Branded goods
Trinity (Management Services) Limited (Company) is a subsidiary of Trinity Limited (Holdings), a Bermuda-based, Hong Kong listed garment designer, manufacturer and retailer. The company defaulted on its HK$150 million bank facility, guaranteed by Holdings, in November 2019.
On 4 December 2019, the bank served a statutory demand. Discussions about restructuring the loan went nowhere. On 8 December 2020, the bank presented a petition in Hong Kong seeking the winding up of the Company and a petition in Bermuda seeking the winding up of Holdings.
On 8 March 2021, pre-empting the bank's application for a winding-up order in Hong Kong, Holdings applied for the appointment of provisional liquidators in Bermuda. On 26 March 2021, Holdings' application was approved and the petition was adjourned for three months which gave the Company time, with the assistance of the provisional liquidators, to progress a restructuring of Holdings. On 26 June 2021, the petition was adjourned for a further month.
At the time of the substantive hearing of the winding-up petition regarding the Company in Hong Kong, the substantive hearing of the petition regarding Holdings in Bermuda had not yet taken place.
Style guide
Before the Hong Kong court, the Company proposed that the petition be adjourned in order to progress a restructuring, a term which Harris J described as a "misnomer for what is proposed."
Holdings was proposing to sell one of its best known brands, Cerruti 1881, and to pay the bank and other bank creditors in full from the proceeds. No restructuring of the bank debt or other liabilities was under consideration and neither did it appear there was any plan to rehabilitate what Holdings' board recognized was a "problematic business model."
Yet exactly when the petitioning bank would be paid was uncertain. On the Company's own evidence, it was unlikely that any binding agreement for the sale of Cerruti would be signed before the end of the year. It followed that the bank would have to wait until the following year to receive payment.
Harris J observed that the application for the appointment of provisional liquidators in Bermuda appeared to have been motivated by Holdings' wish to adjourn the Hong Kong petition and to bolster its application by offering the appointment of insolvency practitioners on a provisional basis as providing some independent oversight on its sale process.
Akin to a "debtor in possession process" which Hong Kong does not favor, the provisional liquidators' role in Holdings was "more in the nature of an independent financial adviser, who can report to the court its views on the progress of the sale of Cerruti, which is a process managed by the Board."
In this regard, Harris J expressly noted that the Hong Kong court is likely to look carefully in future at the recognition of foreign provisional liquidators "appointed on such carefully circumscribed terms."
Model principles
The court has discretion to adjourn a petition to allow a debtor more time to pay the creditor. What was at issue was the correct approach of the court to determining whether or not to grant an adjournment if the petitioner objects to a debtor being given more time.
Citing Snowden J's decision in Re Maud [2016] Bus LR 1243 (a decision which concerned personal bankruptcy) the court set out the principles, which it noted could also apply in corporate insolvency:
- Insolvency proceedings are class actions designed to secure distribution of an insolvent company's assets pari passu between all creditors, not merely a debt collection process.
- Delay in dealing with a petition is likely to have adverse consequences for creditors generally.
- The court has discretion to adjourn the petition only if there is a reasonable prospect of the petition debt being paid in full within a reasonable period.
- This practice can be viewed either as an exercise of the general discretion of the court to refuse to make a bankruptcy order and/or as an exercise of the discretionary case management powers of the judge to adjourn the petition. It is almost always exercised at the behest of the debtor in situations where the petition is not otherwise opposed.
- A debtor has to present the court with a proposal for repayment which is both precise and credible, for example where a debtor says it will be able to pay its creditor in full within 12 weeks, in order to have any prospect of the court exercising its discretion to adjourn a petition.
Here, the court had been presented with a justification for an adjournment that appeared to join different things, seeking time to pay a debt in full, restructuring a portion of corporate debt and protection of creditors' interests by the appointment of provisional liquidators. The court said the company was really only doing the first. The appointment of liquidators seemed to have been of limited effect in protecting creditors' interests.
The evidence filed by the Company and Holdings did not demonstrate that on the balance of probabilities the banks would be paid in full within a reasonable period. Even those banking creditors aside from the petitioner who had been prepared to agree to a short adjournment were now re-evaluating their stance with one now having elected to take enforcement action in the mainland.
It was reasonable for the court to proceed on the basis that the views of the board of Holdings reflected a desire to protect the enterprise value of the business and not the interests of the banks. The court granted the usual winding up order.
Fashion cents
This is the latest in a series of judgments where the Hong Kong court has criticized Hong Kong-listed companies that are incorporated offshore, carry on business primarily in the mainland and that use tactics which are arguably designed to frustrate the interests of creditors by engineering moratoria on winding-up actions or, once commenced, by seeking to adjourn the petition in favour of some vaguely conceived "restructuring” (see Hogan Lovells publication - A "magical incantation" – Hong Kong court warns it will carefully examine restructuring viability).
The Hong Kong court will in future be far less likely to accept the appointment of short-term provisional liquidators in offshore jurisdictions as evidence of serious restructuring intent. It seems the fashion in the Hong Kong companies court is to get back to basics as far as winding-up proceedings are concerned.
Authored by Jonathan Leitch, Yolanda Lau, and Nigel Sharman.
