In recent years, it has become increasingly common for companies seeking to avoid an immediate winding-up order, particularly listed companies, to pray in aid of alleged efforts to restructure its debts in a bid to obtain adjournments of a winding up petition. All too often, these valiant attempts fail: see Re Chase On Development Limited [2020] HKCFI 629, Re SMI Holdings Group Limited [2020] HKCFI 824 and Re REXLot Holdings Ltd [2020] HKCFI 2212 to name a few.
As explained in Re Chase On Development Limited [2020] HKCFI 629 at §5 and Re China Huiyuan Juice Group Ltd [2020] HKCFI 2940 at §51, where a company is insolvent and the petitioner’s debt is not disputed, and the Court is asked to adjourn a petition by a company to allow it to restructure its debts, the Court will normally take into account all the circumstances including the following considerations:
(a) A qualitative assessment of the number of creditors for and against a winding-up order. It is not just a matter of counting the number of creditors in favour and those against or the proportion of the value of the debt they hold.
(b) The reasons proferred by the supporting and opposing creditors.
(c) The feasibility of the proposed restructuring.
In an illuminating judgment handed down very recently in Re Lerthai Group Limited [2021] HKCFI 207, Harris J elaborated on the evidence required for a company to satisfy the Court that an adjournment is justified. In particular, the Court emphasised that it is not enough for a company to show that it will be able to pay off those creditors pressing for immediate payment after restructuring; it must also show that it will continue to operate a profitable business or at least pay its debts as they fall due in at least the medium term (§7). In this regard, the restructuring proposal should be consistent with the character of the business and the debt (§6).
The Court will therefore expect evidence on any proposed restructuring proposal to cover at least the following:
- What the company’s business model has been (§6)
- How the debt arose (§6)
- How the company’s financial difficulties arose (§§6, 8)
- How the company will pay off the debts in the immediate term (§8)
- How the company will be returned to financial viability in the short to medium term (§§7, 8)
Such evidence should be filed before a winding-up petition first comes before a judge. The Court is unlikely to have sympathy for companies who are not able to do so, particularly as substantial businesses must be alive to their financial difficulties and the demands of creditors for repayment long before a petition is presented (§11).
All in all, companies seeking to adjourn a winding-up petition in an attempt to restructure its debts must not take the task of adducing satisfactory evidence lightly. To avoid an immediate winding-up order, comprehensive evidence on the matters set out above should be prepared so that the Court can consider the appropriate course to take in winding-up proceedings.
This article is authored by Douglas Lam SC and Jasmine Cheung. Douglas Lam SC and Jasmine Cheung acted for the Petitioner and José-Antonio Maurellet SC and Terrence Tai acted for the Company in Re Lerthai Group Limited [2021] HKCFI 207.
