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Re Da Yu Financial Holdings Ltd (Formerly Known As China Agrotech Holdings Ltd) (In Liquidation)

Judgment Cited authorities 14 Cited in Precedent Map Related
Vincent
Judgment Date17 October 2019
Neutral Citation[2019] HKCFI 2531
Judgement NumberHCMP2196/2018
Subject MatterMiscellaneous Proceedings
CourtCourt of First Instance (Hong Kong)
HCMP2196A/2018 RE DA YU FINANCIAL HOLDINGS LTD (formerly known as CHINA AGROTECH HOLDINGS LTD) (in liquidation)

HCMP 2196/2018 and
HCCW 325/2014
(Heard Together)

[2019] HKCFI 2531

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2196 OF 2018

______________

IN THE MATTER of DA YU FINANCIAL HOLDINGS LIMITED (formerly known as CHINA AGROTECH HOLDINGS LIMITED) (in liquidation)
and
IN THE MATTER of section 670 of the Companies Ordinance (Cap 622)

COMPANIES (WINDING UP) PROCEEDINGS NO 325 OF 2014

______________

IN THE MATTER of an application under section 186 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32)
and
IN THE MATTER of DA YU FINANCIAL HOLDINGS LIMITED (formerly known as CHINA AGROTECH HOLDINGS LIMITED) (in liquidation)

______________

Before: Deputy High Court Judge William Wong SC in Court
Date of Hearing: 22 July 2019
Date of Decision: 22 July 2019
Date of Reasons for Decision: 17 October 2019

_______________________

REASONS FOR DECISION

_______________________

1. On 22 July 2019, I sanctioned a scheme of arrangement (the “Scheme”) to be entered into between Da Yu Financial Holdings Limited (formerly known as China Agrotech Holdings Limited) (in liquidation) (the “Company”) and its general unsecured creditors (the “Scheme Creditors”) with an undertaking from the Company that all its restructuring and liquidation costs and expenses are subject to taxation. I also granted a permanent stay of the winding-up of the Company. I now give my reasons.

Procedural history

2. On 11 June 2019, under section 670 of the Companies Ordinance, Cap 622 (the “Ordinance”), Mr Justice Harris gave leave for the Company to convene a meeting (the “Scheme Meeting”) of the Scheme Creditors in order that they could consider and vote on the Scheme.

3. On 5 July 2019, the Scheme Meeting took place and an overwhelming majority of the Scheme Creditors present at the Scheme Meeting voted in favour of the Scheme.

4. On 8 July 2019, the Company issued a petition seeking the Court’s sanction of the Scheme (the “Petition”).

5. On 9 July 2019, Mr Justice Harris adjourned the Petition to be heard by me because the Petition was opposed and Mr Justice Harris decided to recuse himself. Mr Justice Harris’ judgment dated 9 July 2019 explained the circumstances leading to his Lordship’s decision to recuse.

Background to the Scheme

6. The Company is:

(a) a company incorporated in the Cayman Islands;

(b) registered in Hong Kong as an overseas company since 4 November 1999, with its principal place of business in Hong Kong;

(c) listed on the Hong Kong Stock Exchange since 14 January 2002, though its shares have been suspended from trading since 18 September 2014;

(d) an investment holding company with operating subsidiaries in the Mainland carrying on the business of, inter alia, trading in fertilizers, pesticides, and other agricultural and non-agricultural resources products;

(e) balance-sheet insolvent; and

(f) in liquidation in Hong Kong since 9 February 2015.

7. The Company’s financial indebtedness includes:

(a) a bank loan of approximately HK$61.9 million;

(b) convertible bonds of approximately HK$540 million;

(c) corporate bonds of approximately HK$57.3 million;

(d) liabilities arising from a financial guarantee provided to some Mainland subsidiaries of approximately HK$198.2 million; and

(e) liabilities arising from a financial guarantee provided to a guarantor of Mainland subsidiaries of approximately HK$812.3 million.

8. It appears that the Company’s only substantial asset is its listing status. As a matter of Hong Kong law, a company’s listing status which carries with it a bundle of contractual rights and obligations under the listing rules and is analogous to a club membership, is a recognised form of asset: Re China Solar Energy Holdings Ltd (No 2) [2018] 2 HKLRD 338 at §39 per Harris J.

9. With a view to realising the Company’s listing status for the benefit of the creditors, the Company’s liquidators have found an investor to pursue a restructuring and resumption of trading of the Company’s shares. The key features of the proposed restructuring include the following:

(a) The Company will acquire the shares in Yu Ming Investment Management Limited (“Yu Ming”) for HK$400,000,000 which the Company will settle in cash on completion of the acquisition.

(b) The Company’s share capital will be reorganised involving a reduction of capital such that new shares will be issued to investors (the “Capital Reorganisation”).

(c) The proceeds of the share subscription will be used to pay for the acquisition of Yu Ming, the Company’s restructuring expenses, and the partial discharge of the Company’s existing indebtedness. The amount of subscription proceeds available for distribution to creditors is HK$80,000,000, and thus the rate of recovery for creditors is about 4.28%.

(d) The partial discharge of the Company’s existing indebtedness will be achieved through parallel schemes of arrangement in Hong Kong and the Cayman Islands.

10. On 16 July 2019, the Cayman court sanctioned the Cayman scheme of arrangement and the reasons were released later: Re China Agrotech Holdings Ltd (Grand Court of the Cayman Islands, 22 July 2019)(the “Cayman Scheme Judgment”).

Opposition to the Scheme

11. A shareholder of the Company, Perfect Gate Holdings Limited (“Perfect Gate”), initially objected to the Petition, but withdrew its objection in the course of the hearing before me. The background to Perfect Gate’s objection is as follows:

(a) On 22 May 2019, in order to effect the Capital Reorganisation,the Company held an extraordinary general meeting (the “EGM”).

(b) Perfect Gate voted against the relevant resolution at the EGM.

(c) However, the chairman of the EGM exercised his power to exclude and disallow Perfect Gate’s votes. If Perfect Gate’s votes were counted, the shareholders’ resolution and Capital Reorganisation would have failed.

12. On 12 June 2019, the Company issued a summons in the Cayman Islands (the “Cayman Application”) seeking a declaration that the shareholders’ resolution passed at the EGM was validly passed.

13. On 26 June 2019, Perfect Gate issued a summons in Hong Kong seeking a declaration that the EGM chairman’s decision to exclude its votes was unlawful and the purported special resolution was unlawful.

14. Although Perfect Gate did not appear by counsel in the Cayman court, it participated in the Cayman proceedings to oppose the Cayman Application by filing written submissions and evidence.

15. On 9 July 2019, the Cayman court granted the Cayman Application and the reasons were released later: Re China Agrotech Holdings Ltd (Grand Court of the Cayman Islands, 16 July 2019) (the “Cayman EGM Judgment”).

16. Nevertheless, Perfect Gate appeared by counsel in Hong Kong to oppose the Petition. The Company, however, argued that Perfect Gate had been estopped from arguing against the validity of the resolution passed at the EGM and that, being a shareholder of an insolvent company, Perfect Gate had no economic interest and thus could not object to the Petition.

17. During the hearing, I drew the parties’ attention to a number of authorities and expressed my preliminary views on Perfect Gate’s objection thus:

(a) Perfect Gate’s status as a shareholder would not preclude its standing to oppose the Petition even if the Scheme did not compromise Perfect Gate’s rights as a shareholder as such. Perfect Gate has sufficient interest to oppose the Petition because the Scheme is part and parcel of a wider restructuring exercise that would significantly dilute Perfect Gate’s shareholding. An analogous authority is Re Bluebrook Ltd [2010] 1 BCLC 338 where Mann J at §26 said:

“The schemes do not involve the mezzanine lenders in the sense of engaging them as parties. They will not bind them, and their legal rights are unaffected. The mezzanine lenders therefore cannot, and do not, complain as persons whose legal rights are being altered by the schemes in some unfair way. However, they are still entitled to object as creditors on grounds of unfairness if the schemes unfairly affect them in ways other than altering their strict rights. The court is exercising a discretion, and as a matter of principle can consider unfairness in that sense, if it is made out. That is the essence of the case of the mezzanine lenders.”

(b) However, the Hong Kong court would recognise and give effect to the Cayman EGM Judgment because Perfect Gate’s participation in the Cayman proceedings to oppose the Cayman Application suggests that it had submitted to the Cayman court’s jurisdiction. The position is neatly summarised in Swiss Life v Kraus [2015] EWHC 2133 (QB). Green J at §61 said:

“ Case law provides illustrations of the sorts of acts of participation in foreign proceedings which amount to submission. These include: pursuing acts as a plaintiff; pleading to the merits of a claim qua defendant without contesting jurisdiction; contesting jurisdiction but nonetheless proceeding further to plead to the merits; agreeing to a consent order dismissing the claims and cross claims; failing to appear in proceedings at first instance but appealing on the merits; taking no part in proceedings and allowing judgment to go against him in default of appearance but later applying to set aside the default judgment on non-jurisdictional grounds.”

(emphasis added)

18. Perfect Gate took time to reconsider its position and then rightly decided to withdraw its opposition to the Petition. In the circumstances, there is no need for this Court to rule on the objections raised by...

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