18 March 2021
Companies planning to resist a winding up petition and seek an adjournment on the ground of progressing a restructuring plan are reminded to produce timely and sufficient evidence in support of their application for an adjournment, in particular evidence of creditors’ support, provides the Hong Kong Companies Court (Court) in Re Founder Information (Hong Kong) Limited [2021] HKCFI 311.
Background
Founder Information (Hong Kong) Limited (Company) was the guarantor of a series of floating rate bonds due 2020 issued by Kunzhi Limited (Bonds). Following the failure of the Company and Kunzhi Limited to satisfy a demand for repayment of the principal of the Bonds and the interest accrued thereon (Debt), a holder of the Bonds (Petitioner), who was also the majority (54%) creditor of the Company, issued a winding up petition against the Company (Petition) on the ground of insolvency.
The Company did not dispute the Debt, but opposed the Petition and sought an adjournment of the hearing of the Petition to provide more information of a proposed restructuring plan for the Company and its ultimate owner, Peking University Found Group Company (PUFG), which is a PRC state-owned enterprise.
Decision
Referring to a well-established body of case law, including the decision of Re China Huiyan Juice Group [2020] HKCFI 2940 (considered in our previous blog post here), Harris J reiterated the principles which guide the Court in determining applications for adjournment of winding up petitions in order to progress a restructuring of debts. In balancing the competing claims, the Court will consider:
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a qualitative assessment (as opposed to a count) of the number of creditors supporting and opposing the winding up petition;
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the reasons proffered by the supporting and opposing creditors;
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the feasibility of the restructuring plan;
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the possible benefit of a winding up order to the creditors. It will not grant a winding up order which serves no useful purpose; and
In this case, the Company failed to prove by evidence to the satisfaction of the Court sufficient details of the restructuring plan and the practical difficulties the PRC administrators of PUFG encountered which gave rise to the necessity of an adjournment. The Court suggested that the Company could and should have filed such evidence much earlier.
Further, the Court had little visibility on the views of the Company’s creditors opposing the Petition, as none of the Company’s creditors filed notice to appear and express their views on the Petition and the adjournment. Significantly, the Court accepted that the Petitioner, being a majority creditor of the Company, was “far better placed to determine what is in the best financial interests of the bond holders” than the Court.
Accordingly, the Court rejected the application for adjournment and made an order winding up the Company.
Comments
This decision highlighted the importance of the timeliness and sufficiency of evidence of the proposed restructuring plan and creditors’ views on it when one seeks to adjourn a winding up petition in furtherance thereof. Many recent cases in this regard have involved Mainland companies. Harris J particularly remarked that “Mainland businesses, which choose to carry on business and raise funds in Hong Kong, have to take the requirements of Hong Kong’s system seriously.” The Court also acknowledged confidentiality requirements to which state-owned enterprises may be subject. Thus, generally, it is prepared to give more leeway to state-owned enterprises when assessing their applications for adjournment, on the premise that such constraints and any other practical difficulties of dealing with the winding up petition are addressed properly at an early stage.
Further, as the Court is often guided by the views of creditors, it is always prudent for insolvent companies undergoing on a rescue or restructuring process to keep creditors fully informed, so as to lobby the creditors’ support for the continuance of business and to encourage them to put in evidence of such support at an early stage.
For further information, please contact:
Gareth Thomas, Partner, Herbert Smith Freehills
gareth.thomas@hsf.com
