong Kong, section 209A did not exist. There was then no avenue for converting a compulsory winding up into a creditors’ voluntary winding up. It was only when section 209A was enacted that the question became relevant whether the compulsory winding up of an unregistered company could be converted into a creditors’ voluntary winding up. 26.It is at this point convenient to refer to the legislative history of section 209A, which is set out by Godfrey JA in Re Conso Electronics (Far East) Ltd (in liquidation), supra, at p 3:
27.Neither the Jenkins Report of 1962 nor the 1973 report of the Companies Law Revision Committee of Hong Kong that led to the enactment of section 209A in 1984 shed any light on the rationale of the provision. As Le Pichon J observed in Re Peregrine Fixed Income Ltd (in liquidation) [1999] 2 HKLRD 653 at :
28.Section 209A was, together with other winding-up provisions of the Companies Ordinance, reviewed by the Law Reform Commission in the late 1990s. Its report published in July 1999 recommended the retention of section 209A (see paragraphs 14.8 to 14.21). 29.I turn now to section 327(2). This is a provision that has always been in the present Companies Ordinance since it was first enacted in 1933. Its origin can be traced to section 199(2) of the (UK) Companies Act 1862, which was in these terms:
30.The Act of 1862 laid down three modes of winding up: compulsory winding up (or winding up by the court), voluntary winding up and winding up subject to supervision. The same Act by section 199(2) expressly provided that no unregistered company was to be wound up voluntarily or subject to the supervision of the court. 31.The same provision was adopted in Hong Kong. The mode of winding up voluntarily but under the supervision of the court was abolished in Hong Kong in 1984. As a result, as currently stated in section 169, only two modes of winding up are left, “by the court” or, as it is sometimes called, compulsory, and voluntary. 32.It seems to me that in its ordinary and natural meaning, section 327(2) is concerned with the mode of winding up. It prohibits one mode of winding up for unregistered companies. This extends not only to the initiation of the liquidation but its entire process as a whole. In other words, the regime of voluntary winding up under the Ordinance, which is a creature of statute, is excluded for unregistered companies. This seems also to have been how Le Pichon J understood the position in Re Greater Beijing Region Expressways Ltd [2000] 2 HKLRD 776. There her ladyship said (at 783J-784A), obiter, that the provisions under Part V(iii) of the Ordinance, which concern voluntary winding up, fall to be excluded by reason of section 327(2) read together with the concluding words of section 327(1). 33.Ms Ismail submits that the meaning of the words “wound up” in section 327(2) is ambiguous and that the phrase “be wound up” is used in parts of the Ordinance to refer simply to the initiation of the winding up process, citing sections 177 and 228 as examples. But those are clearly provisions concerning the first step that brings about the liquidation. In the context of section 327(2) I see no warrant for restricting the meaning of that phrase to the commencement of winding up. 34.No amendment was made to section 327(2) both when section 209A first enacted in 1984 and when it was replaced by a more elaborate version in 1990. Had the legislature intended section 209A to apply to the winding up of unregistered companies, it would have made clear that section 209A so applied notwithstanding section 327(2). The absence of any such amendment or specific provision seems to me to indicate that the legislature did not intend section 209A to be applicable to unregistered companies. In addition, it is to be noted that none of the detailed factors introduced into section 209A by the amendment in 1990 concerns the special status of foreign companies. 35.It is in my view difficult to see why as a matter of principle the law should be that an unregistered company may not be put into liquidation voluntarily in Hong Kong but once it is put into compulsory liquidation in Hong Kong, it may be permitted to continue to be wound up here voluntarily. 36.Ms Ismail seeks to supply an answer by contending that the legislature’s concern is comity. She submits that the object of section 327 as a whole is to ensure that the court must be satisfied, before an unregistered company is placed in liquidation in Hong Kong, that it has sufficient nexus with this jurisdiction. She points to the courts’ jurisprudence on the requirements in terms of local connection that need to be satisfied before the Hong Kong court will wind up a foreign company. The principal concern, she says, is for the Hong Kong insolvency regime to be applied only where appropriate and to avoid infringing the sovereignty of other jurisdictions: Re Real Estate Development Co Ltd [1991] BCLC 210, 212i-213b, 217d-e. 37.The argument runs, therefore, that the legislature does not wish to allow foreign companies to commence liquidation in Hong Kong voluntarily because there is no guarantee of sufficient nexus with Hong Kong. Hence section 327(2). Where a foreign company has been ordered by the court to be wound up here, however, there is bound to be sufficient connection with Hong Kong, and therefore there is no longer any reason not to allow the winding up to continue as a voluntary winding up here. 38.In this connection, Ms Ismail draws my attention to section 221(4) of the (UK) Insolvency Act 1986, which provides that no unregistered company shall be wound up voluntarily under that Act “except in accordance with the EC Regulation”. The quoted words were added in 2002, pursuant to European regulation, to avoid discrimination against non-UK European companies which have their centre of main interests in the UK. There can therefore be no in-principle objection, submits Ms Ismail, to a foreign company undergoing voluntary winding up in Hong Kong if that company has sufficient connection to Hong Kong. 39.The argument is ingenious but, in my opinion, it takes too narrow a view of the object of the legislation. In exercising their power under section 327 with respect to foreign companies, the courts are, as a long line of authorities demonstrate, careful not to arrogate to themselves jurisdiction over an entity that prima facie lies “beyond the limits of territoriality” unless there is sufficient justification. But this is the restraint that the courts have, in applying the statute, themselves exercised out of concern for comity, in cases that involve foreign companies. 40.The Ordinance lays down two modes of winding up of companies, compulsory and voluntary. The two modes of winding up while sharing some similarities also have fundamental differences. The object of section 327(2) is to be found not only in the difference between how the two modes of winding up are commenced, but also by examining the substantive difference between the two processes. 41.The principal difference is explained by Wynn-Parry Jin Re Phoenix Oil & Transport Co Ltd (No. 2) [1958] 1 Ch 565 at 570 as follows:
42.Although steps in a compulsory winding up are no longer taken under the immediate superintendence of the chief clerk of the judge to whose court the winding up was attached, as they sometimes were in nineteenth century England, the control of the court over such a winding up is still very real and manifested by the fact that the liquidator is appointed by the court (sections 192-194), is to report to the court (section 191), is free to seek directions from the court (section 200), and exercises powers and performs duties delegated to him by the court as an officer of the court and subject to the control of the court (section 226). 43.A further difference, and one of great practical significance, is that liquidators in a compulsory winding up are subject to a very wide control by the Official Receiver (section 204) including control over the liquidator’s accounts (section 203). Liquidators in a voluntary winding up are, in contrast, free from such control. 44.By virtue of the definition of unregistered company in section 326, the power of the court to wind up unregistered companies under section 327(1) applies not only to foreign incorporated companies but to “any partnership, whether limited or not, any association and any company” with specified exceptions. When the legislature states, as it does in section 327(2), that an unregistered company shall not be voluntarily wound up, there is no reason to suppose that it is concerned only about how the winding up of these entities may be initiated, and the needs for comity which is relevant in relation to only one type of unregistered companies, namely, foreign companies. Rather, it seems to me that a principal object of section 327(2) is to ensure that the winding up of an unregistered company, coming as it does from so wide an assortment of entities with greatly varying character, constitutions and attributes, is and remains in the hands of the court. 45.Where the unregistered company is a foreign company, there is potentially the additional dimension of cross-border insolvency. A good proportion of the liquidations of such companies in Hong Kong are ancillary to the winding up in their places of incorporation. The Court’s continual involvement in and supervision of such processes is, in my view, expected under the statutory scheme. 46.This is not to say that a foreign company can never go into voluntary liquidation. Where its constitution so provides, it may well be able to go into voluntary winding up at its place of incorporation or indeed elsewhere if the law of that place so allows and if the requirements of such law are satisfied. What section 327(2) precludes is only voluntary winding up “under [the] Ordinance”. 47.Ms Ismail submits that any concern that the court should retain control can be met by the court’s refusal, in appropriate cases, to exercise its discretion to convert a compulsory winding up into a voluntary one. But this seems to me to beg the question why one should conclude that, notwithstanding section 327(2), the legislature intended that section 209A is applicable to unregistered companies in the first place. 48.Ms Ismail also prays in aid section 331 of the Ordinance, which relevantly provides as follows:
Counsel points out that section 209A is in Part V(ii) of the Ordinance, which concerns winding up by the court, and therefore applicable by virtue of section 331. On ordinary principles of statutory construction, however, this general provision does not override section 327(2), which is a specific provision. Section 331 applies those provisions with respect to winding up by the court other than those expressly excepted: Rudow v Great Britain Mutual Life Assurance Society (1881) 17 Ch D 600. Section 209A is, in my view, expressly excepted by section 327(2) and is therefore not rendered applicable to unregistered companies by section 331. 49.For the reasons given above, I have come to the conclusion that section 209A has no application to the winding up of an unregistered company ordered under section 327. The liquidators’ application must therefore be dismissed. In case I am wrong on this, however, I shall briefly discuss the two remaining issues. Jurisdiction to make order under section 209A in respect of winding up where regulating order has been made 50.The issue relating to regulating order arises as follows. Under section 209A, the application must be made within a prescribed period of time. In a case where an order has been made under section 227F (which concerns small winding up), the relevant period is “not later than 3 months from the date of such order” (section 209A(1)(a)). No such order has been made in the case of the Company in this case. Section 209A(1)(b) provides that “in any other case”, the relevant time is
51.The problem is that, in a case such as the present where a regulating order has been made under section 227A, very often the meetings of creditors and of contributories to be summoned and held pursuant to section 194 are, as they were in the present case, dispensed with. There are therefore no meetings, and no resolutions, from the date of which the three-month period runs. 52.In the present case the liquidators have assumed that time started to run from the date of the regulating order and had applied for extensions of time accordingly. The court, whose attention had not been drawn to this point, had granted two extensions sought on ex parte applications on paper. 53.The Official Receiver points out that the basis for a regulating order is that the winding up should be “regulated specially by the court” (section 227A(1)), and that is inconsistent with the object of section 209A which is to relinquish regulation by the court. That is correct as far as it goes. But the fact that a regulating order has been made does not in my view mean that the court must forever remain of the opinion that the winding up should continue as a compulsory one. 54.The time limit for making application was introduced into the Ordinance at the Registrar General’s suggestion: see paragraph 8.10 of the Sixth Report of the Standing Committee on Company Law Reform (1989). The fact that specific provision is made by section 209A(1)(a) in relation to the case where an order has been made under section 227F seems to me to show that the legislature could not have overlooked section 227A, which is in a sub-part of the Ordinance immediately preceding section 227F. The phrase “any other case” in section 209A(1)(b) must, in my view, be intended to include a case where a regulating order has been made under section 227A; otherwise it would have been singled out for special treatment. 55.Section 227A(4) provides:
56.By virtue of this provision, it seems to me that, an order having been made in this case under section 227B dispensing with the meetings in question, the reference to the resolutions and meetings in section 209A(1)(b) should be substituted by the steps taken pursuant to any procedure prescribed for ascertaining the wishes and directions of the creditors and contributories accordingly. I would conclude therefore that the application is not precluded by this jurisdictional point. Merits of the application 57.If I had found that the Court had jurisdiction to grant an order under section 209A in this case, I would on the basis of the evidence presented have exercised my discretion in favour of granting an order, having taken into account the factors enumerated in section 209A(2). In particular, I note that the application is supported or at least not opposed by the creditors and contributories of the Company, there is no allegation against the Company or any of its officers of any wrongdoing or misconduct, and there is no suggestion that any investigation is warranted. Order 58.The application is dismissed for want of jurisdiction. The costs of the Official Receiver are to be paid out of the assets of the Company.
Ms Roxanne Ismail, instructed by Tanner De Witt, for the Joint and Several Liquidators Mr Joseph Hui, Solicitor of Official Receiver |
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