Introduction

In the recent case of Re Hua Han Health Industry Holdings Ltd [2021] HKCFI 793, the Court considered in detail whether a regulating order is appropriate and who should be appointed as liquidators and members of the committee of inspection.

Background

The Company is incorporated in the Cayman Islands and listed on the Main Board of the Stock Exchange of Hong Kong Limited (the “Stock Exchange”). In May 2019, a shareholder of the Company issued a summons seeking the appointment of provisional liquidators against the Company. The joint and several provisional liquidators (the “JPLs”) subsequently filed a report (the “Report”) to the Court which showed that the Company was massively insolvent with indebtedness of over HK$1.8 billion. Satisfied that there was no realistic prospect of restructuring, the Court made a winding-up order. The JPLs applied for an order (the “Application”) seeking the following:

1.      a regulating order under section 227A of the Companies (Winding Up and Miscellaneous Provision) (Cap. 32) (the “CWUMPO”) to dispense with the first meetings of the creditors and contributories of the Company;

2.      appointment of the JPLs as the joint and several liquidators of the Company; and

3.      establishment of a committee of inspection comprising the four major creditors of the Company which collectively hold over 99% of the total creditors’ claims.

Some of the Company’s contributories (the “Opposing Contributories”) opposed the Application.

Legal principles

1.    Regulating order

Pursuant to section 227A of the CWUMPO, where the Court on application by the official receiver, provisional liquidator, liquidator or any creditor after the presentation of a winding-up petition is satisfied that by reason of the large number of creditors or contributories or for any other reason the interest of the creditors so requires, it may, after making a winding-up order, order that the winding-up of the Company be regulated specially by the Court.

A regulating order is usually made where it is impractical to hold a first meeting due to the large number of creditors or contributories: Re Hsin Chong Construction Company Limited [2021] HKCFI 559. In deciding whether to dispense with the requirement of holding a first creditors’ meeting, the Court would usually take into account the costs required for a company to hold a first creditors’ meeting: Re Guangnan (KK) Supermarket Ltd [2002] 1 HKLRD 348. Since section 227A of the CWUMPO is drafted in very wide terms, the Court is empowered to make regulating orders for any reason the interest of the creditors so requires, so long as it is satisfied that it is right in the circumstances to do so.

2.    Appointment of joint and several liquidators

As to the appointment of liquidators, in the usual case where there is a dispute between creditors and contributories on the choice of liquidators, and the dispute is to be resolved by the Court, the Court would usually have regard to the wishes of the independent creditors  

The appointment of a committee of inspection, on the other hand, is a matter for the discretion of the Court. It is not necessary to ascertain the wishes of the creditors or contributories.

Court’s rulings

1.    Regulating order

On the facts, the Court found that the Application should be granted in the circumstances. As shown in the Report, the Company was insolvent with a massive debt of over HK$1.8 billion and it would clearly be impractical to hold the creditors’ and contributories’ first meetings bearing in mind the very large number of contributories, the prohibitively high cost associated with summoning such meetings and the lack of financial resources of the Company. The Court also agreed with the JPLs that confidential sensitive information about their investigations regarding the winding-up of the Company, which includes alleged misappropriation of assets in China, may be leaked if such meetings are to be held.

Further, contrary to the Opposing Contributories’ contention, the Court found that the JPLs have duly complied with the Court’s order to give all interested parties notice of the Application. Although a small number of purported shareholders opposed the Application, the Court accorded little weight to their opposing views on the basis that (i) the views of creditors in insolvent liquidations take precedence over that of the contributories; and (ii) the majority of the purported shareholders who opposed the Application could not be substantiated and no reasonable basis of opposition was provided. The Court also expressed the view that the conduct of some of the shareholders and contributories was questionable and their actions were not motivated by a genuine wish to enable professionals to conduct an investigation into the insolvency of the Company and the suspected wrongdoing.

2.    Appointment of liquidator and committee of inspection

Given the massive debt owed by the Company, the Court considered that unless there is good reason not to do so, the Company should be wound up and the creditors’ preferred liquidator, i.e. the JPLs, should be determinative. Further, since the JPLs have already conducted a substantial amount of investigation work for around 10 months and are experienced professionals, the Court found in favour of the JPLs and appointed them as the joint and several liquidators.  Meanwhile, the Court accepted that it would be fair and just that the committee of inspection comprise the four major creditors of the Company, which collectively hold more than 99% of the total creditors’ claims.

Conclusion

The special circumstances of this case has justified the making of a regulating order. The use of a regulating order has to be based on well-established principles. In the case of an insolvent liquidation, the interests of creditors are of paramount importance and their views would carry substantial weight.