Sun Cheong Creative Development Holdings Ltd

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 20 October 2020
• Court: Grand Court (Cayman Islands)

IN THE MATTER OF SUN CHEONG CREATIVE DEVELOPMENT HOLDINGS LIMITED

(Smellie, C.J.)

Grand Court, Financial Services Division (Cayman Islands)

Companies — liquidators — provisional liquidators — application by insolvent Cayman Islands incorporated company listed on Hong Kong Stock Exchange for postponement of its own winding up petition and appointment of joint provisional liquidators pursuant to Companies Law (2020 Revision), s.104(3) — appointment of joint provisional liquidators to restructure company in best interests of stakeholders

Held, granting the company’s application:

(1) The court acceded to the hearing of the ex parte summons on the basis that where proceedings had been issued in more than one jurisdiction but an appointment had yet to be made, the starting point for the court should be to consider which jurisdiction was the more appropriate to assume the role of primary insolvency proceeding. All other things being equal, this would generally be assumed to be the place of incorporation of the company, being the place that its investors, service providers and trade creditors would typically associate with, among other things, the company’s registered office and the law governing the duties of its board of directors and its articles of association. In the present case, the starting point would be for the company to be wound up by, or reorganized under the supervision of, this court unless there were compelling reasons justifying the displacement of the Cayman Islands as the primary jurisdiction. It was recognized that there had been instances where a foreign court had assumed the role of primary insolvency proceeding in respect of Cayman Islands domiciled companies and where that had been acknowledged by this court, which went on to recognize office holders appointed by the foreign court. Such instances were typically limited to circumstances where (a) there was a particularly strong nexus between the company and the foreign jurisdiction such that the legitimate expectation of interested parties as to the locus of the primary insolvency proceedings had shifted to that foreign jurisdiction; (b) the foreign court had already appointed officers seeking to effect a restructuring for the benefit of stakeholders; and (c) there were no competing proceedings in the Cayman Islands. It was not the practice of the court to defer automatically to winding up proceedings begun in a foreign jurisdiction simply because a petition was presented there first in time. Instead, the court would consider whether it was satisfied that there was a genuine intention on the part of the company to present a plan of reorganization in the Cayman Islands, and the merits of the proposal for carrying out such a plan for the benefit of the company’s shareholders and creditors worldwide. In the present case the court accepted the company’s submission that it was far more appropriate for this court to make an order appointing JPLs in Cayman, notwithstanding the impact the order would likely have on proceedings in Hong Kong (paras. 6–9).

(2) Having considered all the circumstances, in particular the circumstances which led to the company’s insolvency and its prospects for recovery, the court regarded it as plain that the appointment of JPLs tofacilitate a restructuring was in the best interests of the company’s stakeholders (para. 31).

(3) Section 104(3) of the Companies Law provided that a court could appoint joint provisional liquidators after the presentation of a winding up petition on the application of the company where a two-limbed test was satisfied: (a) the company was or was likely to become insolvent; and (b) the company intended to present a compromise or arrangement to its creditors. The court’s power to adjourn a winding up petition to facilitate such a restructuring was derived from s.95(1) of the Law which enabled the court upon hearing the winding up petition to adjourn the hearing conditionally or unconditionally. The court had a broad and flexible discretion under s.104(3) and s.95(1). The matters to which the court might have regard included (a) the express wishes of creditors; (b) whether the refinancing was likely to be more beneficial than a winding-up order; (c) that there was a real prospect of refinancing and/or a sale as a going concern being effected for the benefit of the general body of the creditors; and (d) the considered views of the board as to the best way forward (paras. 32–37).

(4) In the present case, the court was satisfied that the broad discretion under s.104(3) should be exercised in favour of the relief sought by the company. While the petitioner and the company were the same and the application for the appointment of JPLs was being made ex parte, the effect of the court’s order would be to stay the Hong Kong petitions, thereby necessitating an adjournment of those proceedings for the period of the provisional liquidation. In those circumstances, in deference to the Hong Kong court’s expectation of comity and to the principles of modified universalism which sought to maximize enterprise value for the sake of all stakeholders, it was important that the court considered the above general principles on which it would exercise its discretion to adjourn a winding up petition of an admittedly insolvent company. The court recognized that three creditors in particular were likely to oppose any order in the Cayman Islands which would have the effect of requiring an adjournment of the Hong Kong petitions. However, no other creditors had expressed support for the immediate winding up orders sought in Hong Kong; letters of support for the company’s application for the appointment of the JPLs had been provided by two creditors as well as the receiver appointed by Cachet SPC; and a number of bank creditors actively engaged with the restructuring proposal. The court accepted that it should be cautious not to abrogate the rights of the majority of the company’s creditors who might be better served by exploring a restructuring than an immediate winding up order. There was also independent evidence before the court that the refinancing was likely to be more beneficial than a winding up order and that there was a real prospect of such a refinancing being effected. Finally, the resolution of the board to seek the appointment of the JPLs confirmed that it was the considered view of the board that a restructuring was in the best interests of the group (paras. 38–43).

(5) In respect of the requirements of the s.104(3) test, the first limb of the test was satisfied. The company had acknowledged that it was cash flow insolvent. Where a creditor had submitted a winding up petition in respect of an undisputed debt (as two creditors had done in Hong Kong), the primary approach of the court would be that the creditor was entitled to a winding up order as of right unless there were special reasons that the relief should not be granted. It was broadly accepted in the Cayman Islands that an intention on the part of the company to present a compromise or arrangement under s.104(3) could be sufficient justification to depart from this principle. Notwithstanding the Hong Kong petitioners’ rights to a winding up order, the court was satisfied that compelling reasons had been demonstrated for the court to exercise its discretion to make an order in these proceedings which would have the effect of adjourning the Hong Kong petitions. In respect of the second limb of the s.104(3) test, the company had made clear its intention to present a compromise or arrangement. Section 104(3) did not require the company to already have a pre-formulated restructuring plan nor to provide evidence of the viability of its restructuring plan. In the present case, the company came to the court with a detailed restructuring plan, a “white knight” investor in place and confirmation from independent financial advisers that the proposed restructuring was viable and in the best interests of creditors. While the terms of the proposed restructuring remained to be agreed with creditors, this would take place within the framework of a scheme of arrangement to be promoted under s.86 of the Companies Law. Both limbs of the s.104(3) test were therefore satisfied and it was appropriate in all the circumstances that the court exercised its discretion to adjourn the petition and appoint the JPLs to facilitate the restructuring of the company for the benefit of all stakeholders (paras. 44–51).

(6) The application was heard ex parte because it was critical that the JPLs be appointed before a winding up order might be made in the Hong Kong court, the effect of which would have been to limit the company’s options in pursuing its intended plan of reorganization. The court accepted that any insolvency proceedings, including any restructuring or scheme of arrangement, should be supervised by the Grand Court as the court of the place of incorporation of the company. The common law jurisdiction to recognize and assist foreign insolvency officeholders appointed in the country of incorporation of a company was well established in Hong Kong. On the other hand, while the Grand Court would grant reciprocal recognition and assistance to foreign insolvency officeholders appointed in the country of incorporation, the jurisdiction of the Grand Court to recognize and grant assistance to liquidators of Cayman Islands incorporated companies appointed by the courts of another country was more limited. From previous cases it appeared that the Grand Court had considered the purpose of the appointment on each occasion that it had been asked to recognize insolvency practitioners appointed to a Cayman Islands domiciled company by a foreign court. Where the purpose had been to facilitate a restructuring or otherwise avoid the need to wind up thecompany, the cases showed that the court would be more willing to grant recognition as being in the best interests of the company’s stakeholders...