Re Up Energy Development Group Ltd

• Jurisdiction: Bermuda
• Judge: Ian RC Kawaley CJ
• Judgment Date: 20 September 2016
• Neutral Citation: [2016] SC Bda 83 Com
• Docket Number: (COMMERCIAL COURT) COMPANIES (WINDING-UP) 2016: No. 183
• Court: Supreme Court (Bermuda)
• Date: 20 September 2016

[2016] SC (Bda) 83 Com

IN THE SUPREME COURT OF BERMUDA

(COMMERCIAL COURT) COMPANIES (WINDING-UP) 2016: No. 183

In The Matter of up Energy Development Group Limited and In The Matter of The Companies Act 1981

Mr. Keith Robinson, Appleby (Bermuda) Limited, for Credit Suisse AG, Singapore Branch (‘the Petitioner’)

Mr Christian Luthi, Conyers Dill & Pearman Limited, for the Company

Ms. Alsha Wilson, Harneys Bermuda Limited, for Baosteel Resources International Co. Ltd. (‘Baosteel’), a Supporting Creditor

Mr Kevin Taylor and Ms Nicole Tovey, Taylors, for China Minsheng Banking Corp Ltd Hong Kong Branch (‘China Minsheng’), an Opposing Creditor

Winding — up — creditor petition — application to appoint joint provisional liquidators to monitor implementation of insolvent restructuring by board of directors — opposition by company and majority of unsecured creditors — principles governing whether to grant or refuse application

RULING

(in Chambers)

Introductory

1 The Company is incorporated in Bermuda and listed on the Hong Kong Stock Exchange (‘HKSX’). Its underlying assets in the People's Republic of China (‘PRC’), held indirectly through two PRC subsidiaries, include a coal coking facility which is not yet operating at even 50% capacity, and three coal mines which are still at the pre-production developmental stage. The Company also has a substantial interest in a Canadian coal mining company the operations of which have been suspended and are not expected to resume soon. The Petitioner is the holder of Tranche A and Tranche B Convertible Notes with a principal value of HK$150 million which were issued by the Company and matured on January 18, 2016.

2 On January 19, 2016, the Company announced that it had defaulted on the said Notes. In a subsequent February 29, 2016 “UPDATE ON RECENT DEVELOPMENTS”, the Company stated:

‘ The Company is currently negotiating robustly with the creditors, underwriters and financiers to explore different options of fund raising, issuing shares and debt restructuring. The Company endeavours to finalise a plan by the end of March.’

3 On or about March 29, 2016, HEC Securities Limited as the holder of Notes valued at HK$230 million presented a winding-up petition against the Company in Hong Kong (‘the Hong Kong Petition’).

4 On April 1, 2016, the Petitioner served a Statutory Demand on the Company at its registered office in Bermuda in respect of the HK$150 million due under its Notes. On May 6, 2016 the Petitioner presented its Petition herein seeking to wind-up the Company on the grounds of non-payment of the debt which formed the subject of the Statutory Demand, pursuant to the provisions of section 162(a) of the Companies Act 1981. The Petition was issued returnable for July 1, 2016.

5 By a Summons dated June 30, 2016, also issued returnable for July 1, 2016 and supported by the Affidavit of Jason Epstein, the Petitioner sought to appoint joint provisional liquidators (‘JPLs’) to, inter alia:

‘review …all issues relating to the feasibility of the Restructuring proposal exhibited to the Affirmation of Wang Dayong made on 28 June 2016…or any variation thereof… [and], … to monitor the continuation of the business of the Company by the existing board of directors of the Company… [and]… to monitor, consult with and otherwise liaise with the creditors and shareholders of the Company in determining whether any Restructuring Proposal will be successfully implemented…’

6 The Petition and Summons were both adjourned to July 4, 2016 for a contested hearing of both applications. I granted the Company's application for an adjournment of the Petition until September 9, 2016 on the condition that the Company should use its best endeavours to establish a framework for communicating with creditors in relation to the restructuring. On this basis I adjourned the application to appoint JPLs to the same date.

7 The Company on July 4, 2016 opposed the appointment of JPLs referring to its retention that very day of independent restructuring advisers RSM Corporate Advisory (Hong Kong) Limited (‘RSM’). It argued that deference ought to be given to the majority of the creditors' position. Mr Taylor supported the Company's position, in part because of the stigma that provisional liquidation carried in Asia. I felt the case for an immediate appointment had not been made out as there was no evidence of any misconduct on the part of management and a significant creditor constituency appeared to be supportive of there being no JPL appointment. I sought to fill the gap in independent monitoring by imposing as a condition of the adjournment Order a requirement that the Company attempt to form an informal creditors' committee.

8 However, I also expressed concern about the likely efficacy of the process without the insertion of JPLs into the process based on my recent experience in Re Titan Petrochemicalscase 1. In that case, which also involved a Hong Kong listed company, the company contested a winding-up petition for approximately one year while pursuing an unsupervised restructuring. Three months after a creditor with standing was successfully substituted as petitioner, provisional liquidators were appointed to monitor the restructuring. The restructuring process in that case was successfully completed nearly three years after the provisional liquidation commenced and some four years after the creditor petition was presented.

9 At the renewed hearing of the Petition on September 9, 2016, I adjourned the Petition to November 18 2016, with minimal controversy, although the Petitioner sought a shorter return date. The Petitioner also vigorously renewed its application for the appointment of JPLs. Two broad grounds, as I perceived it, were relied upon. Firstly, since it had a right to seek a winding-up order, its wishes for independent supervision of the restructuring process should not be ignored. Secondly, and more substantively, the initial RSM Report demonstrated that the restructuring process was moving too slowly and that, having regard to conflicting interests among creditors and various information black holes about the Company's sources of financing, the best interests of truly independent creditors could only be served if JPLs were appointed. In addition, it was suggested that Harris J in adjourning the Hong Kong Petition to September 26, 2016 had indicated that he would be guided by the approach taken by this Court in the further conduct of those proceedings. Anxious about defaulting to a “muddling through” approach uninformed by legal principle, and conscious that it was extremely unusual for a restructuring to be implemented without JPLs being appointed while a winding-up petition was before the Court, I adjourned the Petitioner's application for a special appointment and invited counsel to specifically address the governing legal principles.

10 The most vexing question to my mind was this. It was well settled that the views of the majority of unsecured creditors would ordinarily be given considerable weight, if not hold sway, when deciding whether or not to adjourn for restructuring purposes rather than immediately winding-up. Did it automatically follow that the majority view carried

similar weight when the Court was deciding the wholly distinct question of whether JPLs should be appointed to monitor the restructuring process as officers of this Court as well as representatives of the body of unsecured creditors as a whole?

Governing legal principles: appointment of provisional liquidators on the application of a petitioning creditor to monitor an insolvent restructuring pursued as an alternative to a traditional liquidation following a winding-up order

The context

11 The established practice of this Court in appointing JPLs to supervise a de facto debtor-in-possession restructuring has typically arisen in the context of winding-up petitions presented by the company. The insolvent company's pre-emptive action in seeking the benefit of the stay of proceedings triggered by the appointment of a provisional liquidator combined with the independent oversight of the proposed restructuring by court officers focussed on protecting creditor interests has never, to my knowledge, ever been opposed by creditor interests. The petitioning company has invariably commenced the provisional liquidation proceedings with the blessing of the main creditors concerned. A decade ago in Discover Reinsurance Company -v- PEG Reinsurance Company Ltd [2006] Bda LR 88, I described the practice in this area of Bermuda insolvency law as follows:

‘ 18. There are circumstances in which, in England and Bermuda, provisional liquidators may be appointed when a winding-up order is not necessarily expected to be made, in early course at least. Since the last decade of the last century, many insolvent English insurers have been routinely placed into provisional liquidation and run-off under schemes of arrangement, essentially for regulatory reasons. Over the last ten years in this jurisdiction, a considerable number of companies, typically non-insurance companies, have been placed into provisional liquidation to facilitate a restructuring involving parallel proceedings in the United States commenced under Chapter 11 of the US Bankruptcy Code. These Bermudian winding-up proceedings have been almost invariably commenced by the company itself, and usually on the basis that the company will ultimately be wound-up in any event, when the restructuring process is completed.

19. The use of provisional liquidation to facilitate a restructuring has not always occurred in clear cases of insolvency. It has often been utilized when companies are in what has been referred to as the ‘zone of insolvency’. Be that as it may, the Bermuda model of restructuring provisional liquidation has often kept the pre-existing management in place, and merely given the...