Insolvency Law — High Court grants immediate winding up order against Cayman-incorporated company notwithstanding restructuring attempts
In assessing the feasibility of the proposed restructuring, the Court will consider the views of the unsecured creditors. It is not for the company or its provisional liquidators to decide whether it is in the interests of the creditors to accept the proposed restructuring.
Re GTI Holdings Ltd
|Reference:|| HKCFI 3647|
|Court:||Court of First Instance|
|Before:||Linda Chan J|
|Appearance:||Andrew Lau, instructed by Messrs. Tam, Pun & Yipp, for 7 supporting creditors who successfully sought the immediate winding up order against the Company|
|Date of Decision:||8 October 2021|
In the present case, Linda Chan J made the usual winding up order against a Cayman-incorporated company (“Company”), notwithstanding the Company’s attempts to implement a restructuring proposal in respect of all the debts owed to its creditors and a consent summons signed by the Company and the Petitioner to adjourn the hearing for the winding-up petition (“Petition”).
The Company was incorporated in the Cayman Islands in June 2004. Its shares have since 5 October 2005 been listed on the Main Board of The Stock Exchange of Hong Kong Limited (“SEHK”) (stock code 3344).
The Petition was presented on 11 March 2020 following the Company’s failure to satisfy a statutory demand served upon it on 21 January 2020. On 26 May 2020, the Company presented a winding up petition against itself and applied for appointment of provisional liquidators for restricting purpose with the Grand Court of the Cayman Islands. On 28 May 2020, the Cayman Court appointed joint and several provisional liquidators for the Company (“PLs”).
On 24 September 2020, the PLs made an ex parte application in HCMP 1556/2020 to seek recognition of their appointment. By order dated 9 November 2020, Harris J recognised the appointment and allowed the PLs to exercise certain powers in Hong Kong for, inter alia, the purposes of putting forward and implementing a restructuring proposal.
The Petition first came to be heard before Harris J on 13 July 2020, and was adjourned to 27 August 2020. The Petition was further adjourned to 16 November 2020, 1 February 2021, 22 March 2021, 19 July 2021 and finally to 22 November 2021 pursuant to the consent summonses filed by the Company and Petitioner. The adjournments were sought without the consent of the creditors who had given notices to appear in support the Petition (“Supporting Creditors”). Andrew Lau represented 7 of those Supporting Creditors (collectively, “7 Supporting Creditors”) to whom the Company owed HK$21,615,661.47.
By another consent summons dated 11 November 2021, the Company and the Petitioner proposed to further adjourn the Petition for another 5 months and to vacate the hearing on 22 November 2021. No explanation has been provided to the Court as to why the Petition should be further adjourned. Nor has the parties sought the consent of the Supporting Creditors. The Court refused to grant an order in terms of the consent summons.
The Company’s Position
At the hearing on 22 November 2021, the Company submitted that the Petition should be further adjourned as it has already taken substantial steps in trying to implement a restructuring proposal in respect of all the debts owed to the creditors.
Under the proposed scheme, new shares will be issued to the creditors as consideration for extinguishing their claims. New shares will also be issued to all the shareholders by way of a rights issue so as to raise funds to finance the future operations of the Company. In short, the scheme does not envisage any cash payment to the creditors and, to the contrary, the creditors will be asked to invest further money into the Company by subscribing for new shares in the rights issue.
Furthermore, the transactions contemplated by the scheme are subject to the approval of the SEHK and the Securities and Futures Commission. However, as of the hearing, the Company had not been able to obtain the requisite approvals from the regulators.
The Company also noted that they had obtained letters of support for the Company to progress with debt restructuring from 76 creditors with aggregate claim of HK$484 million, representing 48% of the Company’s total liabilities.
The starting point is that an unpaid creditor whose debt is not in dispute is entitled ex debito justitiae to seek an immediate winding up order against the Company.
The burden is on the Company to satisfy the Court that there is a proper basis to further adjourn the Petition. Where, as here, the only grounds in opposition to the Petition are that (1) the Company has been seeking to put forward a proposed restructuring, and (2) PLs have been appointed to assist the Company in implementing such restructuring, the Court will consider the feasibility of the proposed restructuring: Re Lamtex Holdings Ltd  2 HKLRD 177 at §38. In assessing the feasibility or otherwise of the proposed restructuring, the Court will have to take into account the views of the unsecured creditors as they have the right to decide whether the proposed restructuring is one which they are prepared to accept. It is not for the Company or the PLs to decide whether it is in the interests of the creditors to accept the proposed restructuring.
Linda Chan J agreed with Andrew Lau, Counsel for the 7 Supporting Creditors, that the proposed scheme is not feasible in that:
• One of the creditors relied on by the Company is a secured creditor. As the secured creditor is entitled to realise the security and applies the sale proceeds to repay the debt owed by the Company, it is wrong for the Company to include its claim as part of the 48% creditors who are willing to consider the proposed scheme;
• It is clear from the evidence that the SEHK has not indicated that it will approve the listing of the new shares proposed to be issued upon implementation of the scheme, and requires the consideration of the latest audited financial statements of the Company. Without any audited financial statements, it is difficult to see how the Company can satisfy SEHK’s requirements.
• More importantly, it is clear that despite the appointment of the PLs for about 18 months, the financial position of the Company and its subsidiaries have not improved and the Company remained unable to comply with the basic obligation of publishing its audited financial statements.
Finally, the Court is satisfied that the 3 core requirements are satisfied for the Court to exercise its discretion to make a winding up order against the Company.
|Andrew is a Charles Ching Scholar who joined Chambers in 2018. He is experienced in commercial disputes, company/insolvency, construction, equity/trusts, probate, personal injuries, and public law.
Court work aside, Andrew teaches administrative law at the Chinese University of Hong Kong and media law at the Hong Kong Baptist University.
Visit Andrew’s profile for more details.
This article was first published on 10 December 2021.
Disclaimer: This article does not constitute legal advice and seeks to set out the general principles of the law. Detailed advice should therefore be sought from a legal professional relating to the individual merits and facts of a particular case. The photograph which appears in this article is included for decorative purposes only and should not be taken as a depiction of any matter to which the case is related.