China Shanshui Cement Group Ltd

• Jurisdiction: Cayman Islands
• Judge: (Mangatal, J.)
• Judgment Date: 12 September 2019
• Court: Grand Court (Cayman Islands)
• Date: 12 September 2019

IN THE MATTER OF CHINA SHANSHUI CEMENT GROUP LIMITED

(Mangatal, J.)

Grand Court, Financial Services Division (Cayman Islands)

Companies — compulsory winding up — dispositions and transfers during winding up — validation by court — good grounds required to vary validation order agreed by consent containing “liberty to apply” — miscalculation of practical effects of order not sufficient

Held, ordering as follows:

(1) The validation order would not be varied so as to remove the reporting obligation or the spending cap. While the court was not aware of any practice in the Cayman Islands of inserting reporting obligations or spending caps in relation to solvent and listed companies, that could not be a determinative factor, particularly as against the backdrop of a consensual position having been arrived at. The court should examine the reporting obligation and the spending cap and the rationale behind each of them to see whether they had utility in the particular circumstances of this case. It was plain that the existence of the Hong Kong petition and the impending application by Tianrui for the appointment of JPLs did loom large in relation to the agreement to include the reporting obligation and the spending cap. In addition, both parties appeared to be under the misapprehension that reporting obligations were generally imposed on solvent listed companies in Hong Kong or gave no particular thought to the fact that the company was a listed company. Although in making this application the company was exercising a right reserved under the contract represented by the consent order where liberty to apply was granted, the company had to show good grounds for the court to discharge the reporting obligation or the spending cap. The discontinuance of the Hong Kong petition was not a sufficiently significant circumstance or good ground to support the removal of the reporting obligation agreed to between the parties when regard was had to all the circumstances, including the apparent reasons for agreeing to the condition (i.e. to assuage the concerns of Tianrui). The fact that the company had miscalculated the practical effects of the validation order was not a sound basis for discharging the aspects of the validation order which it sought to have discharged. The reporting obligation required the company to report to Tianrui after the fact of payments made in excess of HK$500,000 in respect of transactions within the ordinary course of business. The reporting obligation did not permit Tianrui to know of any confidential information or to stop the company, without more, from making these payments. The safe harbour provisions of the Hong Kong Securities and Futures Ordinance were not engaged, nor was the company put in any jeopardy in relation to them or other regulatory provisions by the reporting obligation. As regarded the spending cap, the fact that the company was a holding company was important when looking at its ordinary course of business. It was difficult to see without specific and solid evidence howthe spending cap which the company had freely entered into would have the severely adverse effect alleged. In addition, the analysis of the auditors, including the comment that they held “significant doubts regarding the group’s ability to continue as a going concern,” persuaded the court that there would be merit in maintaining the spending cap, separate from the fact the good grounds for removing the cap had not been demonstrated. Tianrui had, however, offered to increase the spending cap and the court would encourage the parties to agree an increased spending cap (paras. 102–104; paras. 116–119; para. 139).

(2) The relief sought by the company in relation to the CCASS issue would be granted. It was quite important that it was the SEHK that had sought for the company to make the application. The company had provided an abundance of evidence and reasons which, viewed objectively, indicated that the directors considered it necessary and expedient to seek the validation order. The reasons were such that an intelligent and honest director could reasonably hold in good faith and obviously had a clear commercial basis. It was rational as well as reasonable that the company would wish to bring down the illiquidity of its shares, and the company as a holding company had good reasons in wanting to reduce difficulties (such as illiquidity) in the way of it raising required capital in the equity markets in future. It was not possible or necessary for the court at this stage to delve deeper into what were complicated questions as to the causes of the illiquidity; the fact of the matter was that the directors had approached the court to validate a type of transaction which cleared the bar and ought to be validated. Tianrui’s evidence was as to the facility with which changes in beneficial ownership of shares could be effected and the “cloak which CCASS validation would give to future collusive dealings in the shares,” but it was common ground between experts on both sides that CCASS was a computerized system which handled the process of matching buyers and sellers, and the definitive shareholders could not choose to whom their shares would be sold. It was also common ground that s.99 did not affect the ability of shareholders to deal with the beneficial interest in their shares. Shareholders who had not deposited their shares in CCASS could still sell the beneficial interest in their shares off market. The court also accepted the company’s submission that the transfer of legal title from a shareholder to HKSCC was as nominee and did not run afoul of the rationale of s.99, since the shares of the definitive shareholders were fully paid up. Tianrui had not discharged the burden of providing compelling evidence to prove that the disposition was in fact likely to injure the company. Its allegations about being unable to trace beneficial ownership related to its alleged claim which, at this point, remained a matter of assertions. Tianrui had not provided any compelling evidence that the transfers to allow for trading on CCASS were detrimental to the company as a whole. It was appropriate to grant the relief sought by the company in relation to CCASS (paras. 125–132; para. 139).

(3) The court could not at this stage take the view advanced by Tianrui that the expenditure by the company on legal and other professional fees in defending the petition was unjustified or unreasonable (paras. 133–139).

Cases cited:

(1)Akers v. Samba Fin. Group, [2017] UKSC 6; [2017] A.C. 424; [2017] 2 W.L.R. 713; [2017] 2 All E.R. 799; [2017] 2 All E.R. (Comm) 97; [2017] WTLR 373; [2017] BCC 511; [2017] BCLC 151; (2017), 20 ITELR 554; [2017] BPIR 263, referred to.

(2)Burton & Deakin Ltd., In re, [1977] 1 W.L.R. 390; [1977] 1 All E.R. 631, followed.

(3)Chanel Ltd. v. F.W. Woolworth & Co. Ltd., [1981] 1 W.L.R. 485; [1981] 1 All E.R. 745, followed.

 (4)Company (No. 004502 of 1988), ex p. Johnson, In re a, [1992] BCLC 701, considered.

(5)Company (No. 005685 of 1988), ex p. Schwarcz, In re a (1989), 5 BCC 79; [1989] BCLC 424; [1989] PCC 438, applied.

(6)Cybervest Fund, In re, 2006 CILR 80, distinguished.

(7)Emagist Entertainment Ltd., Re, [2012] 5 HKLRD 703, considered.

(8)Fortuna Dev. Corp., In re, 2004–05 CILR 533, followed.

(9)Hydrosan Ltd., In re, [1991] BCC 19; [1991] BCLC 418, considered.

(10)Inland Revenue v. Laird Group plc, [2003] UKHL 54; [2003] 1 W.L.R. 2476; [2003] 4 All E.R. 669; [2003] BTC 385; [2003] STC 1349, considered.

(11)John Richardson Computers Ltd. v. Flanders, [1992] F.S.R. 391, considered.

(12)Revlon Inc. v. Cripps & Lee Ltd., [1980] F.S.R. 85, referred to.

(13)Torchlight Fund LP, In re, 2018 (1) CILR 290, considered.

Legislation construed:

Companies Law (2018 Revision), s.99:

“99. avoidance of property dispositions, etc.

When a winding up order has been made, any disposition of the company’s property and any transfer of shares or alteration in the status of the company’s members made after the commencement of the winding up is, unless the Court otherwise orders, void.”

A creditor petitioned to wind up a company under the Companies Law (2018 Revision), s.94(1)(c).

China Shanshui Cement Group Ltd. (“the company”) was a Cayman Islands company listed on the Hong Kong Stock Exchange (“SEHK”). Tianrui (International) Holding Co. Ltd. (“Tianrui”) was a significant creditor of the company which had presented a petition to wind it up on the just and equitable ground under s.94(1)(c) of the Companies Law (2018 Revision). It was common ground that the company was solvent. The Grand Court (Mangatal, J.) struck out the winding-up petition, but that decision was subsequently overturned by the Court of Appeal which restored the petition.

A validation order had been made in October 2018 largely by the consent of the parties. The order provided that—

“1. Subject to paragraph 4 hereof, notwithstanding the presentation of the Petition unless otherwise ordered by the Court, any payment or other disposition of property made on or after the date of the presentation of the Petition in the ordinary course of the business of the Company provided the total of such payments or dispositions do not exceed US$2 million in each calendar month shall not be void by virtue of s.99 of the Companies Law (2018 Revision).

2. Without prejudice to the generality of paragraph 1 above (but subject to the monthly limit stipulated therein and to paragraph 4 below), the following payments be sanctioned:

(a)Payments made into or out of the bank accounts of the Company maintained with . . .

  In respect of expenses/payments occurred [sic] in the ordinary course of business.

(b)Payment by the Company of any and all legal bills for legal services rendered to the Company after the date of the presentation of the Petition.

3. Without prejudice to the generality of paragraph 1 above but subject to paragraph 4 below, the following payments be sanctioned:

(a)Payment by the Company...