Introduction

In the recent case of Re Lerthai Group Ltd [2021] HKCFI 207, the Court of First Instance clarified the considerations that the court would take into account when exercising discretion to adjourn a winding-up petition so that the company could restructure its debt. It was held that it is not enough for a company to show that it will be able to pay off those creditors pressing for immediate payment after restructuring; it must also show that it will continue to operate a profitable business or at least pay its debts as they fall due in at least the medium term.

Background

On 29 September 2017, the Industrial and Commercial Bank of China (Asia) Limited (“ICBC”) entered into a facility agreement with LT Commercial Limited (“LT”), for which Lerthai Group Limited (“Company”), a company listed on the Main Board of the Stock Exchange of Hong Kong Limited was jointly and severally liable. The facility was for HK$1,500,000,000. LT and the Company defaulted. Hence, on 19 May 2020, ICBC obtained judgment against LT for over HK$1,700,000,000 (“Debt”).

On 2 July 2020, ICBC issued a statutory demand against the Company in respect of the Debt. A winding-up petition (the “Petition”) was subsequently presented against the Company. The Company applied for an adjournment of the Petition so that it could progress a restructuring of its debts, whereas ICBC sought an immediate winding-up order as it considered the adjournment would be futile due to the significant amount of the Company’s total debt, which was approaching HK$4 billion. The other creditors, who had been given notice to appear on the Petition, did not attended the hearing.

Principles relevant to an application
for time to restructure debt

Referring to his own decision in Re Chase on Development Limited [2020] HKCFI 629, Harris J re-emphasised that the views of the unsecured creditors are important consideration when the court is asked to adjourn a petition by a company in order to allow it to attempt to restructure its debt where the company is clearly insolvent and a petitioner’s debt is undisputed. If the creditors have different views, the court will normally take into account all the circumstances including (i) a qualitative assessment of the number of creditors for and against a winding-up order; (ii) the reasons preferred by the supporting and opposing creditors; and (iii) the feasibility of the proposed restructuring. This approach was further developed in Re China Huiyuan Juice Group Ltd [2020] HKCFI 2940. Harris J explained that the court is exercising a discretion and is required to consider the effect of the proposed order on all relevant persons, including both the debtor and the creditor when making a decision as to whether or not to make the winding-up order. The general proposition is that, when there are no good discretionary grounds to the contrary, an applicant for winding up who has proved its debt and has proved insolvency is entitled to a winding up order. However, the discretion can be exercised in favour of granting a stay where the refusal of a stay would be likely to work a substantial injustice.

Evidence required and court’s analysis

Harris J then went on and explained that the court expects evidence which supports an application requesting for time to allow a company to progress a restructuring to be consistent with the character of the business and the debt. In this case, the Company produced a summary of its group’s property portfolio, a list a principal creditors and debts, a liquidation analysis, and a memorandum of understanding entered into by the Company with a view to selling certain properties of its subsidiaries. The proposed restructuring of the Company was that it would sell some of its most attractive properties to another developer and pay its debtors with the proceeds and it was suggested that the Company was more likely to maximise the value of the properties than a liquidator would.

However, the court was not satisfied with the evidence adduced and it held that for the petition to be adjourned with a view to giving the debtor company the opportunity to restructure its financial position, it would be necessary for the debtor company to adduce evidence explaining (i) how the financial difficulties arose; (ii) how they would be addressed in the immediate term; and (iii) how the company would return to financial viability in the short to medium term. The Company in the present case did not adduce the evidence required and it was suggested that the underlying reason for the Company’s dire financial situation was its disproportionate yield on its property portfolio compared to the interest the Company was paying as well as the poor market outlook. The Court found that this explanation, albeit not being supported by evidence, left open the possibility that the Company would remain insolvent even after paying off its creditor as it would not be able to pay its debts as they fall due in the future. In the absence of any evidence suggesting the contrary, the appropriate course was for the court to make an immediate winding-up order. Therefore, the court deferred to the wish of ICBC, the petitioner, who was in a better position to assess what was in the creditors’ best interest than the court, and made the normal winding-up order.

Conclusion

As a concluding note, the court said that the failure to adduce the necessary evidence in an application requesting for adjournment to allow for restructuring was far too common, and companies should assume that they will be wound up if insufficient evidence is provided. It is, therefore, important for companies facing a winding-up petition to seek adequate advice as to what kind of evidence will satisfy the court should they prefer to restructure their debt.