HONG KONG SPECIAL ADMINISTRATIVE REGION.docx
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HONG KONG SPECIAL ADMINISTRATIVE REGION.docx
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HONGKONGSPECIALADMINISTRATIVEREGION
HCCW533/2008
INTHEHIGHCOURTOFTHE
HONGKONGSPECIALADMINISTRATIVEREGION
COURTOFFIRSTINSTANCE
COMPANIESWINDINGUPPROCEEDINGSNO.533OF2008
____________
INTHEMATTERofPEACEMARKPRODUCTIONLIMITED
and
INTHEMATTERofTHECOMPANIESORDINANCE,CAP.32
____________
Before:
DeputyHighCourtJudgeToinChambers-OpentoPublic
DatesofHearing:
11and13November2008
DateofDecision:
13November2008
______________
DECISION
______________
Background
ThisisanapplicationbytheprovisionalliquidatorsofPeaceMark(Holdings)Limited(“PMHoldings”)foravalidationorderundersection182oftheCompaniesOrdinance,Cap32inrespectofthesaleofcertainassetsofPMHoldings,includingthoseofoneofitssubsidiaries,PeaceMarkProductionLimited(“PMProduction”).
1.On10September2008,ABNAMROBankNV(“ABN”)presentedpetitionsforthewindingupofPMHoldingsandoneofitssubsidiaries,PeaceMarkLimited(“PMLimited”).Onthesameday,MrSuttonandMrFok,bothofFerrierHodgsonLimited,wereappointedprovisionalliquidatorsofPMHoldingsandPMLimited(“ProvisionalLiquidators”)pursuanttotheorderofMadamJusticeKwan.
2.PMHoldingsistheparentcompanywithagroupofover207subsidiaries(“Group”).ItwasincorporatedinBermudaon24December1991.ThroughitsimmediatesubsidiaryincorporatedintheBritishVirginIslands,PeaceMark(BVI)Ltd(“PM(BVI)”),itholdsfourlinesofsubsidiaries,includingPeaceMarkDistribution&MarketingLimited(“PMMarketing”)andPMProduction.AnimportantsubsidiaryunderPMMarketingisPMLimitedwhichwasincorporatedinHongKongon24May1983.ItperformstheGroup’streasuryfunctions.InadditiontothefourlinesofsubsidiariesunderPM(BVI),PMHoldingshasadirectandwhollyownedsubsidiary,A-AUnitedLimited(“A-AUnited”)whichownsSincereWatch(HongKong)Limitedanditssubsidiaries(“SincereGroup”).TheSincereGroupistheGroup’smostvaluableassetandoperatesasanindependentbusinesswithintheGroup.
3.On22June2007,PMHoldingsenteredintoaHK$1,200milliontermandrevolvingfacilityagreementbetweenPMHoldingsasborrowerandABNasagentand26financialinstitutions(“SyndicatedLoan”).Italsoenteredintovariousbilateralfacilitiesarrangementsinfavourofitssubsidiarieseitherasborrowerorasguarantorguaranteeingtherelevantsubsidiaries’obligationsundervariousagreementsenteredintobythemwiththirdpartylenders.Inaddition,onvariousdates,PMHoldingsasborrowerenteredintovarioustradefinancefacilitieswiththirdpartylenders.PMHoldingsisinsolventowingcreditorsoverHK$5billion.PMLimitedisalsoinsolvent,owingcreditorsoverUS$202.4million.
4.On1February2008,A-AUnitedasborrowerenteredintoaUS$500milliontermfacilityagreementwiththeSingaporebranchofABNasagentandanumberoffinancialinstitutions(“BridgeLoan”).TheBridgeLoanissecuredovertheassetsoftheGroup.ThelendersoftheBridgeLoanareABN,theHongKongbranchofBNPParibas(“BNP”)andtheHongKongbranchofINGBankNV(“ING”).ABN,BNPandINGarealsolendersundertheSyndicatedLoan.PMHoldingsandPMLimitedareguarantorsoftheBridgeLoan.
5.PMProductionholdsanumberofsubsidiarycompanies,includingMasterDynamicLimited(“MasterDynamic”),acompanyincorporatedintheBritishVirginIslands.MasterDynamicinturnholds51%oftheissuedsharecapitalofTianjinSeagullWatchCoLtd(“TianjinSeagull”),ajointventurecompanyincorporatedinthePeople’sRepublicofChina(“PRC”).TheTianjinGovernmentofthePRCandthegeneralmanagerofTianjinSeagullrespectivelyown40%and9%oftheremainingissuedsharecapitalofTianjinSeagull.TianjinSeagullisaprofitableandstand-alonebusiness.
6.CorporActiveFundLimited(“Fund”)whichismanagedbySomerleyLimited(“Somerley”)isacreditorofPMProduction.TheFundacquired9.9%oftheissuedsharecapitalofMasterDynamicfromPMProductionon28March2008underasaleandpurchaseagreementwhichgavetheFundaputoptiontosellthesharesbacktoPMProductionattheconsiderationofUS$2,388,000within36monthsaftercompletionofthesharetransfer.TheconsiderationwasguaranteedbyPMHoldings.On3September2008,theFundexercisedtheputoption,butbothPMProductionandPMHoldingsdefaultedinpaymentoftheconsideration.
7.SincetakingovertheGroup,theProvisionalLiquidatorshaveseriousdoubtabouttheintegrityoftheseniormanagementofPMHoldingsandPMLimitedsuchthattheyconsideredtheongoingcontroloftheGroupshouldnotcontinuetobeentrustedtotheoriginalmanagement.Hence,theProvisionalLiquidatorstookcontroloftheGroupandtookovertheresponsibilityofmanagementofdaytodaybusinessoperations.TheytookstepstoprotectandpreservetheSincereGroupandpursuedaninvestorprocessinrelationtoasaleoftheassetsorastrategicinvestmentintheGroup.InthecourseoftheirinvestigationintothedebtsoftheGroup,theybecameconcernedoverthelegitimacyofbothsalesandtradereceivablesrelatingtotheGroup’swholesaleanddistributionbusiness.TheythoughttheGrouphadpartiallyfinanceditsacquisitionsandlossmakingbusinessesviaatradefinance“moneygo-round”utilizingsalesofnon-existentgoodstocorporateentitiescontrolledbypartieswithclosetiestothemanagementoftheGroupthatactuallycarryonlittle,ifany,legitimatebusiness.ItappearsthattheGroup’soperationsaresubstantiallysmallerandlessprofitablethanreportedinitsreports.
8.TheProvisionalLiquidatorsobtainednineoffersfrompotentialinvestorsinterestedintheacquisitionofvariouspartsoftheGroup.OneoftheofferswasfromNewFlowGroupLimited(“NFG”),asubsidiaryofChowTaiFookJewelleryCompanyLimited.NFGofferedtopurchasepartoftheGroup(“TargetGroup”)forHK$600million.Afterdeductingsomeinter-companiesdebtsbetweentheTargetGroupandthenon-TargetGroup,thenetconsiderationisHK$505million.TheTargetGroupincludes:
(i)theluxuryandmid-markettimepiecedistributionandretailbusinesseswhicharelocatedprimarilyinthePRC,HongKong,MacauandTaiwan;(ii)MasterDynamic’sinterestinTianjinSeagull;(iii)MilusInternationalSAandShanghaiGoldTimePrecisionInstrumentCoLtd,butnottheSincereGroup.Thosebusinessesarehighlydistressedandmorethanhalfofthemareunprofitable.Theassetsofthosebusinessescompriseprimarilyofretailinventoriesandreceivables.Giventhenatureofthoseassetsandthediverseandnumerousgeographicallocationsofthevariousretailstores,thoseassetsareextremelyvulnerabletodissipation.Thecontrolofthejointventurebusinessesandtheirassetsareinthehandsofthejointventurepartners.ItisextremelydifficultfortheProvisionalLiquidatorstoenforcelegalrightsagainstthejointventurepartners.ThejointventuresarereliantonfundingfromtheGrouptomakepaymentsforrent,wagesandsuppliers.Suchfundinghasnotbeenavailablesincemid-August2008.TheProvisionalLiquidatorsareparticularlyconcernedthatwithoutastrategicinvestorwhoisurgentlywillingandabletoprovideemergencyworkingcapital,theretailbusiness,otherthantheSincereGroup,willlosealloftheirvaluewithin7to14days.
9.TheProvisionalLiquidatorsconsidereditinthebestinterestofcreditorstoacceptNFG’soffer.Theirreasonsaresummarisedasfollows:
(1)theofferisunconditionalwithlimitedconditionsprecedenttoclosing.Thereisalimitedcompletionriskassociatedwiththetransaction;
(2)itresultsinarelativelycertainamounttobepaidinaveryshortperiodoftime;
(3)NFGwillassumeallriskswithrespecttothenumerousjointventurepartners,landlordsandsuppliersthatitrequirestooperatethebusinesses.NFGrealizestheneedtotakecontrolofthebusinessesasquicklyaspossibleandforthatreasonhasbeenpreparedtomakeanunconditionaloffer;
(4)itenablesfinalizationofthemostlabourintensiveaspectofthebusinessesgiventhelargenumberofsalesoutlets,suppliers,employees,landlordsandjointventurepartnersinvolvedandgiventhegenerallypoorleveloffinancialinformationavailable;
(5)itenablesrealizationofthebusinessesthataremostsusceptibletodissipationandlossofvalueinthePRCgiventhenumberofpartiesinvolvedandtheinstabilityofthePRCretailbusinesses;
(6)theretailbusinessesproposedtobesoldarenotprofitable.BasedontheanalysisoftheProvisionalLiquidators,thosebusinesseshaveacombinedannualizednetlossofHK$24.6million;
(7)thetopdownfinancialanalysisperformedbytheProvisionalLiquidators,whichexcludesthesubstantialirregularitiesreferredtoabove,showthattheGroupincurredanetlossofHK$12millionfortheyearending31March2008fromitsretailandmanufacturingbusinesses;
(8)oftheretailandmanufacturingbusinesseswithintheTargetGroup,onlyTianginSeagullhasgeneratedaprofitfortheyearending31March2008;
(9)itresultsinpaymentofanamountthatwilllikelyvastlyexceedtheliquidationvalueoftheassetsproposedtobesold.ItalsoexceedsthebusinessvaluationpreparedbytheProvisionalLiquidatorsinthemostoptimisticscenarioandbearinginmindthattheGroup’sbusinessesaredistressedintheabsenceofworkingcapitalfunding;
(10)theretailbusinessesrequiresubstantialworkingcapitalfundingtobeabletooperateasnormal.TheGroup’scurrentlendershavewithdrawnworkingcapitalfacilities.TheProvisionalLiquidatorsdonotconsidertheyhaveadequatesecuritytoenablethemtoobtainfacilitiestotheextentrequired;
(11)
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