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Re China Beidahuang Industry Group Holdings Ltd

Judgment Cited authorities 8 Cited in Precedent Map Related
Vincent
JurisdictionHong Kong
Judgment Date12 December 2023
Neutral Citation[2023] HKCFI 3232
Subject MatterMiscellaneous Proceedings
Judgement NumberHCMP397/2023
Year2023
HCMP397/2023 RE CHINA BEIDAHUANG INDUSTRY GROUP HOLDINGS LTD

HCMP 397/2023

[2023] HKCFI 3232

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 397 OF 2023

________________________

IN THE MATTER OF China Beidahuang Industry Group Holdings Limited
and
IN THE MATTER OF Sections 670, 671, 673 and 674 of the Companies Ordinance (Cap. 622)

________________________

Before: Hon Linda Chan J in Court
Date of Hearing: 29 November 2023
Date of Judgment: 29 November 2023
Date of Reasons for Judgment: 12 December 2023

________________________

REASONS FOR JUDGMENT

________________________

1. At the hearing of the petition dated 22 November 2023 (“Petition”), this Court sanctioned a scheme of arrangement between China Beidahuang Industry Group Holdings Limited (“Company”) and its creditors with unsecured claims (“Creditors”). These are the reasons for my judgment.

A. BACKGROUND

A1. The Company

2. The Company was incorporated in the Cayman Islands on 6 September 2000. It has since 30 November 2000 been registered as an oversea company[1] and a registered non-Hong Kong company[2]. The Company’s principal place of business has been in Hong Kong. Its shares have since 16 January 2001 been listed on the Main Board of The Stock Exchange of Hong Kong (“SEHK”)[3].

3. The Company is an investment holding company. Its subsidiaries engage in the business of sales and distribution of wine and liquor, trading of food products, construction and development, logistic facilities, office facilities renting, financial leasing, and flotation selection of non-ferrous metals mines and sales of mineral products[4].

4. The Company has been cashflow insolvent in that as at 31 December 2022, it had current assets of HK$8.3 million and current liabilities (exclusive of interest) of HK$553.54 million[5]. The Company had received statutory demands from creditors demanding payment of over HK$82 million but has not been able to comply with them. This led to winding up petitions being presented against the Company in Hong Kong on 9 January 2023 and in the Cayman Islands on 30 May 2023[6].

5. The unsecured debts owed by the Company as at 31 December 2022 may be classified as follows[7]:

Nature Amount Outstanding (HK$) Percentage
Bonds 522,042,832.77 74.8%
Guarantees 78,782,694.82 11.3%
Intercompany Debts 74,263,158.13 10.6%
Service / Working capital 12,886,156.92 1.8%
Professional Fees 6,840,411.40 1.0%
Remuneration, Wages 3,004,521.80 0.4%
Total 697,819,775.84 100%

A2. The Restructuring

6. In view of its financial position, the Company (assisted by its financial adviser) has been exploring ways to restructure its debts including engaging in discussions with potential investors.

7. In October 2022, China Dynamic (Hong Kong) Ltd (“Investor”) expressed interest in participating in a restructuring of the Company’s debts and injecting new fund into the Company for that purpose. A legally binding term sheet was signed. The parties had agreed on the terms of a restructuring agreement (“RA”) and the finalised draft was provided to SEHK alongside with a draft announcement on the RA as the latter requires approval by SEHK. The Company considers that the RA contains price sensitive and, therefore, should only be signed after SEHK approves the draft announcement[8].

8. The restructuring consists of 2 main parts[9]:

(1) “Subscription”: the Investor will subscribe for 850,000,000 new shares in the Company representing 11.24% of its enlarged issued capital for HK$85 million (“Subscription Proceeds”). The Subscription Proceeds will be applied to pay the “Initial Cash Payment” under the Scheme in the amount of HK$45 million; professional fees of HK$20 million and Scheme Costs of HK$8 million[10], and the balance will be used as working capital of the Company[11].

(2) “Scheme”:Under the Scheme,the Creditors are those who have unsecured claims against the Company (“Claims”) as at the date when the Scheme becomes effective (“Effective Date”)[12] whereupon their Claims will be compromised and discharged. The conditions precedent for the Scheme to become effective include (a) the Scheme being sanctioned by the court; (b) the sanction order having been filed at the Companies Registry; and (c) the Initial Cash Payment is received by SchemeCo within 30 days of Registration Date[13].

9. In other words, for the Scheme to become effective, it is incumbent upon the parties having signed and completed the SA, follow by the Company or the Investor transferring HK$45 million out of the Subscription Proceeds to SchemeCo within 30 days after registration of the order sanctioning the Scheme.

A3. Convening Hearings

10. By originating summons filed on 10 March 2023, the Company applied for leave to convene a meeting for its creditors to consider and, if thought fit, approve a proposed scheme then proposed by the Company (“Draft scheme”).

11. At the convening hearing on 31 July 2023, this Court considered that there were a number of issues in the Draft scheme (and the corresponding description and in the draft composite document) which required to be addressed and rectified:

(1) Scheme Shares Issues: The Scheme Shares should not be described as part of the “Scheme Assets” as they are not part of the assets to be transferred by the Company to SchemeCo.

(2) The Scheme Shares should not be issued to SchemeCo. Instead, the Scheme Shares should be issued to the Creditors directly unless the Creditors elect to receive cash in lieu of Scheme Shares.

(3) Scheme Assets issue: The Draft scheme did not stipulate the time limits during which the Scheme Assets are to be realised and the proceeds distributed to the Creditors. This was undesirable as it means that the Creditors might have to wait a period before they would receive any distribution from the sale of Scheme Assets. The Company was required to include a long stop date for realisation of Scheme Assets and a time line for distribution of the proceeds to the Creditors in the Draft scheme.

(4) Related Parties Debts Issue: The Draft scheme was directed at compromising and discharging the debts owed to the bondholders. A very substantial part of debts owed to related parties in the aggregate amount of HK$98 million were excluded from the Draft scheme (“Related Parties Debts”). The Company sought to justify the exclusion of the Related Parties Debts on the ground that these parties would withhold demands for payment until the Company had the means to pay. However, the fact remained that the creditors of the Related Parties Debts were unsecured creditors with the same rights against the Company as the bondholders, and they would be entitled to receive full repayment of their debts after the Company restored to solvency. There was no reason why these creditors should be treated more favourably than the bondholders (none had been suggested).

(5) More importantly, part of the consideration which the bondholders would receive under the Draft scheme are new shares in the Company. The existence of the Related Parties Debts in the accounts of the Company would diminish the value of the shares to be issued to the bondholders. It would also affect the solvency of the Company.

(6) Disputed Interest Issue: The Company did not agree with the claim made by Central China Dragon Growth Fund SPC (“Fund”), to the extent of HK$226,529,716, which represented default interest (30% p.a.) on the outstanding principal plus accrued interest (which had already included contractual interest at 10% p.a. plus default interest at 30% p.a.) on the ground that it was a penalty (“Disputed Interest”) and the entire amount had not been included in the Company’s audited accounts for 2021 and 2022. The Disputed Interest was excluded from the Draft scheme. This was unsatisfactory. In the absence of any agreement from the Fund to waive the Disputed Interest, it would be open to the Fund to claim such Interest after the Draft scheme became effective. Not only would this affect the solvency of the Company, it would also be unfair to the other Creditors whose claims inclusive of interest would be compromised and discharged under the Draft scheme.

(7) China Vered Issue: China Vered Financial Holding Company Ltd (“China Vered”), a shareholder of the Fund, through its solicitors, Messrs. Ashurst, raised a number of complaints about the Company and the Draft scheme, and contended that it was entitled to vote against the Draft scheme. Some (but not all) of the complaints were addressed by the Company in correspondence.

(8) Claims governed by PRC law: Some of the Claims are governed by PRC law. Applying the Gibbs rule[14], the Draft scheme would not bind them unless they submit to the jurisdiction by inter alia voting at the Scheme Meeting[15]. The Company should approach the relevant Creditors to see if they would participate in the Scheme.

(9) Liquidation analysis issue: No liquidation analysis on the estimated recovery to Creditors was provided in the draft composite document. This was unsatisfactory as such analysis was the comparator for the Creditors to consider whether or not to approve the Draft scheme.

12. The Company was required to address and rectify the above issues and, where appropriate, make further disclosures in the draft composite document. The application was adjourned to another convening hearing on 18 August 2023....

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