LET NOT THE SUN GO DOWN ON YOUR WRATH: WINDING-UP PETITION BROUGHT “IN A FIT OF SPITE” ADJOURNED TO AID RESTRUCTURING

In Re China Solar Energy Holding Limited (HCCW 108/2015, 2 April 2020), the Hong Kong Court of First Instance (“CFI”) adjourned a winding-up petition which appeared to have been pursued by the petitioning creditor “in a fit of spite” and which did not appear to be in the creditors’ interests as a whole. The adjournment allowed the company’s provisional liquidators to continue their ongoing restructuring efforts in the hope of realising some value for the creditors.

Background

China Solar Energy Holdings Limited (“China Solar”) is a Bermuda-incorporated company listed on the Hong Kong Stock Exchange, but trading in its shares has been suspended since 16 August 2013. China Solar has been in financial distress since January 2015 and is now in the final stage of delisting.

On China Solar’s own application, provisional liquidators (“PLs”) were appointed in August 2015 in order to preserve China Solar’s assets – the most valuable of which was its listing status. The PLs were also given restructuring powers.

This course of action initially had the support of a shareholder and creditor of China Solar, Ankang Ltd (“Ankang”). Ankang had become a shareholder and creditor by buying the shares of and a debt (the “Debt”) due to a former shareholder and creditor, Crown Master International Trading (“Crown Master”). The evidence showed that Ankang had intended to acquire China Solar’s listing status for itself.

As things happened, however, the PLs entered into an exclusivity agreement with another investor to progress the potential restructuring. The deal envisaged the investor injecting a profit-making business into China Solar in order to facilitate its resumption of trading.

Ankang opposed the deal. It had itself substituted as the petitioner in a winding-up petition presented previously by Crown Master on the Debt (the “Petition”). In March 2018, Ankang unsuccessfully applied to CFI to have the PLs discharged. Ankang continued to pursue the Petition, which was now before Mr Justice Harris of the CFI.

The CFI’s decision

Mr Justice Harris found that China Solar had no defence against the Debt. Ordinarily, if a company fails to prove that it has a bona fide defence on substantial grounds to a debt, a petitioning creditor would be entitled to a winding-up order as of right.

That said, the Court has a discretion in whether to make a winding-up order. In exercising his discretion in this case, Mr Justice Harris considered certain special circumstances:

1. The PLs’ report showed that, if China Solar were to be wound up, the creditors would recover nothing. Allowing the restructuring to take its course could potentially offer some prospect of recovery (however small).
2. Although Ankang sought immediate winding-up, other creditors wished China Solar to remain in provisional liquidation in order that the restructuring attempts (in practice, the sale of China Solar’s listing status) could be pursued as they thought this was the best prospect of recovering part of what was owed to them. As a winding-up order is a class remedy, the Court will have regard to the views of the other creditors as to the appropriate order to make.
3. There was evidence to show that Ankang had pressed on with the petition “in a fit of spite”, because of its frustrated plan to acquire China Solar’s listing status for itself.

Mr Justice Harris therefore adjourned the Petition to late April 2020 to give the PLs more time to continue with their restructuring attempts.

Comments

This decision is a helpful reminder of the nature of a winding-up order as a class remedy, i.e. for the interest of not only the petitioner but all creditors. This is a well-established fundamental principle, and, as this case illustrates, particularly relevant when creditors hold different views as to whether a company should be wound up.

Further, this decision should also be welcomed as it continues to show the Hong Kong Court’s pragmatic approach in dealing with winding-up petitions, taking into account the history of the case and any ongoing restructuring efforts.