Introduction

In the recent case of Chau Cheok Wa v CT Environmental Group Ltd [2021] HKCFI 2602, the Court of First Instance (“Court”) reiterated that for appointment of provisional liquidators pending determination of a winding-up petition, an applicant must establish that there is a good prima facie case for winding-up order at the hearing of the petition and it is right that a provisional liquidator should be appointed in light of the circumstances of the case.

Background

The Petitioner is a judgment creditor of the Respondent Company, CT Environmental Group Limited (the “Company”), pursuant to a default judgment. The Company is incorporated in the Cayman Islands and is listed on the Main Board of the Hong Kong Stock Exchange. On 29 March 2021, the Petitioner presented a winding-up petition (“Petition”) against the Company based on the judgment debt and its failure to comply with a statutory demand. The Company filed two affirmations in opposition to the Petition in July 2021 and made, among others, the following points:-

1.        The Company reserves its right to challenge the judgment debt. 

2.        There has been an effort of the current management to dispose of the Company’s indirect interest in 5 of the Company’s Mainland subsidiaries (the “Disposal of Assets”).

3.        5 major creditors of companies within the same group as the Company (the “Major Creditors”) executed an agreement (“Creditors Agreement”) to release securities including bank accounts and lands located in Mainland to facilitate the Disposal of Assets.

On 20 August 2021, pending determination of the Petition, the Petitioner filed a Summons for appointment of provisional liquidators (“PLs”) on an urgent basis on the ground that there was serious and justifiable concerns that the Company’s assets were in jeopardy and cannot be allowed to further remain under the control of the current board. In particular, the Petitioner claimed that he had received two respective “whistle-blower” letters alleging that the board had inexplicably favoured an investment agreement with 廣州華元匯管理諮詢有限公司, under which the Group’s major assets were used as security (“Investment Agreement”), over an agreement with 中安國際投資有限公司, which the Petitioner considers to be a “more commercially favourable agreement” as it did not require such security (“Original Investment Agreement”) and that the Investment Agreement was approved and executed without modification.

The legal principle

The principles governing application for appointment of PLs are well established. The applicant must satisfy the Court that (1) there is a good prima facie case for a winding-up order at the hearing of the petition; and (2) in the circumstances of the case, it is right that a provisional liquidator should be appointed.

Since the purpose of the appointment is to protect the assets of the Company, some danger to the assets, not limited to malfeasance, has to be shown. Further, the appointment of a provisional liquidator must be for the purposes of the winding-up. Even if it is established that the assets of the Company are in jeopardy it will still be necessary for the court to consider whether the appointment of provisional liquidators will serve any useful purposes.

Court’s rulings

On the evidence, the Court found that there appears to be bona fide dispute on substantial grounds in respect of the Company’s debt, which was based on a purported loan agreement between the Company, as borrower, and the Petitioner as the lender. The Court was thus not satisfied that the Petitioner had shown a good prima facie case for winding up the Company. In addition, the Court took the view that the Petitioner’s criticisms on the Investment Agreement were directed to the perceived advantages and disadvantages of the same as compared to the Original Investment Agreement, which were matters for the board to decide. It would be wrong for the Court to substitute its opinion to that of the management, or indeed question the correctness of such decision, if bona fide arrived at. There was no suggestion that the directors did not act bona fide and the fact that the Petitioner took a different view on the commercial terms of the Investment Agreement would not render the board’s act to become questionable. It follows that the Petitioner failed to demonstrate that assets of the Group were in jeopardy or that there was an urgent need for independent investigation of the affairs of the Group.

Lastly, the Court opined that there appeared to be no constructive benefits for PLs to be appointed. Rather, disadvantages of such appointment were obvious. For instance, it would hamper the ongoing effort of the Group in implementing the Disposal of Assets and replacement of directors with PLs would require much time and costs. Further, the appointment might possibly jeopardise the Creditors Agreement, and result in the Major Creditors taking their own enforcement actions against the Group’s assets. This would not be in the interest of the creditors as a whole.

Accordingly, the Court dismissed the Summons.

Conclusion

This case serves as a good reminder to the practitioners of the Court’s robust approach when scrutinising application for appointment of PLs, especially on urgent basis, and the Court will take into account all the circumstances when determining whether it is right that a provisional liquidator should be appointed.