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Re Guangdong International Trust & Investment Corporation Hong Kong (Holdings) Ltd (In Creditors’ Voluntary Liquidation

Judgment Cited authorities 21 Cited in Precedent Map Related
Vincent
Judgment Date10 October 2018
Neutral Citation[2018] HKCFI 2498
Judgement NumberHCMP2638/2017
Citation[2018] 5 HKLRD 396
Year2018
Subject MatterMiscellaneous Proceedings
CourtCourt of First Instance (Hong Kong)
HCMP2638/2017 RE GUANGDONG INTERNATIONAL TRUST & INVESTMENT CORPORATION HONG KONG (HOLDINGS) LTD (In Creditors’ Voluntary Liquidation)

HCMP 2638/2017

[2018] HKCFI 2498

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2638 OF 2017

________________

IN THE MATTER of Guangdong International Trust & Investment Corporation Hong Kong (Holdings) Limited (In Creditors’ Voluntary Liquidation) ( 廣東國際信託投資（香港）有限公司（在債權人自動清盤中）)
and
IN THE MATTER of section 255 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32)

________________

Before: Hon Harris J in Chambers
Date of Hearing: 10 October 2018
Date of Decision: 10 October 2018

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D E C I S I O N

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The Application

1. In this application the issue before the court concerns the application of conventional liquidation principles to a novel set of facts: If a company in liquidation in Hong Kong has only foreign assets, the liquidator may comply with foreign distribution procedures and distribute the assets pari passu. Guangdong International Trust & Investment Corporation Hong Kong (Holdings) Limited (“Company”) is in liquidation in Hong Kong, with assets in Hong Kong and the Mainland.[1] Under Mainland regulatory rules, the Mainland assets may be distributed only in RMB and only to creditors holding Mainland bank accounts. But some creditors do not have a Mainland bank account. Are the liquidators unable to distribute the Mainland assets?

2. Under section 255 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“CWUMPO”), the liquidators of the Company (“Liquidators”) [2] seek a direction that they be permitted to:

(1) distribute the Company’s cash balances held in a Mainland bank account (“Mainland Account”) to creditors of the Company who have Mainland bank accounts and are willing to accept RMB dividends, on a pari passu basis;

(2) distribute the Company’s assets in Hong Kong to all creditors of the Company (other than those who have received the proposed RMB dividends) on a pari passu basis; and

(3) rely on the notices of assignment (and similar documents) received by the Liquidators for the purposes of determining each creditor’s eligibility to receive dividends.

3. The liquidators’ position is that the order sought is consistent with Hong Kong’s liquidation law and practice, including the principle of pari passu distribution. A draft Order was appended to Mr Ho’s skeleton argument.

Background

4. The Company’s liquidation may be summarised as follows:

(1) The Company is a wholly-owned subsidiary of Guangdong International Trust & Investment Corporation, the Company was incorporated in Hong Kong on 6 June 1989 and went into creditors’ voluntary liquidation on 12 October 1998.

(2) Since the commencement of liquidation, realisations of approximately HK$1,144.3 million have been made.

(3) As at December 2014, dividends paid to preferential and unsecured creditors amounted to approximately HK$998.7 million.

(4) In or about September 2005, dividends in RMB were paid within the Mainland using funds from the Mainland Account held with the Bank of China Guangzhou Yue Xiu Sub-branch (“BOC”).

(5) The remaining assets of the Company consist of:

(a) HK$18 million cash at bank in Hong Kong; and

(b) RMB38.9 million cash in the Mainland Account (“RMB Asset”), equivalent to HK$43.8 million at the exchange rate of RMB1:HK$1.127 (being the rate available from The Hong Kong Association of Banks as at 2 October 2018).

5. The Mainland Account has been operated as follows:

(1) The Mainland Account was opened in March 1999 to facilitate recoveries in RMB. Due to non-compliance with Mainland regulatory requirements, the Mainland Account has been frozen since September 2007.

(2) Before the Mainland Account was frozen:

(a) realisations amounting to about RMB30 million were deposited into the Mainland Account and then remitted to Hong Kong (with the approval of the State Administration of Foreign Exchange (“SAFE”));

(b) funds from the Mainland Account were used to pay some dividends in RMB to creditors within the Mainland on a pari passu basis.

6. While the Liquidators will be able to operate the Mainland Account again (subject to certain conditions explained below), SAFE would not permit the RMB Asset to be converted into Hong Kong Dollars and remitted to Hong Kong for the following reasons:

(1) The RMB Asset represents the proceeds of recovery of advances made by the Company to Dongguan Donghua (Dongsheng) Power Company Limited (“Dongguan Company”) which is a Mainland entity (“Advances”).

(2) From Mainland’s regulatory perspective, the Advances were improper because the Advances were in breach of Mainland regulations, there were irregularities in the registration of the Advances as foreign debts, and the Advances documentation was incomplete.

7. After extensive negotiation with BOC, the Liquidators have obtained BOC’s approval to operate the Mainland Account subject to the following conditions to comply with the Mainland regulatory requirements:

(1) the RMB Asset must be withdrawn in its entirety, such that the Mainland Account balance is zero thereafter (and the Mainland Account closed);

(2) the RMB Asset is remitted to specified bank accounts within the Mainland held by identified creditors;

(3) the Hong Kong court permits the Liquidators to deal with the RMB Asset as proposed;

(4) with the Hong Kong court’s permission, the Liquidators issue an allocation report setting out the list of eligible creditors, their respective dividend entitlements, and their Mainland bank account details.

8. The Liquidators have obtained Mainland legal advice confirming that the above procedures are the only available avenue to access the RMB Asset to pay the Company’s creditors.

9. In light of the distribution conditions attached to the RMB Asset, the Liquidators have sought to obtain the creditors’ views. The creditors’ position can be divided into the following four main categories:

(1) creditors with Mainland bank accounts and willing to accept RMB dividends (about 20%);

(2) creditors willing to accept RMB dividends, but unsure if a Mainland bank account could be successfully opened or a third party’s Mainland bank account could be used (about 30%);

(3) creditors unwilling to accept RMB dividends (including being unwilling to open a Mainland bank account) (about 29%);

(4) creditors failing to respond to the Liquidators (about 21%).

10. The final factual background concerns some creditors’ assignment of their right to receive dividends:

(1) A Form 72 (set out in the appendix to the Companies (Winding-up) Rules (Cap 32H) (“CWUR”)) permits an original creditor to direct the Liquidators to pay dividends to another person (such as an assignee). Certain of the assignees have further assigned their rights to receive dividends to further assignees by way of Form 72 or other transfer documents such as assignment or novation agreements or “modified” Form 72.

(2) Some of the Forms 72 received are in the standard form as appears in CWUR and are thus expressed to be revocable by the original creditors. The standard Form 72 stipulates: “[i]t is understood that this authority is to remain in force until revoked by me/us in writing”. No written revocation has been received.

(3) Regardless of the precise transfer document used, the Liquidators believe that the creditors intended in all cases to divest themselves permanently of their right to receive dividends.

The Principles of Insolvency Distribution relevant to this Application

11. Three principles of insolvency law are relevant to this application, namely:

(1) the principle of collectivity;

(2) the principle that liquidation does not create new substantive rights or destroy the existing ones; and

(3) the principle of pari passu distribution.

12. The principle of collectivity underlying an insolvency process was succinctly summarised by Morgan J in JSC Bank of Moscow v Kekhman:[3]

“A bankruptcy is normally regarded as being in the interests of the creditors as a whole which is, of course, why creditors often themselves petition for the bankruptcy of an insolvent debtor. Bankruptcy can bring various benefits to creditors. One benefit is the orderly realisation of the debtor’s assets and an equal distribution to creditors. The alternative is a free-for-all which will favour some creditors at the expense of other creditors. Thus, if one regards the creditors as a whole, an orderly equal realisation is better than a free-for-all. Normally, the court prefers to avoid a free-for-all of this kind. In Singularis Holdings Ltd v PricewaterhouseCoopers [2014] UKPC 36, at [12], the judgment of the Privy Council explained that the main purpose of a winding up order in England was usually to avoid this kind of free-for-all.”

13. It is a well-established principle that insolvency proceedings are essentially administrative in nature because they do not create or destroy rights or obligations. Lord Hoffmann has explained this on a number of occasions:

“[A] winding up order does not affect the legal rights of the creditors or the company. It only puts into effect a process of collective execution against the assets of the company, for the benefit of all creditors.” [4]

“The purpose of bankruptcy proceedings … is not to determine or establish the existence of rights, but to provide a mechanism of collective execution against the property of the debtor by creditors whose rights are admitted or established. That mechanism may vary in its details. For example, in personal bankruptcy in England, the assets of the bankrupt are vested in a trustee for realisation and distribution to creditors. So the mechanism...

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