Introduction

In the recent case of Re Carnival Group International Holdings Ltd [2022] HKCFI 2668, our firm succeeded in representing the Petitioner in winding up Carnival Group International Holdings Ltd (the “Company”), a Bermuda company listed on the Stock Exchange of Hong Kong (“SEHK”). Notably, the Court clarified and confirmed its jurisdiction in winding up a foreign company. Further, it ordered that the directors of the Company (the “Directors”) be joined as respondents for the purposes of costs, opening up the possibility that directors may be personally liable for the costs of the petitioner and supporting creditors where there is no meritorious ground for the company to oppose a petition.

Background

The Company was incorporated in Bermuda and registered under Part XI the former Companies Ordinance. Its shares are listed on SEHK with stock code being 996. The Company was an investment holding company and holds subsidiaries incorporated in Hong Kong, the Mainland and the BVI (collectively, the “Group”). The Group was principally engaged in theme-based leisure and consumption business in the Mainland.

The Petitioner is a holder of senior unsecured bonds issued by the Company with an outstanding principal sum of over HK$30 million (the “Debt”). The Petition was supported by 99 other creditors, who are immigration bondholders or unsecured creditors, with an aggregate amount of debts over HK$878 million (the “Supporting Creditors”).

The Company did not dispute the Debt and also admitted that it was unable to pay its debts generally. However, in previous hearings, it opposed to the Petition on the ground that there had been ongoing restructuring effort in respect of its indebtedness which, if implemented, would result in a higher return to the unsecured creditors. Hence, the Company had repeatedly sought and obtained adjournments, which caused a delay of 2.5 years in the winding-up proceedings.

Eventually, the purported restructuring efforts of the Company had come to nothing. In fact, the Company had not made any real effort in pursuing the restructuring proposals.

 

Court’s ruling

Directors’ duties: potential breaches

Against this backdrop, the first question the Court raised was: whose interest was the directors of the Company trying to protect?  Since the commencement of the winding-up proceedings, the Company had resisted the Petition based on restructuring only. However, the Company continued to oppose the Petition even after the restructuring of the Company proved to be fruitless. This raised concern as to whether the Directors had properly carried out their duties to the Company.

The Court highlighted that where a company is insolvent, the directors are under a duty to consider whether there is any reasonable prospect of the company avoiding going into insolvent liquidation. If there is no viable restructuring proposal which is supported by a majority of its creditors, it would be incumbent upon the directors to take step to put the company into liquidation. This duty is enshrined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32) and accords with the principle that where a company is insolvent or of doubtful solvency, the interests of the company are in reality the interests of the creditors as it is the creditors’ money which is at risk.

In the present case, the Court held that it must be clear to the Directors, who had been discussing restructuring proposals with the institutional creditors, that there would be no reasonable prospect of the Company being able to implement any proposals to compromise its debts such that its liquidation was inevitable. However, the Directors continued to oppose the Petition and incurred substantial legal costs in opposing the Petition at the outset. As we will explain further below, it was on this basis that the Court directed that the Directors be joined as respondents for cost purpose.

Jurisdictional challenge:
belated and unmeritorious 2^nd core requirement argument

With the fall of the purported restructuring plan, the Company opposed the Petition on a single ground: arguing that the 2^nd core requirement for winding up a foreign company was not satisfied. It was contended that the Company had no meaningful assets in Hong Kong and there was no possibility of benefits to the Petitioner and the Supporting Creditors if the Company was wound up.

First things first, the Court reminded that any genuine jurisdictional challenge should have been raised at an earlier stage. If the Company had decided not to take issue with the averments in the Petition by way of its affidavit evidence, it would not be open for the Company to raise it at such a late stage (i.e. 2.5 years after the Petition was presented) as the “last ditch effort to defeat the Petition”.

In any event, the Court held that even if the Company had raised such an argument, it would have no merit. The Court followed the ruling in the recent Court of Final Appeal case of Shandong Chenming Paper Holdings Ltd v Arjowiggins HKK2 Ltd [2022] HKCFA 11 that the test of the 2^nd core requirement has been set at a “low threshold”. The observations made by the Honourbale Madam Justice Linda Chan in the case of Re Up Energy Development Group Ltd [2022] 2 HKLRD 993 equally applied to this case.

The Court had no difficulty in finding that the Company was well-connected to Hong Kong and the Petitioner would have enjoyed at least “some benefits” by winding up the Company. As illustration:

1.       The Company was a registered company and had a principal place of business in Hong Kong. It listed its shares on SEHK. It had utilized and benefited from the Hong Kong’s financial markets and system, not least in being able to raise funds through the issuance of shares and bonds. Most of its directors were holders of Hong Kong identity cards with residence in Hong Kong and had Hong Kong residential address.

 

2.       The liquidation analysis produced by the Company suggested that on a conservative estimate, there would be a return in the range of 3.6% to 10.5% to the bondholders of the Company. Despite the low percentage, this would suffice as “benefit”.

 

3.       According to the Company’s Annual Report for the period ended 2019, the Company had total assets of HK$4.6 billion[1]. This showed that the Company had substantial assets which can be realised for the benefit of unsecured creditors.

 

4.       Further, the Company had made substantial payments to its legal advisers and financial advisers for the past 2.5 years. Upon a winding up order made against the Company, these payments might be held as void and liable to be returned to the Company, and be distributed to the creditors.

 

5.       The Company suggested, inter alia, that all operating subsidiaries were “valueless” as most of substantial assets in the Mainland would go to secured creditors. In view of (2) above, this definitely cried out for investigation by the liquidators why billions of dollars’ worth of asset were gone, for the benefit of the unsecured creditors, including the Petitioner! (Re Crigglestone Coal Co Ltd [1906] 2 Ch 327)

Last but not least, the Company alleged that there were “cross-border insolvency hurdles” in the sense that the Company would not be able to access to and gain control of the assets in the Mainland. The Court found this contention to be “wholly without basis”:

1.       Following Re NewOcean Energy Holdings Ltd [2022] HKCFI 2501, it is a matter of fact as to whether the current directors would cooperate with the liquidators in passing control of the direct and indirect subsidiaries. There was no evidence showing that they are unwilling to do so. In the unfortunate event that the directors were unwilling to do so, the liquidators could apply to the Hong Kong and/or Bermuda Court for appropriate reliefs (if necessary).

 

2.       Further, the recent insolvency cooperation mechanism between the Mainland and Hong Kong could assist Hong Kong liquidators to access Mainland assets or the Company’s indirect shareholdings in the Mainland subsidiaries. In this case, although some of the main assets and developments projects were located in Beijing and Shandong, they were indirectly held by subsidiaries in Shenzhen or Shanghai (two of the three pilot areas), which, in turn, were wholly owned by Hong Kong subsidiaries. Once the liquidators take control over these Hong Kong subsidiaries, they can have access to the Mainland subsidiaries and the development projects.

 

After all, the Court simply cannot forget to remark that Hong Kong liquidators have ample experience in dealing with liquidation of foreign companies listed on SEHK. It has been renowned that the entire liquidation of Yung Kee Holdings Ltd (a BVI company) has been carried out by liquidators in Hong Kong and supervised by Hong Kong court without any difficulty.

Order for costs

As mentioned above, the Directors owed a duty to cause the Company to be wound up so as to protect and safeguard the interests of the unsecured creditors once they became aware that the restructuring proposals would not come to fruition. Therefore, the Court was preliminarily of the view that the Directors to pay the costs of and occasioned by the Company’s opposition to the Petition from the time when they became aware that the restructuring proposals would not be implemented.

Commentary and takeaway

Since Re China Huiyuan Juice Group Limited [2020] HKCFI 2940, the Court somehow recalibrated the Hong Kong winding-up jurisdiction and its application to an offshore incorporated, Hong Kong-listed entity. This in reality has posed confusion and difficulties to the listed company’s important stakeholders: when a listed company took benefit of access to Hong Kong’s financial system to raise billions of dollars, its creditors in Hong Kong lost the proper avenue to seek relief even if the listed company is in financial distress.

The recent cases, i.e. Shandong Chenming Paper Holdings Ltd v Arjowiggins HKK2 Ltd [2022] HKCFA 11, Re NewOcean Energy Holdings Ltd [2022] HKCFI 2501, Re Up Energy Development Group Ltd [2022] 2 HKLRD 993 together with this decision appear to form a new line of authority, which not only affirms the low threshold of the 2^nd core requirement in winding up foreign companies, but also demonstrates how the 2^nd core requirement can be easily met.  

On the other hand, this case sends a clear message to all directors of companies to carefully consider whether there is any merit in opposing petitions. Where a company is insolvent, its directors should always act in the interests of its creditors.

 

For enquiries, please feel free to contact us at:

E: insolvency@onc.hk                                                        T: (852) 2810 1212 W: www.onc.hk                                                                    F: (852) 2804 6311 19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2022