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Re China Huiyuan Juice Group Ltd

Judgment Cited authorities 22 Cited in 19 Precedent Map Related
Vincent
Judgment Date19 November 2020
Neutral Citation[2020] HKCFI 2940
Year2020
Judgement NumberHCCW298/2019
Subject MatterCompanies Winding-up Proceedings
CourtCourt of First Instance (Hong Kong)
HCCW298/2019 RE CHINA HUIYUAN JUICE GROUP LTD

HCCW 298/2019

[2020] HKCFI 2940

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 298 OF 2019

________________

IN THE MATTER of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32)

and

IN THE MATTER of China Huiyuan Juice Group Limited （中國滙源果汁集團有限公司）

________________

Before: Hon Harris J in Chambers

Date of Hearing: 4 August 2020

Date of Decision: 19 November 2020

________________

D E C I S I O N

________________


Introduction

1. On 26 September 2019 SDF III Holdings Limited issued a petition to wind-up China Huiyuan Juice Group Limited (“Company”) on the grounds of insolvency. The debt relied on by the Petitioner arises from a default under a convertible bond for the principal amount of HK$1,000,000,000 issued in January 2018. The debt is not disputed.

2. The Company is incorporated in the Cayman Islands and listed on the Main Board of the Hong Kong Stock Exchange. Its business operations are conducted in the Mainland through companies incorporated in the Mainland and held indirectly by the Company through intermediate holding companies incorporated in the British Virgin Islands (“Group”). There is no dispute that the Company is insolvent. The Company seeks an adjournment of the Petition until the end of this year in order to progress a restructuring of the Company’s debt. The Petitioner initially sought an immediate winding-up, alternatively if I am minded to grant an adjournment, appointment of provisional liquidators. As the argument developed the Petitioner accepted that it would not be appropriate to adjourn the Petition and appoint provisional liquidators as the only purpose for doing so would be to take-over the board of the Company’s attempts to restructure its debt, which would be impractical in the circumstances and inconsistent with the current state of the law in Hong Kong on the purposes for which provisional liquidators can properly be appointed [1]. The decision to be made, therefore, is whether to make an immediate winding-up order or grant an adjournment. Determining this issue requires consideration of the legal and commercial complexities of managing the restructuring or liquidation of Chinese business groups, which arise as a consequence of the common structure of such groups.

The Company and its Debt

3. As I have mentioned in the previous paragraph the Company’s assets consist of its ownership of subsidiaries incorporated in the British Virgin Islands. These intermediate subsidiaries own subsidiaries in the Mainland, which in turn own the Company’s underlying assets and carry on the manufacturing and other operations, which constitute the Company’s business and source of revenue. That business involves the manufacture and sale of fruit and vegetable concentrate, puree and juice beverages in the Mainland. The Group’s headquarters are in Beijing. As of 30 September 2019, the Group had over 60 subsidiaries, close to 3,600 employees, 42 production plants and over 200 production lines. Almost 100% of the Group’s revenues are generated by its Mainland subsidiaries. In the period between January and September 2019 its financial position was as follows:

January to September 2019 (RMB)
Revenue 2,151,763,609
Profit before tax (200,300,673)
Total assets
(as of 30 September 2019)		 18,773,804,851
Total liabilities
(as of 30 September 2019)		 10,853,564,012

During this period the Company says that it generated an operating cash flow of about RMB200 million.

4. The Company’s total offshore debt[2] is approximately RMB3.6 billion (principal only) of which approximately 39% arises from defaults and cross-defaults under a series of notes and bonds representing approximately RMB2.32 billion of the offshore debt. The balance of approximately RMB1.29 billion arises under a facility agreement dated 27 March 2017 with the Group’s bankers (“Facility Agreement”). In addition to the Facility Agreement it would appear from the evidence [3] that the Bank of China and the Agricultural Bank of China have provided loans of RMB1.1 billion and RMB1.45 billion respectively to the Company’s subsidiaries in the Mainland, which the Company has guaranteed.

5. The Group’s total onshore debt amounts to approximately RMB4.9 billion (principle only) as at 30 September 2019. Currently, approximately RMB3.3 billion is in default. The majority of the default was due to default in interest payments as opposed to repayment of principle, while some of the default was due to technical or cross defaults. RMB2.26 billion of this sum is the onshore bank debt I have referred to in the previous paragraph.

6. It is the Company’s evidence that the Group’s high level of debt compared to its annual revenue is partly due to the Group’s capital expenditure and investments in sales and marketing for the purpose of business and market expansion in recent years, which has not resulted in the anticipated growth in revenue.

7. The Company has engaged CITIC Securities and ICBC New York branch as financial advisors to assist it in identifying potential investors in the Company with a view to restructuring the Group’s business. The Company has also engaged PwC as financial advisor to assist the Group’s restructuring. However, the Company has not produced a detailed restructuring plan. Its initial evidence about its restructuring efforts is contained in the 2nd affirmation of Zhu Shengqin [4] (a director and the daughter of the major shareholder) made on 31 October 2019, which describes in outline form the way a restructuring of the offshore debt and equity structure of the Company would be effected (which is largely conventional), but there are no details of what this would mean in terms of a return to offshore creditors. So far as the onshore debt is concerned the way it is envisaged this will be dealt with is explained by the Company as follows: The onshore debt will be restructured using out of court bilateral and consensual restructuring arrangements. To effect the restructuring, neither the Company nor the onshore creditors intend to invoke any formal restructuring proceedings under the Enterprise Bankruptcy Law in the Mainland. The term of the Group’s credit facilities may be extended to reduce the regular periodic principal repayments, grace periods in respect principal repayments may be granted or periodic repayments may be reduced to interest payments only for a limited period with a deferral of principal repayment, in order to make more cash available for interest servicing and create a prospect of full or improved recoveries in the foreseeable future. It is also envisaged that there will be interest rate concessions. The current rate of interest may be reduced or, as an alternative, there may be a reduction of interest in combination with a margin ratchet, which allows for the interest rate to float upwards as the credit quality of the Group improves. Ms Zhu says that the Group may also offer debt-for-equity swaps in order to reduce the debt by exchanging a portion of the amount owed by the relevant borrower or issuer for equity in the Group. I assume, although this is not stated, this would be equity in the Company.

8. In her 3rd affirmation, which Ms Zhu made on 28 November 2019, Ms Zhu updates the Court on the progress of the restructuring efforts in the Mainland during November 2019. Ms Zhu subsequently resigned as a director, along with her Father, because of the complaints made by the Petitioner about Mr Zhu’s use of the Company’s assets. Further affirmations updating the court on the progress of the restructuring have been made by another director, Ju Xinyan, the first filed on 14 July 2020 and another shortly thereafter, which is unsworn.

9. In the first of the affirmations Ms Ju informs the court that progress of the restructuring has been interrupted by COVID-19. She also addresses the Listing Committee’s decision (which I deal with in [14]–[16] to cancel the Company’s listing). In respect of the progress of the restructuring she explains that a number of companies, private and state owned, have been in negotiations with the Company about participating in the restructuring. What is proposed is not clearly explained. It would appear that there are three principal companies negotiating acquisition of an interest in the Company: Beijing Financial Holdings Group Co. Ltd, which is stated owned, China Orient Asset Management (International) Holdings Limited (“China Orient”) and Shanghai Wensheng Asset Management Co. Ltd (“Wensheng”). In addition there are a number of other companies, who have apparently expressed an interest in investing, although I assume that their participation would be smaller than the companies to which I have referred. In her 1st affirmation Ms Ju explains that it is proposed that the offshore debt will be restructured through a scheme of arrangement, which involves issue of five-year zero coupon convertible bonds to the holders of offshore debt. These will be convertible into new shares that (if all were to be converted) would represent 46.5% of the anticipated enlarged share capital of the Company. Rather confusingly the details of the change this would cause to the current shareholding profile would appear to suggest that the investors to which I have referred would acquire no interest in the Company. Ms Ju describes this restructuring as a “self-restructuring plan”. If I have understood Ms Ju’s evidence correctly, despite the interests shown by the investors I have referred to, the self-restructuring plan does not involve a fresh injection of capital through subscription by the prospective investors for new shares, at least not at the listed holding company level. What form...

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