Introduction

In Hong Kong, a company can be wound up by way of voluntary or compulsory liquidation. In creditors’ voluntary liquidation, creditors have the right to oversee and participate in the liquidation process, including the appointment of liquidator. However, disputes between creditors may arise and some creditors may want the liquidation process to be conducted with the Court’s sanction. In this recent case of Re Samwell Spare Parts Limited (In Creditors’ Voluntary Liquidation) [2022] HKCFI 2851, the Court revisited the principles for converting a voluntary winding up to a compulsory winding up.

Facts

Samwell Spare Parts Limited (the “Company”) owed Airbus Helicopters China HK Limited (the “Petitioner”) a substantial debt as a result of a partial arbitral award. A special resolution was passed to wind up the Company by way of creditors’ voluntary liquidation. By the time of the creditors’ meeting, another camp of connected creditors (the “Connected Creditors”) whose debts constituted over 50% of the total amount appointed the liquidator of their choice (the “Liquidator”).

The Liquidator found that there were potentially unfair preference payments to some of the Connected Creditors, but did not pursue further investigations citing that he did not have sufficient funds. The Liquidator also experienced some delay retrieving the Company’s books and records and other documents.

The Petitioner was dissatisfied with the conduct of liquidation and complained that it was not pursued by a liquidator that is not only independent, but is seen to be independent. The Petitioner applied to convert the creditors’ voluntary winding up to compulsory winding up. It was not disputed that the Petitioner is the major independent creditor despite the parties’ disagreement as to who the majority creditor was after the further costs award ordered by the arbitral tribunal in favour of the Petitioner.

The Court’s findings

Recorder Rachel Lam SC (the “Recorder”) applied the relevant legal principles governing conversion as set out in Re STX Pan Ocean (Hong Kong) Co Ltd (in liq) [2014] 5 HKLRD 581 to the facts and found that:

1.       The Petitioner is indisputably the majority independent creditor and its view is clearly in favor of a compulsory winding up.

 

2.       There are various matters that require further investigation and it was not ideal to leave it in abeyance due to a lack of funding.

 

3.       The views of the majority by number (i.e. the Connected Creditors) are not decisive and the Court will accord lesser weight to them in view of the possible unfair preference transactions.

 

4.       Whilst there is insufficient evidence to suggest that the Liquidator has been lacking independence, the present arrangements, in particular the Liquidator’s decision not to proceed with further investigations, leave a substantial independent creditor with a strong and legitimate sense of grievance.

Infeasibility of alternative remedy

One of the opposition raised by the Connected Creditors is that there is another route or remedy available to the Petitioner, namely the removal or replacement of the Liquidator.

The Recorder considered that such alternative is not truly available to the Petitioner. First, it is impossible for the Petitioner to convene a meeting under section 244A of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) to consider the removal of liquidator, which requires a resolution to be passed by a majority in number and three-fourths in value of the creditors present and voting on the resolution. Secondly, as there were insufficient ground or evidence suggesting that the Liquidator was in fact biased or partial, the Court would not replace the Liquidator under section 252 of Cap. 32. Therefore, the Petitioner was justified in not pursuing these theoretically available alternative remedies.

Accordingly, the Recorder ordered that the Company be wound up by way of compulsory winding up.

Takeaway

This case illustrates that in deciding whether to convert a voluntary winding up to a compulsory one, the Court would take into account a number of factors, rather than taking the creditors’ wishes by simple count of heads or debt amount. Further, the Court is likely to accord less weight to creditors who are reasonably suspected to be involved in voidable transactions. Whilst the liquidator’s lack of independence can be a ground for conversion, it is not a requirement.

 

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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