Both cases involved petitions by creditors to wind up the companies, being guarantors that defaulted on their respective payment obligations. There was no dispute the companies were insolvent in that they were unable to pay their debts as they fell due and that the respective debts were due and payable.
Both companies applied for the petitions to be adjourned in order to allow time to progress a restructuring. Harris J held that the evidence filed by the companies fell short of the criteria for granting an adjournment and proceeded to grant winding-up orders in both cases.
Time for opposition
Under rule 32 of the Companies (Winding-Up) Rules, a company that wishes to contest a winding-up petition must file evidence in opposition within seven days of the filing of the evidence verifying the petition. In Re Founder Information (Hong Kong) Ltd., Founder Information (Hong Kong) Ltd. (Founder) did not do so.
Views of the creditors
An important consideration in determining an application by an insolvent company to adjourn a petition based on an undisputed debt is the views of the creditors, their reasons for supporting or opposing the petition, and the feasibility of the proposed restructuring (see Hogan Lovells client alert Hong Kong court tells listed companies to do things "properly" if they want to restructure debt).
This will require evidence showing that it would be in the best interests of the creditors if the petition were to be adjourned. The evidence needs to be even more compelling if no creditor opposes an immediate winding-up. Generally, unless there is a substantial body of creditors opposing a petition for good reasons, the court will defer to the petitioners' wishes on the grounds that the petitioners are better placed than the court to determine what is in their best financial interests.
Citing his decision in Re China Huiyuan Juice Group Ltd. [2020] HKCFI 2940 (see Hogan Lovells client alert Managing misconceptions: Hong Kong court issues dual warnings over cross-border insolvency), Harris J. also pointed out that when the court considers potential benefits resulting from a winding-up order, while the normal starting point is to consider potential benefits to the petitioner, disadvantages or unfairness to others may also be relevant.
In Re Lerthai Group Limited, a creditor of Lerthai Group Limited (Lerthai) indicated its intention to oppose the petition but failed to file a notice to appear in the petition hearing, and another creditor initially opposed the petition but later withdrew its opposition. Hence, there were effectively no creditors opposing the winding-up.
In Re Founder Information (Hong Kong) Ltd., none of the independent creditors of Founder filed notice to appear to oppose the petition. Although members of Founder's parent company, Peking University Founder Group Company Limited (PUF Group), who were creditors of Founder, supported an adjournment, they did not confirm so in writing.
The petitioner, in contrast, filed two lengthy and detailed supporting affirmations explaining not only Founder's insolvency, but also why an immediate winding-up order was necessary. The petitioner believed that there was a need to imminently protect Founder's most valuable asset, which was its claim against the PUF Group, and that there may be a real risk of dissipation of such asset in the process of PUF Group's onshore restructuring if winding-up orders were not granted.
The progress of the claim against the PUF Group in the mainland had been stagnant as it was held up by the mainland administrator on the grounds that the documents required notarization. However, Founder provided no update on the status of the claim and did not push for adjudication of the claim as expected of a creditor. None of these issues was discussed in detail in Founder's evidence in opposition either.
Financial viability
The court expects the evidence filed by an insolvent company in support of an application for time to restructure its debt to be consistent with the character of the business and the debt. In order to satisfy the court that a petition should be adjourned to give a company time to address its financial problems, Harris J highlighted that:
It is necessary to adduce evidence explaining how the financial difficulties arose and how they will be addressed not just in the immediate term, but also by explaining how the company will be returned to financial viability in the short to medium term.
In Re Lerthai Group Limited, Lerthai failed to adequately explain its business model, the reasons for entering into a guarantee for the debt, and how it found itself unable to pay its debts. In terms of its restructuring plans, Lerthai proposed to sell some of its properties in the mainland to another developer and pay its debtors with the proceeds. However, Lerthai did not elaborate how it would continue to operate a profitable business after paying off the existing creditors.
The company further explained, without adducing evidence, that its business model involved developing property for sale so the yield on its property portfolio was likely to be less than the interest it was paying on its borrowing and that the market was, and remains, poor. Harris J noted that:
This explanation leaves open the possibility that even after the company pays off its current creditors it will remain insolvent because it will not going forward be able to pay its debt as they fall due and payable to new creditors. The court needs to be satisfied that this is not the case, otherwise the appropriate course is to make an immediate winding-up order.
Requirements must be followed
In Re Founder Information (Hong Kong) Ltd., Founder is a state-owned enterprise ultimately controlled by the Ministry of Finance of the People's Republic of China. In its explanation for its failure to provide the petitioner and the court with sufficient information about its proposed restructuring, Founder argued that as the PUF Group involves the state's interests, the process of the selection of "white knight" investors in its restructuring plan had to be kept strictly confidential.
While Harris J acknowledged the possible difficulties and confidentiality restrictions that Founder faced as a state-owned entity, he criticized Founder for not filing evidence explaining such problems at an earlier stage. He commented that Founder had, "no or insufficient regard to the position of the bondholders or the Hong Kong proceedings once they were commenced in October [2020]."
His Lordship reiterated that:
…Mainland businesses, which choose to carry on business and raise funds in Hong Kong have to take the requirements of the Hong Kong's system seriously. If they do not, they are liable to be wound-up… There are tools such as recognition and assistance that have been developed to assist Mainland companies, Mainland courts and Administrators to address difficulties that may arise at the interface between the systems in the Hong Kong SAR and the Mainland. It is incumbent on Mainland companies and administrators to use them. If they choose not to they leave the Hong Kong court with no choice but to apply the established principles in a conventional manner.
Give me a reason
Taken together, the two decisions serve as a reminder that an insolvent company must demonstrate good enough reasons and put forward compelling evidence when seeking an adjournment of a winding-up petition in order to pursue a restructuring.
The company should explain in detail its business model, the reasons for failing to repay its debts, and what the restructuring plan is. This includes how the company intends to maintain a profitable business in the long run once it has repaid its existing creditors. The court will also be more likely to grant an adjournment if there is a substantial body of creditors opposing the winding-up petition.
Authored by Jonathan Leitch and Nigel Sharman.
