RE NERICO BROTHERS LTD

HCCW 47/2022 [2022] HKCFI 1487 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING UP) PROCEEDINGS NO 47 OF 2022 _______________ IN THE MATTER of Nerico Brothers Limited and IN THE MATTER of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Chapter 32, Laws of Hong Kong _______________ Before: Hon Linda Chan J in Court Date of Hearing: 3 May 2022 Date of Order: 3 May 2022 Date of Reasons for Judgment: 19 May 2022 __________________________________ R E A S O N S F O R J U D G M E N T __________________________________ At the hearing of the petition presented by the petitioner, Target Insurance Company Limited (“P”), against Nerico Brothers Limited (“Company”) on 10 February 2022, I made a usual winding up order against the Company. These are the reasons for my judgment. P is an authorised insurer regulated by the Insurance Authority (“IA”) under the Insurance Ordinance (Cap 41) (“Ordinance”) and covers around 60% of the tax insurance market in Hong Kong, with more than 10,000 taxi insurance policies in its business portfolio. The Company is incorporated in Hong Kong and is a licensed corporation regulated by the Securities and Futures Commission. Since June 2020, P has maintained a managed account with the Company in respect of securities (cash account) and spot forex (cash account) (“Account”). Pursuant to section A, clause 3(b) of the Institutional Services Client Agreement, the Company shall open, maintain and operate the Account in accordance with P’s instructions. By October 2021, the Company transferred an aggregate amount of HK$1.4 billion to the Account. Since the end of October 2021, at the IA’s request, P has been demanding the Company to return all the monies deposited in the Account but to no avail. On 7 January 2022, pursuant to s.35(2)(b) of the Ordinance, the IA appointed Mr Lai Kar Yan and Mr Kam Chung Hang both of Messrs. Deloitte Touche Tohmatsu as joint and several managers of P (“Managers”). One of the mandates of the Managers is to recover the monies transferred from P to the Company as the IA was concerned that those monies had been unlawfully transferred away which would seriously affect P’s ability to make payments under its insurance contracts and meet its solvency requirement under the Ordinance. According to the investor statement issued by the Company, as at 17 January 2022, the amount standing in the credit of the Account was no less than US$154,177,206.74 (“Sum”). Despite repeatedly acknowledging P’s entitlement to the Sum, the Company failed to repay the same to P. On 18 January 2022, P served a statutory demand on the Company requiring it to pay the Sum (“SD”). Other than remitting US$7,035.74 to P on 25 January 2022, the Company failed to pay the balance of US$154,170,171 (“Debt”) to P. As the Company has failed to pay the Debt within 3 weeks of service of the SD, it is deemed insolvent by virtue of s.178(1) of the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUO”). On the same day the petition was presented (10 February 2022), P applied for appointment of provisional liquidators (“PLs”) over the Company on the grounds that (1) there was an urgent need to investigate the whereabouts of the Sum, which had been concealed by the management of the Company; (2) if the Sum is not located and recovered, it would prejudice the Company’s ability to repay its creditors including P; and (3) if the Sum is not recovered timeously, it would put P in a precarious position which, in turn, would affect its ability to fulfil its obligations under the existing insurance contracts. At the hearing on 17 February 2022: the Company through counsel confirmed that it did not dispute the Debt, but opposed the appointment of PLs on the ground that the Company had been attempting to recover the Sum from one Four Dimensions Global Strategy Fund (“Four Dimensions”); and after a contested hearing, DHCJ Bernard Man SC accepted P’s submissions and held that it was appropriate to appoint the Managers as PLs over the Company. Despite the lapse of more than 2 months after the hearing, the Debt remains unpaid. Shortly before the hearing of the petition, on 26 April 2022, the Company belatedly filed an Affirmation of Wan Kai Leung Paul to oppose the petition on the ground that the Company is solvent and that there is reasonable prospect for the Sum to be repaid to P within a reasonable time. The principles are well established. As stated in Zhaoheng Hydropower (Hong Kong) Limited [2021] HKCFI 1434, §§11-17: The starting point is that the petitioner whose debt is not in dispute is entitled ex debito justitiae to an order for the compulsory winding up of the company. The burden is on the company to demonstrate that there are good grounds for the Court not to make a winding up order against the company. The company would be deemed insolvent if it failed to satisfy the statutory demand within the time limited to do so. An assertion that the company is “balance sheet solvent” does not assist the company as the petitioner and the supporting creditors are entitled to be paid once the debt has fallen due. In any event, “inability to pay debts” by itself is sufficient for the court to make a winding up order against the company under s.177(1)(d) of the CWUO. Where the company is insolvent and unable to pay its debts, it is the creditors who have real interest in the company, and they can decide whether it is in their interest to have the company being wound up. It is not for the company to assert otherwise. If the company wants to seek an adjournment of the petition to implement any restructuring proposal, there must be a proper evidential basis in support of the request. Otherwise, acceding to the adjournment will only have the effect of delaying the entitlement of the petitioner to seek an immediate winding up order but without any corresponding benefit of receiving any payment from the company. Further, if a company wishes to seek an adjournment of the petition on the ground that it will be able to pay the creditor if given the time to do so, the company has to put before the court a proposal for repayment, which is “both precise and credible”. The court would also be guided by the views of the creditors and the commercial reality of the case. Ultimately, the court has to be satisfied that at the end of the adjournment period, it is more likely than not that the petitioner’s debt will be paid in full (Re Trinity (Management Services) Limited [2021] HKCFI 2207 §§6-7, 10-11, per Harris J). Mr Jonathan Chang SC (leading Martin Ho), counsel for P, submits that the Company has no valid ground in opposition to the petition for the following reasons: The Debt is not in dispute and P is entitled ex debito justitiae to an immediate winding up order. The Company’s assertion that it is solvent, by reference to bank statements or financial reports provided to the SFC, is wholly misconceived. Once the Company fails to satisfy the SD within the time limited for payment, it is deemed unable to pay its debts under s.178(1)(a)(ii) of CWUO. The repayment proposal put forward by the management is insufficiently precise and not credible, evident by the fact that up to now, the Debt remains unpaid. The Company claims that the Sum is with Four Dimensions, but could not be withdrawn purportedly due to Cayman anti-money laundering regulations. The request for more time smacks of a further delaying tactic given that: the Company asserts that it will be able to withdraw such funds “within a reasonable time upon compliance with the relevant requirement”, and the director responsible for handling the transactions (Jerff Lee) will be able to give the court a further update upon his return from Singapore on 29 April 2022; however, back in February 2021, Jerff Lee already indicated to the court that the Company had been in the process of complying with the Cayman regulations and retrieving the Sum. No meaningful progress has been made. As the Company is insolvent, it is the creditors who have real interest in the Company, and they are the best persons to decide whether it is in their interest to have the Company wound up. There is no evidence to suggest that there are any other significant creditors. The commercial views of P should be given weight by the court. Ms Melinda Chiang, counsel for the Company, is unable to answer any of the above points other than submitting that the court should give a short adjournment so as to allow the management to obtain the return of the Sum. I agree with Mr Chang that this is a clear case where the court should make an immediate winding up order against the Company for the reasons submitted. There is no reason why the management should be left with the important task of obtaining the return of the Sum, in circumstances where they had caused the Sum to be removed from the Company and failed to obtain its return for more than 6 months. (Linda Chan) Judge of the Court of First Instance High Court Mr Jonathan Chang SC leading Mr Martin Ho, instructed by DLA Piper Hong Kong, for the Petitioner Ms Melinda Chiang, instructed by Cheung & Choy, for the Respondent Mr Raymond Kong, instructed by Official Receiver’s Office, for the Official Receiver