RE JINRO (HK) INTERNATIONAL LTD

HCCW 1352/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1352 OF 2001

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DECISION ON COSTS

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1. On 14 May 2003, I handed down judgment in a contested creditor's petition to wind up Jinro (HK) International Ltd ("the Company") after a 3-day hearing from 25 March 2003 to 28 March 2003. I ruled in favour of the petitioners on the only ground of opposition, which related to the locus of each of the petitioners to present the petition as creditors of the Company. I did not make any order to wind up the Company as a letter was received from the petitioners' solicitors after the hearing that they intended to apply for provisional liquidators to be appointed to explore the benefits to creditors of a rescue proposal as opposed to immediate liquidation of the Company. I have reserved the question of costs of the contested hearing and costs of the amendment to the petition sought and granted at the outset of the contested hearing. The hearing today is to resolve the costs reserved.

2. The Company has not appeared at this hearing. Notwithstanding that the hearing date was fixed in consultation with counsel's diaries pursuant to the directions I made on 22 May 2003, it transpires that the Company's solicitors have not in fact instructed counsel to appear. The Company's solicitors have sent a representative to court today on a watching brief. I have heard submissions only from the petitioners' counsel, Mr Bartlett.

3. The petitioners seek the costs of the contested hearing in accordance with the normal rule that costs should follow the event.

4. But for the late amendment made to the petition at the start of the contested hearing, there should have been no difficulty in awarding the entire costs of the hearing to the petitioners who have succeeded on the question of their locus to present the petition. In my view, the amendment sought is of material importance to the petitioners' case. I have summarised the different versions advanced by the petitioners in their petition as regards their claim to be the creditors of the Company in paragraphs 19 and 20 of my judgment in May 2003 and I do not propose to go into the details. Suffice it to say that the previous assertions, although not abandoned, were not relied upon at the hearing and it was on the basis of the latest amendments made (i.e. that the petitioners are "successors and/or assigns [of the Accountholders] and/or equitable assignees of the rights under the Deed of Covenant") that the petitioners rested their case at the hearing.

5. Mr Bartlett recognizes the general rule that when late amendment is made by the plaintiff which has substantially altered the case the defendant has to meet and without which the action would have failed, the defendant is entitled to costs of the action down to the date of the amendment (Hong Kong Civil Procedure 2002, Vol. 1, para 20/8/12; Beoco Ltd v Alfa Laval Co. Ltd & Another [1994] 3 WLR 1179 at 1193A-C, 1194G-H). He submitted that this rule should be departed from in the present situation on two broad grounds.

6. Firstly, a winding-up petition is not the equivalent of a writ and statement of claim. It is not a pleading, see O. 1 r. 4(1) of the Rules of the High Court. The court was urged to adopt a broad and flexible approach. Mr Bartlett cited the cases of Re Playmates Investment Ltd [1996] 4 HKC 577 and Re Richbell Strategic Holdings Ltd [1997] 2 BCLC 429 as examples where the court has adopted a less stringent approach in allowing amendments to winding-up petitions. I would observe that both cases do not relate directly to the implication of costs arising from late amendments. It was said that it is a characteristic of proceedings by way of petition that the petitioners' case is generally not as precisely pleaded as it would be in a proper pleading. Further, as the amendments only related to matters of law, i.e. whether on the facts the petitioners were successors and assigns or equitable assignees, it was unnecessary to plead this in the petition. The amendments in the petition, Mr Bartlett contended, have only served to refine the legal issues relating to the challenge of the petitioners' locus and conform the petition to what the parties had clearly regarded as the locus issue as appeared from the evidence filed and the agreed list of issues.

7. I am not satisfied that these matters would give adequate justification to depart from the general rule that I have mentioned. I do not think it could be explained away in this case that the petitioners' claim to be creditors of the Company is not required to be set out as precisely as one would expect in a pleading.

8. Although a petition is not a pleading, it must contain all necessary allegations in a form which is sufficient to enable the court to make the requisite findings and consider the appropriate order. I fully endorse what Chu J had said about this in Re Tourmaline Ltd [2000] 4 HKC 348 at 354C-D:

"Although a petition does not constitute a formal pleading, it serves to define the scope of the matters in issue and the disputes that the court has to resolve. Accordingly, a petition must set out with precision and sufficient particulars the matters complained of or relied on by a petitioner in justifying a winding-up order on just and equitable ground and the court will not travel beyond the allegations contained in the petition in adjudicating the matter: In re Fildes Bros Ltd [1970] 1 WLR 592 at 597G-598C. It follows that a sufficient case must be stated on the petition and defects or omissions in the petition cannot be cured by the supporting affidavit, see Derek French, Applications to Wind Up Companies, p. 86-88; Re Wear Engine Works Company (1875) LR 10 Ch. App. 188 at 191."

9. I should also point out that the amendments introduced at the last minute are not just in relation to legal conclusions to be drawn on the basis of factual matters in the petition. The petitioners have also alleged that they have purchased the floating rate notes through the Euroclear System as a result of which they acquired rights as successors and assigns under the Deed of Covenant and/or as equitable assignees. These are material allegations to the petitioners' case, although they have deposed to the purchases in their evidence filed earlier.

10. I have been taken by Mr Bartlett to the first draft of the agreed list of issues put forward by the Company's solicitors. From the issues set out, I am not persuaded that the Company had anticipated or envisaged what the petitioners ultimately relied on to support their claim that they have acquired valid rights as successors and assigns of Accountholders that could be enforced against the Company.

11. The fact that the petitioners' case was set out in the skeleton submissions served on the Company prior to the hearing or that the Company's leading counsel was able to deal with the petition as amended without seeking an adjournment does not alter the fact that an important and material change was made to the petition and it was on the amended case that the court was asked to adjudicate on the petitioners' claim to be creditors of the Company.

12. The other broad ground advanced by Mr Bartlett is that the amendments would not have altered the position in that the Company was always going to contest the petition vigorously, regardless of whether the amendments were made. He referred me to Kaines (UK) Ltd v Osterreichische [1993] 2 Lloyd's Rep. 1 at 9, which was cited at Beoco, supra. at 1193B. He has set out in his submissions the considerable number of issues raised by the Company and ultimately abandoned at the hearing. It does seem to me that the Company's approach from the start has been to generate as much delay as possible by raising as many issues as it could to buy time. I agree with Mr Bartlett's assessment that the late amendment would have made no difference to the Company's opposition to the petition. In these circumstances, I think there is sufficient justification to depart from the rule of awarding costs of the proceedings to the opposite party down to the date of the late amendment.

13. I order that the petitioners should have the costs of the contested hearing, with a certificate for two counsel, to be paid out of the assets of the Company. The costs in favour of the petitioners are to include all costs reserved on previous occasions, except for the costs of the late amendment of the petition. As for the costs of the late amendment, I follow the usual rule and order that the costs of and occasioned by the amendment of the petition be to the Company.

14. Regarding the costs of the Company, the Company has fully opposed the petition and failed. I make no order as to the Company's costs after the first hearing date of the petition, with the effect that they do not rank as costs of the petition within the 2nd category of rule 179 of the Companies (Winding-up) Rules and thereby achieve no priority over unsecured creditors (Re Bathampton Properties Ltd [1976] 1 WLR 168 at 172-5).

15. It is not necessary to provide for the costs of any supporting creditor as Notice of Intention to appear was served by the supporting creditors only after the contested hearing.

16. I also order that the petitioners are to have their costs of today as part of the costs of the petition and that they are to be paid out of the Company's assets.

Representation:

Mr Jeremy Bartlett, instructed by Messrs Herbert Smith, for the Petitioners

The Company, represented by Messrs Victor Chu & Co. on a watching brief

HCCW 1352/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1352 OF 2001

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D E C I S I O N

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1. This is an application by the provisional liquidators of Jinro (H.K.) International Limited ("the Company") for power to dispose of eleven kinds of loans and floating rate notes all in the nature of distressed debt securities. The application is opposed by the Company. The Official Receiver adopts a neutral position. The petitioners support the application of the provisional liquidators.

2. The estimated market value of these securities is in the region of US$1.7 million. Other than these securities, the only valuable asset of the Company is its interest in Jinro Japan Inc. The Company is insolvent, on the available evidence that has been adduced before the court in previous applications.

3. These securities are of a highly speculative nature. The provisional liquidators have obtained indicative bid pricing from Deutsche Bank and ICAP AP (Singapore) Pte Ltd. A number of them have been valued at as little as 5% or less of the principal amount.

4. The Company is opposed to giving power to the provisional liquidators to dispose of the securities on the ground that there should be no undue haste in this. It was submitted that the provisional liquidators should continue to investigate whether there would be any value in retaining these securities and, perhaps, to obtain expert advice if any of them should be sold. It was also submitted that if one of the reasons for the disposal of these securities is to fund the expenses of the provisional liquidators, the provisional liquidators should seek such funding from the petitioners who have applied for their appointment.

5. As I have said, these securities are of a highly speculative nature. Whether this is the right time to sell is a commercial decision that should rightly be left to the provisional liquidators, who are entrusted with the duty to gather in assets of this insolvent company for the benefit of creditors. The provisional liquidators may not necessarily wish to sell the securities immediately or en bloc, all they are seeking is power to dispose of some or all of these securities at an opportune moment.

6. In so far as the funding of the expenses of the provisional liquidators is concerned, there is no obligation that the provisional liquidators should seek funding from the petitioners in the first place.

7. In my view, it would be appropriate to grant the order as sought in paragraph 3 of the summons with one amendment in that the securities concerned should be set out in a schedule annexed to the order.

Representation:

Mr Jonathan Harris, instructed by Messrs White & Case, for the Provisional Liquidators

Mr Cheong of Messrs Herbert Smith, for the Petitioners

Mr Pierrepont of Messrs Victor Chu & Co., for the Company

Mrs C Sit, for the Official Receiver

HCCW 1352/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1352 OF 2001

____________

____________

_______________

D E C I S I O N

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The application

1. This is an application by the petitioning creditors, Goldman Sachs International and Goldman Sachs (Asia) Finance (collectively "the petitioners") for the appointment of provisional liquidators to Jinro (H.K.) International Limited ("the Company"), pursuant to section 193 of the Companies Ordinance, Cap. 32. The timing of the application is somewhat unusual. It was made at an advanced stage after the substantive hearing of the winding up petition and is proposed in lieu of immediate liquidation of the Company. An application under section 193(1) and (2) may be made at any time after the presentation of the petition and before the making of the winding-up order.

2. The application arose in this way. Between 25 to 28 March 2003, I heard the petition to wind up the Company. Judgment was reserved at the conclusion of the hearing. Before judgment was handed down on 14 May 2003, a letter dated 3 April 2003 was received from the petitioners' solicitors, stating that they have instructions to apply for the appointment of provisional liquidators to explore the benefits to creditors of a rescue or restructuring as opposed to immediate liquidation. In view of this communication, notwithstanding I have ruled in favour of the petitioners on their locus to present the petition, which was the only ground raised in opposition, I did not make a winding-up order immediately and gave directions that the petition is to be restored to a date to be fixed, to deal with the application proposed to be made for the appointment of provisional liquidators.

3. After judgment was handed down and on 22 May 2003, the petitioners issued the present summons. Evidence in support and in opposition was filed pursuant to the directions given. On 20 June 2003, the petitioners issued a summons to amend the summons for appointment of provisional liquidators. The majority of the proposed amendments are designed to assist the provisional liquidators in dealing with overseas parties and assets belonging to overseas entities and to clarify the basis on which powers in respect of subsidiaries of the Company are being sought to be exercised.

4. Two further creditors, Avenue Asia International Limited and Avenue Asia Investments, L.P., have given notice of intention to appear as supporting creditors on 2 April 2003. When they learned of the intention of the petitioners to apply for the appointment of provisional liquidators, they have written to the petitioners' solicitors on 19 May 2003 indicating their support for the application. These creditors are allegedly owed a total of US$18 million as holders of the Guaranteed Floating Rate Notes issued by the Company due 2001.

5. The Company has admitted its insolvency at the hearing of the petition. For background information relating to the Company, its parent company in Korea, Jinro Limited ("Jinro Korea"), and its wholly owned subsidiary in Japan, Jinro Japan Inc. ("Jinro Japan"), I refer to paragraphs 4 to 8 of my judgment on 14 May 2003. The Company was effectively the vehicle for the investments of Jinro Korea outside Korea, and the principal asset of value of the Company is its holding of all the shares in Jinro Japan. Jinro Japan conducts a valuable and profitable business in the Japanese market importing and distributing an alcoholic beverage called soju, pursuant to distribution agreements probably made between Jinro Korea and Jinro Japan initially. Jinro Korea also has an arrangement with the Company to supply soju and related alcoholic products for sale in Hong Kong and Mainland China.

The grounds for the application

6. The petitioners are concerned that if a winding-up order were made, this might have negative effects on distribution agreements to which the Company or Jinro Japan is a party. It is possible that the making of a winding-up order might lead to automatic termination of such agreements or the granting of an automatic right to the other party to terminate. The petitioners' solicitors have repeatedly requested the Company to provide copies of the relevant distribution agreements, but the Company has chosen not to disclose any such agreement or document evidencing the arrangements in correspondence or to exhibit them to any of the affirmations filed herein.

7. According to the evidence filed by the Company, there was a shareholders' meeting of Jinro Korea on 28 May 2002 at which the "transfer of Japan-related liquor export business was approved as presented", "as part of its corporate restructuring efforts". The transferee company is a wholly owned subsidiary called JML Company Limited ("JML"), a company incorporated in Korea on 20 June 2002 with a total paid up capital of 50 million Won, which is apparently the statutory minimum amount. The petitioners do not know what exactly was transferred by Jinro Korea to JML but consider it likely that the transfer would have impinged on the business of Jinro Japan. According to the affirmation of Mr Hak Chul Kim, the president of JML filed on behalf of the Company on 13 June 2003, under the current arrangement, JML is the sole supplier of soju and related alcoholic beverages distributed by Jinro Japan.

8. The petitioners are also concerned about the likely negative reaction of the senior management and staff of Jinro Japan to a perceived "liquidation scenario" as a result of the winding up of the Company. The Japanese employees would be very important to preserving the value in the business there and the continuation of ongoing operations. The petitioners are of the view that the Japanese employees would be more likely to cooperate and provide support if they understand that provisional liquidators are looking to rescue and turn round the business of Jinro Japan instead of closing it down.

9. Hence, the petitioners seek the appointment of provisional liquidators to preserve and protect the assets and businesses of the Company and Jinro Japan, to allow for an independent investigation and review of the commercial options for restructuring of the Company, which, if feasible, is likely to enhance the return to creditors. It is envisaged that provisional liquidators would take steps to secure the Company's shareholding of Jinro Japan, implement arrangements to supervise Jinro Japan and its business, and take such action as may be necessary to prevent the dissipation of assets or the disruption of business. Given the strong performance of Jinro Japan, these assets should be attractive for sale or investment if offered by provisional liquidators and appropriately packaged or structured. The provisional liquidators would have greater flexibility, as compared to a winding up, to plan and implement structuring options, ranging from a scheme of arrangement to a sale of the Company or individual businesses.

10. A receiver has been appointed recently for Jinro Korea by the Korean Court, as I will mention further. The petitioners seek the appointment of provisional liquidators to "mirror" the appointment of the receiver in Korea, so as to allow these court appointed officials to explore together the possibility of a restructuring process which might well be to the advantage of all the creditors of the Company and the Jinro Group as a whole. The Company and Jinro Japan could be an attractive part of a larger restructuring centring on Jinro Korea's operations. It is recognised that the value of the Jinro Group may be maximized by a group-wide restructure by cooperation with the receiver in Korea, than from a realisation or restructuring of the separate business components in Korea, Hong Kong and Japan.

11. The petitioners have explained that they did not make this application at an earlier stage due to the vigorous challenge by the Company of their locus to petition for winding up.

12. The application thus framed is primarily "rescue-based" rather than "jeopardy-based". The timing of the application is influential in this regard. As the court is minded to wind up the Company immediately but for this application, there is scarcely any need for provisional liquidators to be appointed purely to protect assets at this late stage. Once a winding-up order is made, under section 194(1)(a) of Cap. 32, the Official Receiver is automatically the provisional liquidator and continues to act as such until the liquidator is appointed.

13. The basic requirements to be satisfied for such an appointment to be made are well established (Re Five Lakes Investment Co. Ltd [1985] HKLR 273). The applicant must show a good prima facie case for the making of a winding-up order at the ultimate hearing of the petition. As I have ruled in favour of the petitioners in the substantive hearing of the petition that they are entitled to a winding-up order, this requirement is clearly satisfied, notwithstanding that the Company has filed a Notice of Appeal against the judgment. The other requirement is that it must be shown that it is appropriate for provisional liquidators to be appointed, having regard to the commercial realities, the degree of urgency and need established by the applicant, and the balance of convenience in all the circumstances of the case.

14. There is no dispute that it may be appropriate for provisional liquidators to be appointed to facilitate a corporate rescue in order to maximise recovery for creditors, if it is demonstrated that a valuable asset, such as the listing status of the company, may be realised in the event that the company is not wound up (Re Keview Technology (BVI) Ltd [2002] 2 HKLRD 290; Re Luen Cheong Tai International Holdings Ltd [2002] 3 HKLRD 610 and [2003] HKEC 90; Re I-China Holdings Ltd [2003] HKEC 35; Re Fujian Group Ltd [2003] HKEC 266).

15. The timing of the present application differs from the cases cited above. There is no listing status here that provides a specific focus for the corporate rescue. However, I do not think these distinguishing features should matter for present purpose. As submitted by Mr Bartlett, who appeared for the petitioners, the principles stated in the above cases are of broad scope and not predicated on the peculiar phenomenon of the availability of a listing asset for realisation. There is no statutory restriction on the circumstances of appointing provisional liquidators or on the width of the powers of provisional liquidators under section 193(3) of Cap. 32 or rule 28(1) of the Companies (Winding-up) Rules. The court's discretion is unfettered provided it is exercised in a "proper judicial manner" (Re Highfield Commodities Ltd [1985] 1 WLR 149 at 159). As stated in Re Keview Technology, supra. at 293C: "The duty of the Court is to see what, in the circumstances of each case, within the existing framework of the law, can be done, which is just and fair to all the parties involved in a winding-up petition, in particular, creditors seeking to maximise recovery". Besides, the distribution rights of Jinro Japan may be destroyed by a winding-up order, so in that respect they would share some of the characteristics of the listing status of the companies concerned in the cases cited.

16. If upon investigation by the provisional liquidators, it should be considered that there is in fact no benefit to the creditors in restructuring, the provisional liquidators or the petitioners would proceed to seek a winding-up order. This would not be regarded as an abuse of the process of the court (Re Luen Cheong Tai, supra. at 620C to D).

17. I am satisfied that from a jurisdictional perspective, there is no obstacle to appointing provisional liquidators in this instance. The question is whether the discretion should be exercised in favour of an appointment.

Recent developments in Korea

18. I turn to the recent developments in Korea.

19. On 31 March 2003, after the hearing of the petition, Jinro Korea has defaulted under its composition plan, which was sanctioned by the Seoul District Court on 19 March 1998. As a result, Senna Investments (Ireland) Limited ("Senna"), a Goldman Sachs company which holds debt issued by Jinro Korea, filed a reorganisation petition. This is a procedure similar to the appointment of a receiver to the debtor company at the behest of its creditors.

20. On 14 May 2003, the Seoul District Court ruled in favour of Senna on its application and appointed Mr Lee Won ("the Korean receiver") as the receiver of Jinro Korea. Jinro Korea has lodged an appeal against the reorganisation order, but the order remains in effect pending the determination of the appeal. The effect of the reorganisation order, as I am given to understand, is that the power of the board of directors is suspended immediately and such suspension will be effective until the termination of the reorganisation process. It would appear from the order, of which a rough translation has been provided, that the powers of the Korean receiver are subject to the supervision of the Korean Court, and for most substantial matters prior court approval is required. It should also be noted that the reorganisation order applies only to Jinro Korea and not to its subsidiaries, such as the Company and JML, although it is possible for the receiver to exercise the rights of Jinro Korea as shareholder of its subsidiaries and replace or change the board of directors of its subsidiaries in accordance with the applicable corporate law and rules of the relevant jurisdiction.

21. The Jinro Group does appear to have a viable core business in the production of alcoholic beverages notwithstanding its heavy debt burden. With the reorganisation order, it would seem that the restructuring would be driven by the Korean Court, the Korean receiver and the creditors of Jinro Korea, rather than by the Jinro Group itself.

22. Also on 14 May 2003, the Korean office of KPMG, KPMG-Samjung ("KPMG"), was appointed by the Seoul District Court to act as the Official Examiner and conduct financial due diligence on Jinro Korea and its subsidiaries, including the Company and Jinro Japan, and to report to the court the current financial position of each of these entities. The report of KPMG has to be filed with the court by no later than 31 July 2003, and will be available for inspection by all creditors of Jinro Korea.

23. The Seoul District Court has convened a first creditors' meeting to be held in Korea on 27 August 2003, when the report of KPMG will be considered by all creditors of Jinro Korea and the next steps can be considered and agreed upon. A corporate reorganisation plan, if formulated after the first creditors' meeting, would require the approval of 75% of those secured creditors and 67% of those unsecured creditors who have filed claims in the reorganisation proceedings as well as the confirmation of the court. About 6% of the total unsecured indebtedness of Jinro Korea arose out of its guarantee for the Floating Rate Notes issued by the Company, according to the current estimate of the Korean receiver, so to that extent there are creditors in common for Jinro Korea and the Company.

24. I should mention that at the outset of this hearing, Miss Ismail, who appeared for the Company, sought an adjournment of the application to appoint provisional liquidators until after the first creditors' meeting of Jinro Korea on 27 August 2003, to see what position might be arrived at for a group-wide restructuring, alternatively for three weeks, for the Company to respond to certain matters in the evidence in reply served by the petitioners on 21 June 2003. I refused to adjourn the application. I do not think what the Company may wish to answer in the reply evidence of the petitioners would be of critical importance to this application. As for the possibility of a group-wide restructuring, I have reservations if it would become sufficiently clear after the first creditors' meeting that this might be implemented. A group-wide restructuring is likely to be a complex and time-consuming exercise. It would not be appropriate to adjourn the application to await any further development at the first creditors' meeting in the circumstances. Whatever views the Korean receiver may hold on the possibility of a group-wide restructuring could be taken into consideration in the exercise of the discretion if provisional liquidators should be appointed.

Evidence in opposition

25. The main evidence filed by the Company in opposition to the application is an affirmation of the Korean receiver made on 13 June 2003. The Korean receiver is an independent officer of the court with such powers to act given to him by the court and by law. He regards it as his part of his responsibility to safeguard as far as possible the assets of the subsidiaries of Jinro Korea and the value of the businesses conducted by them, so as to preserve "shareholder value" for Jinro Korea and its creditors. He has opposed the appointment of provisional liquidators for the Company for these reasons.

26. Firstly, the Korean receiver is concerned that if provisional liquidators are appointed for the Company, they would interfere with the due diligence work of KPMG and the preparation of the report by the latter. KPMG has not started its review of the financial records of the Company and Jinro Japan at the time the Korean receiver made his affirmation herein. The Korean receiver is confident that KPMG would be given appropriate access to the records so long as he is able to exercise control over the Company and Jinro Japan, as at the moment. He is concerned that such access to the books and records of the Company and Jinro Japan might be denied to KPMG by the provisional liquidators, or that the provisional liquidators might not make available the key managers and employees for interview by KPMG because they would require the staff for other tasks.

27. Secondly, as one of the functions of the Korean receiver is to explore the possibility of a restructuring of the overall debts of Jinro Korea, including the debts of its subsidiaries that it has guaranteed, he considers it important that he should try to maintain control of the subsidiaries as far as possible. He has deposed that to the extent that he is able to exercise control over the existing directors and management of the Company and Jinro Japan, he intends to continue the current distribution agreements and to provide other support to them such as financial support including payment of necessary expenses, licence of intellectual property rights, marketing and advertising, and product development, to enable the businesses of the Company and Jinro Japan to continue as going concerns, whilst the possibility of a group-wide restructuring is explored. If, however, he is not able to control the affairs of the Company or Jinro Japan, with the appointment of provisional liquidators, he would "immediately recommend" to the Seoul District Court and seek its approval to terminate the distribution agreements and the financial and other support to the Company and Jinro Japan referred to above (regardless of whether the agreements would permit termination), and cause Jinro Korea to establish new distribution arrangements for Japan, Hong Kong and mainland China. His reasons for doing so would appear to be as follows.

28. He is of the view that the Company and Jinro Japan should be viewed as component parts of a "single, vertically integrated manufacturing and distribution business", conducted through the Jinro Group, and it would not be in the interests of Jinro Korea and its creditors, or the Jinro Group, to have the distribution of the group's products in Japan, Hong Kong and mainland China under the separate management of provisional liquidators.

29. Furthermore, he is of the view that the benefits to creditors of Jinro Korea, including the creditors of the Company as guaranteed by Jinro Korea, would be maximised if restructuring efforts for the Jinro Group were "centralised" and implemented from the level of Jinro Korea under his administration, rather than for each company in the group to explore separate individual restructuring possibilities under the administration of its own insolvency practitioner. There is no certainty that the provisional liquidators of the Company would cooperate with him towards a group-wide restructuring. He is concerned at the possibility that certain creditors of the Company may exert influence over the provisional liquidators causing them to refuse to cooperate.

30. Thirdly, under the Korean law, the receiver is duty bound to treat all creditors of Jinro Korea, and creditors of its subsidiaries as guaranteed by the parent company, fairly and to ensure that no creditor is preferred at the expense of others. He is obliged to submit to the court business and management reports on a monthly basis, balance sheet and profit and loss statements on a quarterly basis, and all creditors of Jinro Korea would have access to these reports. The Korean receiver has deposed that he is willing to undertake to use his best endeavours "to ensure that no creditor of [the Company] is unfairly prejudiced to the benefit of creditors of [Jinro Korea] or of other companies in the Jinro Group" and "to ensure as far as possible that any restructuring proposal submitted by [Jinro Korea] treats creditors of [the Company] fairly". Accordingly, he is of the opinion that provisional liquidators are "not necessary for the protection of [the Company's] creditors whose claims are guaranteed by [Jinro Korea], as their interests are already adequately protected through [his] appointment".

31. Miss Ismail submitted on behalf of the Company that significant weight should be attached to the views of the Korean receiver, in particular, his avowed intention to terminate the distribution arrangements of the Company and Jinro Japan regardless of whether the termination would constitute a breach of contractual provisions. She also emphasised that the Korean receiver has deposed in his affirmation that he was advised by lawyers in Korea that if he were to apply to court for approval to terminate the distribution agreements, it is "highly likely" that the court in Korea would grant approval. If that should happen, that would defeat the very objective of the petitioners in this application to bring about an enhancement of value for creditors.

Exercise of the discretion

32. There is no evidence to suggest that the provisional liquidators, who would function as officers of the court, may not cooperate with KPMG in providing information of the financial position of the Company and Jinro Japan or that they may not cooperate with the Korean receiver towards a group-wide restructuring. To the contrary, the petitioners have produced a letter from Ferrier Hodgson Limited dated 19 June 2003 stating that if their directors were to be appointed, they would cooperate with KPMG fully to establish the Company's financial position and work with the Korean receiver in relation to the possibility of a group-wide restructuring. Specifically, the proposed provisional liquidators would seek to agree and implement a Cross Border Protocol arrangement with the Korean receiver to deal with issues of concern to both including the following:

(1) harmonizing and coordinating the proceedings in Hong Kong and Korea, and Japan if required;

(2) ensuring the orderly and efficient administration of proceedings in the above jurisdictions;

(3) identifying, preserving and maximising the value of Jinro Group's worldwide assets for the collective benefit of the creditors of Jinro Group and other interested parties, wherever located;

(4) sharing of information and to minimise duplication of effort and costs; and

(5) complying with the laws of Hong Kong and Korea, and to satisfy the statutory and professional obligations of the Korean receiver and the provisional liquidators.

It seems to me that the concerns of the Korean receiver of lack of cooperation from the provisional liquidators should be allayed.

33. As for the control that the Korean receiver claims he has over the Company and Jinro Japan, his control is exercised by virtue of the rights of Jinro Korea as shareholder in that he can change the board of directors in accordance with the applicable corporate laws. He does not exercise direct control over these companies, as control is vested in the board of directors and the existing management. I therefore find it difficult to understand the importance of the shareholder's control to the Korean receiver in the discharge of his duties to safeguard the assets and businesses of the subsidiaries of Jinro Korea so as to warrant the draconian step he proposes to take to terminate the distribution agreements if provisional liquidators were appointed for the Company. It is odder still that he should immediately resort to such action without even allowing time to assess for himself whether the effect of such an appointment would indeed bring about any adverse consequence or disruption to the distribution businesses in Japan, Hong Kong and mainland China. After all, the provisional liquidators would be just as concerned as the Korean receiver to preserve the value in the distribution businesses and continue with ongoing operations, in order to bring about a restructuring process that would maximise recovery for the creditors.

34. In this application, the court is concerned with protection of the interests of the creditors of the Company. As the Company is insolvent, the interests of its shareholders are subservient to those of its creditors. The obligations and concerns of the Korean receiver are directed to the interests of Jinro Korea and its creditors, not to the interests of the creditors of the Company, unless they happen incidentally to be also the creditors of Jinro Korea. There is no evidence that the interests of the creditors of Jinro Korea are co-extensive with the interests of the creditors of the Company. It is clear that the indebtedness of Jinro Korea is substantial, whereas the full extent of the Company's current liability to creditors and their identity is not known. The Official Receiver is rightly concerned that the management and shareholders should continue to be in control of the Company, an insolvent entity, without any party looking after the interests of the creditors. Even though the Korean receiver has said he would use "best endeavours" to ensure that the creditors of the Company are treated fairly in any restructuring of Jinro Korea, he could not properly represent the interests of both the creditors of Jinro Korea and the creditors of the Company if those interests should diverge. I agree with the submissions of Mr Bartlett, and Miss Mckenna of the Official Receiver, that the situation calls for independent representation for the creditors of the Company.

35. As for the steps the Korean receiver may take to terminate the distribution agreements, he would need to apply to the court in Korea for approval and the creditors of Jinro Korea would be heard on the application. The Korean receiver has not stated in his affirmation why it is "highly likely" that his application would be granted even if creditors should object to this. The termination of distribution agreements is a draconian move, this would give rise to massive expense and an enormous amount of work. According to the affirmation of Mr Hak Chul Kim referred to earlier, termination of the distribution agreement may render Jinro Japan liable to pay damages to customers, wholesalers and distributors. Mr Tae Sub Kim, a director of the Company, said much about the same thing in his affirmation filed on 13 June 2003 as to potential liability of the Company to pay damages to customers, wholesalers and retailers, if commitments or orders could not be fulfilled owing to the termination of the distribution agreement. Both deponents are curiously non-committal as to any claim for damages Jinro Japan or the Company might have against Jinro Korea in respect of the termination of the distribution agreements, save to say that the value of any such claim would be uncertain in view of the insolvency proceedings relating to the parent company. I proceed on the basis that any decision of the Korean receiver to apply to court to approve the termination of the distribution agreements would not be taken lightly, without regard to all relevant considerations, and contrary to his professed willingness to undertake to use best endeavours to ensure that no creditor of the Company is unfairly prejudiced to the benefit of creditors of Jinro Korea or of other companies in the Jinro Group. In the event that such an application were made by the Korean receiver, I proceed on a similar basis that the court in Korea would take into account any valid objection that may be raised by any of the creditors and all relevant circumstances before reaching an appropriate decision.

36. The position of the Official Receiver on this application is that the court should take steps to protect the interests of the creditors of the Company by the appointment of an independent third party to manage the affairs of the insolvent entity in accordance with Hong Kong law. The option of allowing the Korean receiver to retain control of the Company in light of his stated intention is not supported by the Official Receiver. As regards the choice between the appointment of provisional liquidators and a winding-up order, the Official Receiver is in favour of the former, as the option of restructuring should be fully explored by an independent third party for the benefit of all creditors in the hope of achieving a group-wide restructuring.

37. In my judgment, in the interests of the creditors of the Company, the discretion should be exercised in favour of appointing provisional liquidators for the Company.

Orders

38. I grant leave to the petitioners to amend their summons for the appointment of provisional liquidators. I make an order in terms of paragraphs 1 to 3 of the amendment summons filed herein on 20 June 2003.

39. I turn to the amended draft order which is prepared on the basis of the summons as amended.

40. The petitioners initially offered an undertaking as to damages as it was unclear at the time of filing of the application whether this would be opposed by the Company. It was submitted that as the application was made inter partes and the Company was heard, it may not be strictly necessary to require an undertaking as to damages from the petitioners. Mr Bartlett referred me to Re The Prudential Enterprise, Limited HCCW No. 594 of 1999, 2 April 2003, paras. 57 to 59, which in turn referred to Highfield Commodities, supra. and some Australian decisions. I note the general practice is not to require an undertaking to be given where the application is inter partes, and it is recognised by Chu J in Prudential Enterprise that there may well be cases where it is necessary to extract an undertaking on an inter partes application. I consider the present case to be such an instance, in view of the avowed intention of the Korean receiver to seek to terminate the distribution agreements on the appointment of provisional liquidators.

41. I make an order appointing Mr Kelvin Edward Flynn, Mr Roderick John Sutton and Mr Desmond Chung Seng Chiong, all of Ferrier Hodgson Limited, jointly and severally as the provisional liquidators of the Company until further order upon, inter alia, the petitioners' undertaking as to damages. The terms of their appointment and other orders I make on the amended summons are as per the amended draft order, with the exception of the following:

(1) In paragraph 3(3), I delete the word "examinations" to make clear that an application to the court is required if it is sought to conduct examinations of any one under section 221 of Cap. 32.

(2) I delete paragraphs 3(5) and (19) which relate to disposal of the assets of the Company without first obtaining the sanction of the court, even though they are qualified by the words "so far only as may be necessary for the purpose of protecting the assets of the Company, and managing the affairs of the Company". They are objected to by the Official Receiver as being too wide. I do not think the work of the provisional liquidators would be hampered if they are required to seek court approval for disposition of assets.

(3) Paragraph 3(29) is to be varied in the manner as suggested by Mr Bartlett in that the last part of the opening words is to read "which may include but are not limited to the following", to address the concern raised by Miss Ismail that wider powers would appear to have been given in relation to the subsidiaries, which is not the case.

(4) Similar alterations are made in relation to the powers exercised in relation to the subsidiaries, as I have done in respect of the Company in (1) and (2) above. Thus the word "examinations" is to be deleted from sub-paragraph (c) and sub-paragraphs (e) and (p) are to be deleted.

(5) Paragraph 4 is to be varied by deleting the words "forthwith deliver to the Provisional Liquidators" and substituting them with "cause to be delivered to the Provisional Liquidators as soon as practicable". This relates to the delivery up of the Company's share certificate of Jinro Japan, which is not in the custody of the Company but is in the custody of the Korean receiver.

(6) Paragraph 6 is to be varied by inserting these opening words "subject to the approval of the court", this relates to the remuneration of the provisional liquidators.

(7) The last paragraph relating to the non-avoidance of disposition by the provisional liquidators by virtue of section 182 of Cap. 32 is deleted as this can be dealt with when the provisional liquidators seek approval of the court to dispositions.

42. In view of the above orders on the appointment of provisional liquidators, I give these further directions as to the hearing of the petition:

(1) The petition is to be adjourned to 15 September 2003 9:30 am.

(2) The provisional liquidators are to submit a report to the court 7 days before the adjourned hearing on the progress of restructuring for the Company.

(3) The petitioners are to file and serve evidence on the orders they propose to seek at the adjourned hearing by 10 September 2003.

Representation:

Mr Jeremy Bartlett, instructed by Messrs Herbert Smith, for the Petitioners

Ms Roxanne Ismail, instructed by Messrs Deacons, for the Respondent

Ms Phyllis Mckenna, for the Official Receiver

HCCW 1352/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1352 OF 2001

____________

____________

_______________

J U D G M E N T

_______________

1. This is a creditor's petition presented by Goldman Sachs International ("GSI") and Goldman Sachs (Asia) Finance ("GSAF") (collectively "the petitioners") to wind up Jinro (HK) International Limited ("the Company") under section 177(1)(d) of the Companies Ordinance, Cap. 32, on the ground that the Company is unable to pay its debts. The debt in the re-amended petition is in the sum of US$31,427,934.03, calculated up to 8 November 2001. It is alleged that the principal sum of US$23 million is owed to GSI with interest accrued due up to the aforesaid date of US$5,913,669.31 and that US$2 million is owed to GSAF with interest accrued due up to the same date of US$514,234.72. The petition herein was presented on 14 December 2001, after a demand for the debt was served on the Company on 12 November 2001.

2. The Company initially opposed the petition on a number of grounds. At the close of the petitioners' case, Mr Bleach, SC indicated on behalf of the Company that only one broad ground is relied on in opposition, in that the locus of each of the petitioners as creditors is disputed. There is no need to be further concerned with the grounds abandoned or the new matters raised, whether by the Company or by the petitioners, until I come to deal with the question of costs.

3. The only witness for the petitioners is Mr Jeffrey Fergus, who is currently an executive director of Goldman Sachs (Asia) LLC. For the Company, only two witnesses were called in the end. They were Mr Walter Yanghoon Kim ("Mr Walter Kim"), the legal counsel to the Jinro group of companies, and Mr Tae Sub Kim ("Mr TS Kim"), a director of the Company. All three were cross-examined on their affidavits or affirmations, which were adopted as their evidence in chief. The resolution of the main issue in dispute does not turn on any conflicting evidence as to fact. The issue to be resolved is entirely a question of law and the proper construction of documents. As examples of cases in which the courts have had to do a similar construction exercise to determine whether the petitioner in a creditor's petition to wind up a company had the necessary locus, Mr Strachan for the petitioners has referred me to In re Uruguay Railway Company (1879) 11 Ch D 372 (in which it was held that the petitioner, being the holder of a mortgage bond, was not a creditor, upon the terms of a trust deed) and In re Olathe Silver Mining Company (1884) 27 Ch D 278 (in which it was held that the petitioner, being the holder of some debentures, was a creditor, upon the terms of the debentures and a trust deed).

The Company and its parent

4. There is no issue when it came to the hearing of the petition that the Company is insolvent. I will just give a brief description of the Company and its parent.

5. The Company was incorporated in Hong Kong on 28 February 1996. It has an authorised and issued share capital of US$9,450,000.00, divided into 9,450 shares of US$1,000.00 each. 9,449 of these shares are held by Jinro Limited ("Jinro Korea"), a company established in the Republic of Korea. The Company has been engaged in the trade of soju (a distilled spirit popular in Korea) in the markets of Hong Kong and Mainland China. Jinro Japan Inc. ("Jinro Japan") is a wholly owned subsidiary of the Company and is mainly engaged in the sale and distribution of soju in Japan.

6. Jinro Korea was founded in 1924 with the traditional business of trading in soju. It is the flagship company in the Jinro group of companies, which has a diversified range of businesses. The shares of Jinro Korea have been listed on the Korea Stock Exchange since 1973 until they were delisted in January 2003.

7. On 7 September 1997, Jinro Korea filed an application for composition with the Seoul District Court under the Korean Composition Act, which I am given to understand, is similar to the Chapter 11 procedure in the United States that provides a moratorium from creditor action to allow a company in financial difficulties to re-organise its affairs and to improve its position. The composition plan was sanctioned by the Korean Court on 19 March 1998. As a result, the creditors of Jinro Korea have been prevented from enforcing their claims so long as there is compliance by Jinro Korea with the composition plan.

8. As for the Company, the latest audited accounts for the year ended September 2001 showed the Company to be insolvent. The net liabilities according to these accounts stood at HK$266 million odd.

The debt in the petition

9. The debt to the petitioners is said to arise in this way. Four months after its incorporation and in June 1996, the Company issued Guaranteed Floating Rate Notes ("the 2001 Notes") in bearer form in denominations of US$100,000.00 and US$500,000.00 with an aggregate value of US$50 million, for the purpose of raising finance in the international capital markets. The 2001 Notes were guaranteed by Jinro Korea, with interest payable in arrears at six monthly intervals in June and December commencing December 1996 and the principal repayable on the maturity date of 27 June 2001. Chuo Trust Asia Limited was appointed the fiscal agent and the fiscal agent and other financial institutions were appointed paying agents for the Company in relation to the 2001 Notes.

10. The 2001 Notes were issued pursuant to documentation dated 14 June 1996 and 24 June 1996 ("the issue documentation"). The main issue documentation I will be concerned with consists of the following:

(1) the terms and conditions of the 2001 Notes, set out in the fourth schedule to the Fiscal Agency Agreement;

(2) the Permanent Global Note (" the PGN"); and

(3) the Deed of Covenant executed by the Company as the issuer of the 2001 Notes in favour of the "Accountholders" as defined therein ("the Deed of Covenant").

11. It is expressly provided in the issue documentation that the 2001 Notes are governed by and shall be construed in accordance with English law. The Deed of Covenant also contains a similar provision on the governing law of the Deed. It is accepted that there is no difference between English law and Hong Kong law in respect of the petitioners' locus as founded upon the issue documentation.

12. It is apparent from the issue documentation that the Company intended to, and did in fact, issue the 2001 Notes into the Euroclear system, which is a securities clearing and settlement system that provides a means of trading in and making payments in respect of internationally traded securities. The practice and procedure of the Euroclear system are of importance here and I will go into details in subsequent paragraphs.

13. The 2001 Notes were all initially represented by a "temporary global note" in bearer form, which was then exchanged for the PGN in bearer form issued on 24 June 1996. The PGN was duly deposited with Deutsche Bank, Hong Kong branch, for Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear system. Under the terms of the PGN, the PGN would be exchangeable for notes in definitive form ("Definitive Notes") against surrender of the PGN if, inter alia, an event of default under the terms and conditions of the 2001 Notes should occur.

14. There is no dispute that when Jinro Korea filed an application for composition in the Korean Court on 7 September 1997, this had constituted the first event of default under the terms and conditions of the 2001 Notes.

15. It is also not in dispute that the Company had only paid interest under the 2001 Notes for the periods up to and including 24 December 1997, and that interest for the six-month period ending December 1997 was paid late on 15 February 1998. No further interest payments were made thereafter, nor was the principal paid on the maturity date. The successive failure to pay principal and interests constituted further events of default under the terms and conditions of the 2001 Notes.

16. Under clause 7 of the PGN, it is provided that the Definitive Notes shall be issued within 45 days of the delivery of the PGN becoming exchangeable. The material part of this clause continued as follows:

"If Definitive Notes have not been issued by 5.00 p.m. London time on such forty-fifth day, then this Permanent Global Note, including the obligation to issue and deliver Definitive Notes, will become void and the bearer hereof will have no further rights under this Permanent Global Note (but without prejudice to the rights which the bearer hereof or others may have under [the Deed of Covenant], a copy of which may be inspected (and certified copies obtained) at the specified office from time to time of the Fiscal Agent)." (emphasis supplied)

17. Whether Definitive Notes were to be issued was entirely a matter for the Company. No such notes were issued in this instance, by the expiry of 45 days from 7 September 1997, i.e. 22 October 1997. Thus, by virtue of clause 7, as from 22 October 1997, the PGN has become void.

18. It was only after 22 October 1997 that the petitioners have acquired "rights" in the 2001 Notes by way of trading in the Euroclear system. On 28 October 1998, GSAF purchased 2001 Notes with a face value of US$2 million for its own account. Between 4 June 1999 and 7 November 2000, GSI purchased 2001 Notes with a face value of US$23 million on behalf of ASO I Delaware LLC, which is a corporate vehicle for a Goldman Sachs investment fund managed by affiliates of the petitioners. What rights, if any, have been acquired by the petitioners in the purchases is the crux of this dispute.

19. The petitioners' pleaded case of their claim to be creditors of the Company went through several changes. Initially, it was pleaded that they are the holders of the 2001 Notes. Then the petition was amended to plead that they are the "Accountholders" under the Deed of Covenant. In the latest amendment, which was made with leave granted on the first day of trial, it is pleaded that as a result of the petitioners' purchase of the 2001 Notes, they are "successors and/or assigns [of the Accountholders] and/or equitable assignees of the rights under the Deed of Covenant".

20. The previous assertions that the petitioners are holders of the 2001 Notes as well as Accountholders have not been abandoned in the latest amendment. It is however accepted by the petitioners that they cannot be Accountholders under the Deed of Covenant, having regard to the definition of this expression in the Deed, which is dealt with below. As for the rights of holders under the 2001 Notes, the Notes were represented by the PGN which has become void.

21. The Company has accepted that undoubtedly it is liable to someone under the Deed of Covenant in respect of the 2001 Notes which the petitioners believed they were acquiring, but contends that the petitioners have failed to establish that they have acquired any valid rights which could be enforced against the Company.

The Deed of Covenant

22. As the Deed of Covenant is the document upon which the petitioners' rights are founded as alleged, I shall set out the material provisions.

23. Clause 2 of the Deed of Covenant provides as follows:

"2. Direct Rights

2.01 Creation: If the Permanent Global Note becomes void in accordance with its terms, each Accountholder shall have against the Issuer [i.e. the Company] all rights ("Direct Rights") which such Accountholder would have had in respect of the Notes if, immediately before the Relevant Date, it had been the holder of Definitive Notes, duly executed, authenticated and issued, in an aggregate principal amount equal to the Principal Amount of such Accountholder's Entries including (without limitation) the right to receive all payments due at any time in respect of such Definitive Notes as if such Definitive Notes ... had been duly presented and ... surrendered on the due date in accordance with the Conditions.

2.02 No further action: No further action shall be required on the part of the Issuer or any other person:

for the Accountholders to enjoy the Direct Rights; and

for each Accountholder to have the benefit of the Conditions as if they had been incorporated mutatis mutandis into this Deed of Covenant;

provided that nothing herein shall entitle any Accountholder to receive any payment in respect of the Permanent Global Note which has already been made."

24. A number of expressions in clause 2 have been defined in clause 1.01 and the relevant ones are as follows:

"Accountholders" means "any accountholder with a Clearing System which at the Relevant Date has credited to its securities account with such Clearing System one or more Entries in respect of the Permanent Global Note ...";

"Clearing System" means "each of Euroclear and Cedal Bank";

"Conditions" means "the terms and conditions of the Notes (as scheduled to the Fiscal Agency Agreement and as modified from time to time in accordance with their terms) ...";

"Entry" means "any entry which is made in the securities account of any Accountholder with a Clearing System in respect of Notes represented by the Permanent Global Note";

"Relevant Date" means "the date on which the Permanent Global Note becomes void in accordance with its terms".

25. Hence, under clause 2.01, the Deed accords to each Accountholder, who has entries in respect of the PGN credited to its account on the date when the PGN becomes void in accordance with its terms, Direct Rights against the Company, being essentially the rights which would have been possessed by a holder of Definitive Notes. Since the petitioners had only purchased the 2001 Notes after the Relevant Date, they cannot be Accountholders under the Deed.

26. Clause 6 however extends the category of persons who can take the benefit of the Deed of Covenant beyond Accountholders and it provides as follows:

"6. Benefit of Deed of Covenant

6.01 Deed poll: This Deed of Covenant shall take effect as a deed poll for the benefit of the Accountholders from time to time.

6.02 Benefit: This Deed of Covenant shall enure to the benefit of each Accountholder and its (and any subsequent) successors and assigns, each of which shall be entitled severally to enforce this Deed of Covenant against the Issuer.

6.03 Assignment: The Issuer shall not be entitled to assign or transfer all or any of its rights, benefits and obligations hereunder. Each Accountholder shall be entitled to assign all or any of its rights and benefits hereunder."

27. It is asserted by the petitioners that as purchasers of the 2001 Notes in the Euroclear system, they are "successors and assigns" of Accountholders or downstream purchasers from Accountholders, and are therefore creditors within the meaning of section 178(1)(a) of Cap. 32. Further or alternatively, they also have locus to petition for winding up of the Company by virtue of sections 178(1)(c) and 179(1) as a creditor in equity of the Company, as they are equitable assignees of the Direct Rights in respect of the 2001 Notes granted to Accountholders under the Deed of Covenant.

28. The Company's contention is that neither the PGN nor the Deed of Covenant envisages any trading through the Euroclear system after the PGN has become void and the Direct Rights are triggered under the Deed. Once the Definitive Notes are issued, the relevant securities exit the Euroclear system. As the Direct Rights are to be the same rights as if Definitive Notes were issued immediately before the PGN becomes void, it is contended that the Direct Rights must exit the Euroclear system upon the PGN becoming void. Hence, there can be no valid assignment of the Direct Rights by virtue of a change of account entries by way of trading through Euroclear.

29. There are two other material provisions in the Deed of Covenant relating to evidence and the deposit of the Deed. I set out the full terms below:

"3. Evidence

3.01 Records: The records of the Clearing Systems shall be conclusive as to the identity of the Accountholders and the respective amounts credited to their securities accounts and a statement issued by a Clearing System setting out

(a) the name of the Accountholder in respect of which it is issued; and

(b) the Principal Amount of any Entry credited to the securities account of such Accountholder with such Clearing System on any date,

shall be conclusive evidence for all purposes of this Deed of Covenant.

3.02 Relevant Date: If a Clearing System determines the Relevant Date, such determination shall be binding on all Accountholders with such Clearing System.

4. Deposit of Deed of Covenant

This Deed of Covenant shall be deposited with and held by the Fiscal Agent until the date on which all the obligations of the Issuer under or in respect of the Notes (including, without limitation, its obligations under this Deed of Covenant) have been discharged in full. The Issuer hereby acknowledges the right of every Accountholder to the production of this Deed of Covenant."

The Euroclear system

30. I turn to the practice and procedure of the Euroclear system, as they form an important part of the factual matrix for the purpose of construing the provisions in the Deed of Covenant. The following account is taken from the evidence of Mr Fergus, who has practical experience with the procedures as part of his work, and from various publications of Euroclear exhibited to his 3rd affidavit.

31. The Euroclear system is the world's largest clearance and settlement system for internationally traded securities. It also provides a custodian service for securities and is an international central securities depositary ("ICSD"). The majority of participants in the system are banks, brokers, dealers, custodians, and other institutions professionally engaged in managing new issues of securities, market making, trading or holding the wide variety of securities accepted in the system. The participants trade in the system as principals, notwithstanding that they may trade on their own behalf or on behalf of an underlying investor. GSI was, at all relevant times, a participant in Euroclear and had operated three Euroclear securities clearance accounts. GSAF had its own Euroclear securities account since October 1999.

32. Prior to the acceptance of a new issue of securities for trading in the system, various criteria would have to be met. The important ones for present purpose, as set out in the "Guide to acceptance of securities in the Euroclear system" ("the User Guide"), are as follows.

(1) Immobilization of securities

33. To be accepted for trading in the system, securities must be deposited with one of the Euroclear depositaries and a depositary is appointed by the Euroclear Operations Centre ("EOC") for each issue accepted in the system. Securities designed for the ICSD are generally issued in the form of a temporary global note which is subsequently exchanged for a permanent global note. Where securities are represented by a global note, these are lodged with a common depositary authorised by Euroclear. Where securities are represented by definitive notes or other certificates, these are lodged with a specialised depositary, generally located in the country in whose currency the notes or certificates are denominated, or where the issuer is located. In this way, the physical documents which represent the securities traded in the system are "immobilized" in the Euroclear depositary network. The immobilization of securities enables a high volume settlement to take place without the movement of the underlying physical certificates. The settlement of transfers is done electronically, sales and purchases of such securities are recorded by book entries in the accounts of participants who are recognised as accountholders in respect of the securities. Payments due in respect of the securities are made by the issuer via the paying agents to the common depositary and thence into the Euroclear system. There is no registry maintained by or under the control of the issuer which records the legal ownership of the securities.

34. In the present case, when GSI or GSAF acquired the 2001 Notes, each acquisition is represented simply by an entry in the respective securities clearance account of GSI or GSAF. And when payment of interest for the six-month period ending December 1997 was effected on 15 February 1998 (this was after the first event of default and before the petitioners had begun to acquire the 2001 Notes), the payment was remitted to Euroclear and paid by Euroclear to those who had account entries at that time in respect of the 2001 Notes. At the request of the petitioners, Euroclear has provided a certification by letter dated 5 March 2002 that the petitioners were holding the 2001 Notes in their respective accounts at Euroclear in the respective principal amounts of US$2 million and US$23 million at all times since 12 November 2001, being the date of the statutory demand in these proceedings.

(2) Fungibility

35. For securities to be accepted in the system, it must be possible to hold them on a fungible basis. Amongst other things, this means that all securities of a same issue must be treated as equivalent. It is provided in clause 4(a) of the "Terms and conditions governing use of Euroclear" ("the Euroclear Terms") that no accountholder has entitlement to any specific securities but each will be entitled to transfer (by book entry), to deliver or to repossess from Euroclear an amount of securities of any issue equivalent to the amount credited to any securities clearance account in its name. It is further provided in the Euroclear Terms that a security "shall be deemed to be held in the Euroclear System" if it is standing to the credit of a securities clearance account (clause 4(d)(i)(v)) and that a security held in the Euroclear system "shall be deemed to be held by the holder of the Securities Clearance Account" to which it is standing to the credit (clause 4(d)(ii)(v)). Hence, accountholders have a co-ownership right in the notional pool of securities of each category held on their behalf by Euroclear and this intangible right is represented solely by a book-entry record in the securities clearance account of the participant, see "Operating procedures of the Euroclear System" ("the Euroclear Operating Procedures") clause 3.2.

(3) Transferability

36. Securities deposited in the system must be freely transferable between participants, without further reference to or communication with the issuer. Transfer restrictions are acceptable only if they require the standard certification procedures described in the User Guide. As a general rule, EOC handles certifications only in relation to the exchange of temporary global securities, the payment of income or redemption proceeds, or the exercise of certain custodian operations. Other restrictions on the transfer of beneficial ownership or registered title can only be enforced outside the Euroclear system and participants are solely responsible for complying with such restrictions. It is also provided in clause 10.3.1(c)(ii) of the Euroclear Operating Procedures that each participant is solely responsible "for informing itself of the characteristics of the securities it holds, or it intends to hold, or to be recorded on any Account through the Euroclear System including without limitation ... holding or transfer restrictions ...".

(4) Disclosure

37. EOC does not accept securities of which the terms and conditions require EOC to disclose information about the participants' holdings of the issue. EOC is generally prevented, without a participant's authorization, from disclosing ownership of securities held in the system by applicable law. Moreover, EOC has no knowledge of the beneficial ownership of securities held by participants, which often hold securities of their own clients in the system.

38. In November 1999 (this was two years after the first event of default and after the petitioners had started to purchase the 2001 Notes), the Company by its fiscal agent issued a notice into Euroclear for distribution to accountholders. By the notice, the Company requested disclosure of the identities of "the current holders of the Notes", since the Company would like to consider convening either a noteholders' meeting or meeting with noteholders on a one to one basis to discuss the future treatment of the 2001 Notes in view of the composition plan of Jinro Korea confirmed by the Korean Court on 19 March 1998. The request was made subject to the noteholders' consent to declare their identity to Euroclear. As accountholders with credit entries in respect of the 2001 Notes, the petitioners received the notice from Euroclear.

(5) Enforcement of holders' rights

39. Neither EOC nor its depositaries will enforce the terms of securities against an issuer or guarantor on behalf of persons holding such securities through the Euroclear system. The beneficial owners of the securities must be able to enforce their rights under the terms of the securities against the issuer and/or the guarantor and specific arrangements may be necessary to achieve this when the securities are represented by permanent global certificates. If there is no trustee for the issue (who will be responsible for enforcing beneficial owners' rights against the issuer in the case of default) and the issue is evidenced by a global certificate, there should be a "clearly documented procedure" in place whereby either:

* Euroclear participants or the beneficial owners can appoint a trustee; or

* the issuer exchanges the global certificate into individual certificates that can be delivered out of the Euroclear system; or

* if the issuer cannot issue definitive certificates, a Deed of Covenant or similar provision included in the terms and conditions should state that the issuer will recognise statements of account, issued by EOC to participants, as evidence of beneficial ownership.

40. A full description of an event of default should also be included in the terms and conditions of the securities, for example a declaration of default on the request of a beneficial owner to a fiscal agent or other agent, or as to an automatic default. Euroclear requires that in a default situation the issuer must recognise the beneficial owner's rights in the securities. It is expressly provided in the User Guide at page 27 that "securities in default" can be held in the Euroclear system.

41. In issuing the 2001 Notes into the Euroclear system, the Company had sought to structure the issue of the securities to comply with the acceptance criteria described above. It is provided at page 35 of the User Guide that when a new securities issue is submitted to Euroclear for consideration of acceptance, the issuer's advisers and agents are required to specifically draw to Euroclear's attention "any unusual, innovative or non-standard features which are not immediately identifiable from a routine review of the documentation". In particular, Euroclear requires the issuer to highlight any feature in the terms of security issue where "beneficial ownership certification [by Euroclear] does not conform with the standard certification". If unusual or non-standard features are not discussed and agreed to by Euroclear prior to acceptance, such special features may not be serviced by Euroclear. There is nothing in the issue documentation of the 2001 Notes to indicate that there is any unusual or non-standard feature about the securities issued into the Euroclear system.

42. The petitioners have also obtained a letter dated 19 April 2002 from the Legal Division of Euroclear confirming that securities held under the system are to be handled on a book-entry basis and that "subject to any agreement to the contrary between the transferor and the transferee, each and every transfer within the Euroclear System (other than, of course, transfers for the purpose of providing collateral) is a complete transfer of all rights to and interest in the subject instrument in that a transferor transfers all of its rights to the transferee including, if applicable, enforcement rights against the issuer". It was further confirmed in that letter that Euroclear "continues to receive and process settlement instructions with respect to certain securities for which [Euroclear has] received a notice of an event of default."

43. It would appear from the certification mentioned earlier provided by Euroclear regarding the petitioners' holdings of the 2001 Notes in the petitioners' securities clearance accounts that notwithstanding successive events of default in these securities, Euroclear still maintains account entries for noteholders of the 2001 Notes.

44. There is evidence from Mr Fergus, which is not disputed, that trading in "defaulted securities" and transfers of "defaulted securities" between participants to a clearing system, are common features in a major international securities market, particularly in relation to debt and bond securities. He asserted that when the 2001 Notes are transferred through Euroclear, whether these securities are in default or not, all rights attaching to the securities, including rights of enforcement, are transferred to the purchaser. If it were otherwise, this would have major ramifications in the international capital markets, particularly for companies in Hong Kong that seek to issue Eurobonds.

45. Mr Fergus also gave evidence, which is again not challenged, that whilst it is not unusual for a situation to arise where there has been a default so that there is an obligation on the issuer to issue definitive notes to noteholders, in practice the issue of definitive notes "almost never occurs".

The meaning of "successors and assigns"

46. Before turning to the Company's arguments in detail, I will first deal with the less controversial matters on various aspects of the Deed of Covenant and the meaning to be attached to the expression "successors and assigns" therein.

47. It is pertinent to note that the Deed of Covenant has the character of a deed poll by the express provision in clause 6.01. A deed poll may be "a deed made by and expressing the active intention of one party only" and "any person named or sufficiently indicated in a deed poll may sue to enforce any obligation thereby undertaken in his favour, notwithstanding that he has not executed the deed" (Halsbury's Laws of England, 4th ed Reissue, Vol. 13, paras. 3 and 60). Hence, provided that the petitioners are "successors and assigns" within the meaning of clause 6.02, they will be entitled to enforce the Direct Rights under the Deed of Covenant. There is no decided authority on the ability to assign similar direct rights under a deed of covenant by trading through the Euroclear system.

48. Mr Strachan has referred me to various authorities to show that the words "successors" and "assigns" have been broadly and flexibly construed in a wide range of legal contexts. As stated in Black's Law Dictionary, 7th ed, of the word "assign" or "assignee", "it is difficult to ascribe positive meaning to it with any specificity. Courts recognise the protean nature of the term and are therefore often forced to look to the intent of the assignor and assignee in making the assignment - rather than to the formality of the use of the term assignee - in defining rights and responsibilities." Thus, depending on the context of the document in which the word "assign" is found, it can mean a licensee, a donee, a person in possession of land albeit that his possession is only under a conditional agreement for a lease, and a person may be an assign of another without taking that other's entire interest in the property in question, such as a lessee for a term of years may be regarded as the assign of the freehold owner of the land. As for the word "successor", the word has been defined as "one who follows in the place of another" (Jowitt's Dictionary of English Law, 2nd ed). In Ruthig v. Stuart Brothers [1923] 53 OLR 558, the plaintiff obtained an injunction restraining the defendant company, its "successors and assigns" from damming the waters of a river and it was held that the company that had purchased the mill and dam from the defendant company was bound by the injunction, being "successors and assigns" within the meaning of the order.

49. Mr Strachan submitted that here the words "successors and assigns" in clause 6.02 were plainly intended to extend the Direct Rights granted therein to those, such as the petitioners, who purchased the 2001 Notes in the Euroclear system, whether directly or indirectly, from any of the Accountholders as defined. If it were otherwise, those in the position of the petitioners who had purchased securities in default in the Euroclear system would have no rights against the issuer or any one else.

50. Mr Bleach submitted that the word "successor" does not add anything of substance to the petitioners' case, as it is apparent from the authorities cited by Mr Strachan as illustration that some act or event is necessary to effect a succession and it is still incumbent on the person claiming to be a successor to provide evidence of the succession, however it occurs. I am inclined to agree with Mr Bleach in this respect.

51. Mr Bleach also referred me to Silkdale Pty. Ltd v. Long Leys Co. Pty. Ltd, a decision of the Supreme Court of New South Wales on 25 August 1995, in which the court construed the word "successor" in a provision in a mortgage to the effect that the bank being the mortgagee could issue a statement of the indebtedness and such statement would be conclusive and binding on the mortgagor. The mortgage defined the bank as including "its successors or assigns". The court considered two possible constructions of this expression, it could mean a successor or assign of the business of the bank or a successor or assign of the mortgage from the bank and came to the view that the former construction would appear to be correct in the context of the document. Using this case as an analogy, Mr Bleach contended that in respect of the similar expression in clause 6.02, there are two possible constructions. It could mean that the Deed of Covenant will enure to the benefit of each Accountholder and the successors to and assignees of its business, or that the Deed of Covenant will enure to the benefit of each Accountholder and to the successors and assignees of the Deed. He submitted that the first construction would appear to be more likely because of the use of the possessive article "its" in clause 6.02.

52. Mr Strachan pointed out that there is an important difference in the context in which the expression was construed in Silkdale. There, the expression referred to the bank which is an entity that may have a continued existence. In the present case, the expression refers to Accountholders whose status rests on holding specific rights at a particular point in time. Mr Strachan submitted that the expression here should be construed to mean the successors and assignees of the rights of the Deed rather than the successors and assignees of the business of any Accountholder. In any event, if the expression should be construed in the way as contended by Mr Bleach, a purchaser of the entire rights of any Accountholder would have indeed acquired the business of the Accountholder, having acquired everything which accorded the Accountholder his status as defined in the Deed.

53. I agree with Mr Strachan's analysis that ultimately it would make no material difference which of the two constructions is to be adopted. I am also inclined to agree that in the present context, the expression should be construed to mean successors and assigns of the rights under the Deed.

The Company's contentions

54. I turn to the Company's contentions. It is contended by the Company that the book entries in the Euroclear system of the petitioners' securities clearance accounts do not constitute evidence of assignment of the Direct Rights to the petitioners. Mr Bleach advanced a number of grounds in support of this primary contention.

55. Firstly, it is submitted that the conclusive evidence provision in clause 3.01 of the Deed does not apply to the petitioners because this provision relates to "the identity of the Accountholders and the respective amounts credited to their securities accounts" and the petitioners are not Accountholders. I think that must be right. But what I do not agree with Mr Bleach is that any statement or certification given by Euroclear of the holdings of the 2001 Notes in the petitioners' securities clearance accounts (such as the letter dated 5 March 2002) is to be treated as having no effect at all. Even if the certification is not to be regarded as conclusive, in my view it is good evidence that the person to whose account the securities have been credited is the holder of those securities and it is something which the court is entitled to take into account.

56. I also reject a similar submission of Mr Bleach that the deeming provisions in clauses 4(d)(i)(v) and 4(d)(ii)(v) of the Euroclear Operating Procedures are of no relevance in that these provisions are only binding as between Euroclear and the participants of the system and do not affect the Company. In my view, as the securities were issued into the Euroclear system, the practice and procedure of Euroclear form part of the factual matrix for the purpose of construing the issue documentation of the securities. An issuer of securities into the system must be taken to know that when securities are traded within the system, transfers of securities are effected by debits and credits in the accountholders' account.

57. Secondly, Mr Bleach drew a distinction between the trading of securities in default (there is clear evidence that such securities could be held and traded in the Euroclear system) and securities which are void. Here, the PGN had become void as from 22 October 1997 by virtue of clause 7 of the PGN. He submitted that the evidence of trading in defaulted securities within the Euroclear system does not support the petitioners' case that void securities could be properly acquired by the petitioners through trading in the Euroclear system.

58. I think there is a fallacy in this argument. As Mr Strachan has pointed out, it is only the PGN that has become void, not the securities which are in default. I see no reason to restrict the expression of "securities in default" at page 27 of the User Guide to securities as to which an event of default has occurred but the PGN has not yet become void because it is still within the period (45 days from the event of default in this instance) during which the PGN is exchangeable for Definitive Notes. The securities remain in default in the event Definitive Notes are not issued within the stipulated period and the PGN has thereby become void. It would be a misnomer to speak of the 2001 Notes as "void" securities in the sense that they are of no effect once the PGN has become void, as it is a characteristic of the issue documentation (and this in conformity with the acceptance criteria in the User Guide) that once the PGN should become void, the rights under the Deed of Covenant are triggered and Direct Rights are afforded to Accountholders which may be assigned by them.

59. Thirdly, Mr Bleach has relied on various provisions in the Euroclear publications to the effect that certain restrictions on the transfer of beneficial ownership or registered title of securities can be enforced outside the Euroclear system, which I have already summarised above (the User Guide page 23; the Euroclear Operating Procedures, clause 10.3.1(c)(ii)). Regarding the statement in the letter of Euroclear dated 19 April 2002 that a transfer of securities within the Euroclear system is a complete transfer of all rights in the securities, this is qualified by the words "subject to any agreement to the contrary between the transferor and the transferee". He has also pointed out that under clause 6.03 of the Deed of Covenant, it is expressly provided that "all or any of [each Accountholder's] rights and benefits" under the Deed may be assigned.

60. On the basis of the above, Mr Bleach submitted that it is possible for any Accountholder to assign only some of the rights and benefits to a purchaser. If that had happened, this restriction on the transfer of ownership would not have been recorded in the Euroclear system. It is therefore incumbent on a purchaser to make sure that the seller is entitled to sell all the Direct Rights and that he has acquired all the Direct Rights in the purchase and that the same is established throughout the chain of transactions going right back to an Accountholder. The petitioners have simply not adduced any evidence of this kind to establish what rights, if any, they had acquired in the purchase through the Euroclear system. The only evidence of the petitioners is a credit entry for the securities in the Euroclear system.

61. Mr Strachan did not apparently dispute the theoretical possibility of a transferor assigning only some of the Direct Rights, but he emphasised one must look at the realities of the situation. It is a fact that no one apart from the petitioners has come forward to assert any rights in respect of the securities for which there is a credit entry in the petitioners' account in Euroclear. Furthermore, the Company admitted in evidence that it has not at any time received any notice of any assignment of rights of any kind in respect of the securities acquired by the petitioners through trading in Euroclear. If an accountholder had indeed reserved some of the Direct Rights when it transferred the securities to another accountholder by trading through Euroclear, it is very unlikely that the transferor would not have given notice of this to the issuer or the fiscal agent, as the rights of the transferor could only have been enforced outside the Euroclear system. There is also evidence from Mr Fergus that when the petitioners purchased the 2001 Notes, they were not notified of any restrictions in the rights transferred in the securities. If there had been restrictions, this would not be commercially acceptable to the petitioners and the price would have to be re-negotiated. It seems to me to be a fanciful possibility on the existing evidence that the petitioners did not acquire all the Direct Rights when they purchased the securities through Euroclear trading.

62. Fourthly, Mr Bleach submitted that the Direct Rights cannot be immobilized and are not capable of being validly traded through the Euroclear system. His argument runs as follows. The PGN being a bearer document was immobilised in a Euroclear depositary and immobilization is fundamental to the way Euroclear operates. The PGN has become void in this instance when no Definitive Notes were issued within the stipulated time. If Definitive Notes had been issued, they could not be immobilized. Hence, once Definitive Notes were issued, the whole transaction would exit the Euroclear system. On the basis that the Direct Rights in the Deed of Covenant are to be the same rights as if the Definitive Notes were issued immediately before the PGN becomes void, then the Direct Rights must likewise exit the Euroclear system upon the PGN becoming void. Further, as the Deed of Covenant was not immobilized in Euroclear, it is not a security of the type which could be traded through Euroclear.

63. The contention that Definitive Notes cannot be immobilized is founded upon the evidence of Mr Fergus on affidavit and under cross-examination. Mr Fergus has no experience of a situation when definitive notes were issued, as it is his evidence that such an event "almost never occurs". He had understood that Definitive Notes when issued would be exchanged for "delivery into the hands of the noteholders". If that were indeed provided in the issue documentation, it would be correct to say that Definitive Notes cannot be immobilized. However, there is no such provision in the issue documentation. Clause 3.05 of the Fiscal Agency Agreement provided that in the event that Definitive Notes are required to be delivered by the issuer pursuant to the terms of the PGN, the issuer shall "arrange for delivery to the Fiscal Agent or to its order". Clause 3.06 provided inter alia that the Fiscal Agent shall "hold in safe custody all ... Definitive Notes delivered to it in accordance with Clause 3.05" and shall ensure that such Notes are delivered in accordance with the terms of the Fiscal Agency Agreement or the PGN. Clause 4.03 provided that when Definitive Notes have been delivered to the Fiscal Agent, the Fiscal Agent shall, against presentation or surrender to it of the PGN, authenticate and deliver "to the bearer of the Permanent Global Notes Definitive Notes in an aggregate principal amount which corresponds to the principal amount of the Notes in respect of which Definitive Notes are required to be delivered". The understanding of Mr Fergus that Definitive Notes would be delivered into the hands of the Noteholders is not consistent with the issue documentation.

64. Further, it was pointed out to Mr Fergus in re-examination that contrary to what he had thought, there is express provision in the User Guide at page 76 that definitive notes or certificates are a form of security accepted for trading in the Euroclear system, on the basis that there is "physical receipt and delivery [of the certificates] through the Euroclear Depositary". Thereupon, Mr Fergus retracted his earlier evidence that Definitive Notes cannot be accepted for trading in the Euroclear system.

65. It seems to me that the Company's argument is based on a false premise that Definitive Notes when issued in this instance must necessarily exit the Euroclear system. There is nothing in the publications of Euroclear which precludes the trading in and transfer of the Direct Rights. Further, I see no reason why the Deed of Covenant, which is already deposited with the Fiscal Agent for safe custody in accordance with clause 4 thereof until all the obligations of the Company in respect of the 2001 Notes have been discharged in full, including its obligations under the Deed, should be required to be immobilized by depositing the same with a Euroclear depositary.

66. For the above reasons, I reject the Company's submissions that it has raised a bona fide dispute that the book entries in the Euroclear system of the petitioners' accounts do not provide evidence of assignment of the Direct Rights under the Deed to the petitioners. The provisions and effect of the Deed should be construed in the context of the practice and procedure of the Euroclear system and in the context of the understanding of those who participate in the system. I hold that the words "successors and assigns" in clause 6.02 of the Deed, as properly construed, should embrace those who purchased the securities in default, whether directly or indirectly from any Accountholder, through trading in the Euroclear system. Such purchasers are plainly intended to be accorded the Direct Rights against the Company as and when they acquire the securities.

The locus of the petitioners to petition for winding up

67. As I am satisfied that the petitioners are successors and assigns of Accountholders or downstream purchasers from any Accountholder and are entitled to the rights and benefits under the Deed of Covenant, they are creditors within the meaning of section 178(1)(a) of Cap. 32 and have locus to present this petition.

68. The petitioners have also relied on an alternative submission that they are equitable assignees and have locus to petition for winding up as creditors in equity pursuant to sections 178(1)(c) and 179(1), citing In re Steel Wing Co. Ltd [1921] 1 Ch 349 at 355. Mr Bleach does not dispute the proposition in that case that the equivalent provision of our section 179(1) would include a creditor in equity as well as a creditor at law. I am also satisfied that the petitioners are equitable assignees of the Direct Rights and as such they have locus to petition for winding up. The requirement in section 178(1)(c) that the Company "is unable to pay its debts" is also satisfied, as there is no dispute that the Company is insolvent.

69. As for the Company's contention that GSI (it had purchased the securities with a face value of US$23 million on behalf of ASO I Delaware LLC, and this is different from the situation of GSAF which had acquired securities with the face value of US$2 million on its own behalf) has no authority or capacity to petition for winding up as it is merely a trustee on behalf of beneficiaries who have not been joined as petitioners, this could be disposed of shortly. The Company's contention is founded on Re Adams, ex p Culley (1878) 9 Ch D 307 and Re Hastings, ex p Dearle (1884) 14 QBD 184. These cases established the rule in bankruptcy that a "bare trustee" of a debt for an absolute beneficial owner capable of dealing with the debt cannot present a petition against the debtor without joining the beneficiary as a petitioner. A similar norm applies in cases of corporate insolvency, see Segenhoe v. Permanent Trustee Co. Ltd [1992] 9 ACSR 270 (where a trustee for the benefit of holders of convertible notes issued by a company was held to have locus to commence winding up proceedings) and McPherson's Law of Company Liquidation by Andrew R Keay, 1st ed., para. 3.09. It is common ground that if GSI is not a "bare trustee", it can petition on its own.

70. It is submitted by the petitioners that GSI is not a bare trustee as it has full discretionary power to enforce debts owing under the 2001 Notes and that the individual investors under the investment fund managed by the affiliates of the petitioners have no ability to deal with the Notes or to release the Company from liability. This may well be the case but there is no evidence before me of these matters. Even if there is doubt on the locus of GSI to petition on its own, the locus of GSAF is not in doubt in this respect.

Events after the hearing

71. Having found in favour of the petitioners on the question of locus to present this petition, which is the only ground in opposition, I would have made a winding-up order against the Company but for a letter of the petitioners' solicitors to the court after the hearing. In their letter dated 3 April 2003, the petitioners' solicitors stated that they have instructions to apply for the appointment of provisional liquidators to explore the benefits to creditors of a rescue or restructuring as opposed to an immediate liquidation of the Company.

72. Also after the hearing and on 2nd April 2003, two notices of intention to appear were filed for Avenue Asia International Limited, an alleged creditor for US$3 million, and Avenue Asia Investments, L.P., an alleged creditor for US$15 million, to appear at the next hearing of the petition on a date to be fixed and to support such petition.

73. In view of the above matters, it would not be appropriate to make a winding-up order at this stage. I order that the petition is to be restored for hearing to a date to be fixed, to deal with the application proposed to be issued for the appointment of provisional liquidators. I do not propose to make an order nisi as to the costs in these proceedings, in view of the issues raised at earlier stages and subsequently abandoned by one party or the other and new issues raised by one or the other only at the hearing of the petition. I will hear argument on costs at the adjourned hearing of the petition.

74. I direct that the parties are to inform the court, within 7 days of the handing down of this judgment, of the estimated length of the adjourned hearing, and if the petitioners are to apply for an appointment of provisional liquidators, what directions the parties would seek regarding the filing of further evidence, for the application to be dealt with in a substantive way at the adjourned hearing. I further direct that notice of the adjourned hearing should be given to the solicitors for the two alleged creditors, for them to seek leave under rule 30 of the Companies (Winding-up) Rules to appear at the adjourned hearing. I will give further directions on the adjourned hearing by letter.

Representation:

Mr Mark Strachan and Mr Jeremy Bartlett, instructed by Messrs Herbert Smith, for the Petitioners

Mr John Bleach, SC and Ms Roxanne Ismail, instructed by Messrs Freshfields Bruckhaus Deringer, for the Respondent

The Official Receiver, attendance excused

HCCW 1352/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 1352 OF 2001

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____________

_________________________

REASONS FOR DECISION

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1. This is an application taken out by Jinro (HK) International Ltd. ("the Company") on 10 June 2002 for an order that certain paragraphs in the 3rd and 4th affidavits of Jeffrey Fergus filed on behalf of the petitioners, Goldman Sachs International and Goldman Sachs (Asia) Finance, be struck out on two grounds under Order 41 rule 6 and Order 38 rule 36 of the Rules of the High Court. Firstly, some of the paragraphs complained of relate to settlement negotiations that are subject to without prejudice privilege. Secondly, other paragraphs complained of contain expressions of comment, opinion and/or legal submission by a non-expert witness who is only able to give factual evidence.

2. The application was taken out pursuant to a direction I gave on 3 June 2002. I was given to understand that the Company objected to certain parts of the affidavit evidence of the petitioners on the ground that they are protected by without prejudice privilege. I decided that it would be appropriate to resolve this issue before the petition is set down for hearing because one of the deponents is residing in Korea and it would dispense with the need of cross-examination on affidavits if the parts objected to by the Company should be struck out. When the Company issued the summons to strike out, it added the second ground that I have mentioned and raised objections to other paragraphs in the 3rd affidavit of Mr Fergus.

3. At the conclusion of the hearing, I ruled that the Company is successful only to a very limited extent and these are the reasons for my decision.

4. Before I go to the two grounds of objection, I will set out briefly the relevant background to make my ruling comprehensible.

5. The petition to wind up the Company is founded on a debt of US$25 million. It is alleged by the petitioners that they are accountholders of US$25 million of the US$50 million Guaranteed Floating Rate Notes issued by the Company due 2001 ("the 2001 Notes") pursuant to documentation dated 24 June 1996, under which the Company was obliged to pay interest and the principal on the maturity of the 2001 Notes on 27 June 2001. Apart from their rights under the 2001 Notes, the petitioners allege that as accountholders they have also acquired rights against the Company under a deed of covenant executed by the Company as the issuer on 24 June 1996 in favour of all accountholders ("the Deed of Covenant"). By reason of this, they have rights of payment of principal under the 2001 Notes, as if they were holders of Definitive Notes duly executed, authenticated and issued, and rights to payment of interest. The Company has not paid interest due under the 2001 Notes after the period ending 24 December 1997. The principal was not paid on maturity. A statutory demand was served on the Company on 12 November 2001 and the petition was presented on 14 December 2001. It is alleged in the Amended Petition that "the Company has never previously disputed its indebtedness to the Petitioner".

6. In the 1st affirmation of Tae Sub Kim ("Mr T.S. Kim") filed on behalf of the Company, the Company has denied liability on these grounds. The 2001 Notes are in bearer form and they were issued under a scheme as set out in the documentation dated 24 June 1996. The 2001 Notes were initially represented by a temporary global note, which was then exchanged for a permanent global note issued on 24 June 1996. The permanent global note would then be exchangeable for Definitive Notes. In this instance, the permanent global note has never been surrendered to the Company in exchange for the issuance of Definitive Notes by the Company. In the absence of exchange of the permanent global note and the issuance of Definitive Notes, it is asserted by the Company that the petitioners cannot be holders of bearer promissory notes of any kind and do not have any rights against the Company in that capacity.

7. Insofar as the petitioners have relied on their rights as accountholders under the Deed of Covenant, the Company asserted that the petitioners have not put forward any evidence to show that they were accountholders in relation to the 2001 Notes at the relevant date as defined in the Deed in that they each held an account with a clearing system and had credited to those accounts the 2001 Notes at the material time.

8. Lastly, Mr T S Kim asserted that the Company "has never admitted liability to any of the Petitioners".

9. Among the matters covered in the 3rd affidavit of Mr Fergus filed in reply to the 1st affirmation of Mr T S Kim, he sought to refute the allegation that the petitioners were not accountholders at the relevant date. This involved a lengthy explanation as to how the Euroclear system operates, the details of which I will not go into. In summary, the 2001 Notes were issued by the Company into the international debt market via Euroclear. Euroclear is an international clearing system that provides a clearance, trading and settlement system for securities, and it is also an international central securities depository. Where securities are represented by a global note, this is lodged with a common depository authorised by Euroclear and the process of deposit of the physical document being the bearer global note is described as "immobilisation". As described by Mr Fergus, after the permanent global note for the 2001 Notes has been immobilised in a Euroclear authorised depository, the 2001 Notes are then recorded in the accounts of the relevant participants in the Euroclear system. The Euroclear participant with access to settlement and clearing in the system is recognised as the accountholder of the 2001 Notes. Transfers of the 2001 Notes would be settled electronically through Euroclear without physical exchange of any documentation and it is the book entries recording the participant's entitlement in its account with Euroclear that would constitute the source of the participant's rights attaching to the 2001 Notes, including the rights of enforcement against the Company under the Deed of Covenant.

10. The Company seeks to strike out various parts in the 3rd affidavit of Mr Fergus dealing with the Euroclear system and the transfer of securities within the Euroclear system on the basis that I have mentioned earlier.

11. Other parts of the 3rd and 4th affidavits of Mr Fergus are objected to on the basis that they deal with discussions between the Goldman Sachs entities and the Jinro group of companies that were allegedly without prejudice. This evidence was introduced to counter the assertion of Mr T S. Kim that the Company has never admitted liability to any of the petitioners. I will deal with the without prejudice privilege first.

Without prejudice privilege

12. It would be convenient to separate the paragraphs complained of into two periods. The first period covered the discussions that took place before the service of the statutory demand on 12 November 2001. The relevant paragraphs are 59 to 70 of the 3rd affidavit of Mr Fergus and 4 to 15 of the 4th affidavit of Mr Fergus. It is the contention of the petitioners that discussions in this period were not without prejudice.

13. Mr Carolan, who appeared for the Company, referred me to an article in the International Journal of Evidence & Proof, Vol. 5, 2001at page 213, entitled "Without Prejudice Privilege" by Declan McGrath, which contained a helpful exposition of the law. For a claim of privilege to succeed, the party claiming it must establish that the communication in question was made "(1) in a bona fide attempt to settle a dispute between the parties, and (2) with the intention that, if negotiations failed, it could not be disclosed without the consent of the parties". In establishing that there is a bona fide attempt to settle a dispute, the party seeking to assert privilege must show that "at the time the communication was made, a dispute existed between the parties in respect of which legal proceedings had commenced or were contemplated and the communication was made in a genuine attempt to further negotiations to settle that dispute. The fact that a communication concerns a dispute between the parties is not sufficient to confer privilege - it must be made in furtherance of the settlement of the dispute" (at pages 213-4). See also Foskett's The Law and Practice of Compromise, 5th ed., paras 27-04, 27-05 and 27-15. It does not matter that the "without prejudice" stamp was not expressly applied to the negotiations if it is clear from the surrounding circumstances that the parties are genuinely seeking to compromise their dispute (Rush & Tompkins Ltd. v. Greater London Council [1989] 1 AC 1280 at 1299, per Lord Griffiths).

14. I have considered the evidence of the discussions as related in the affidavits of Mr Fergus, as well as the account given on behalf of the Company in the 1st affidavit of Walter Yanghoon Kim ("Mr Walter Kim"), the legal counsel to the Jinro group of companies. It does not appear to me, in the discussions as related by Mr Fergus, that there was any dispute of the petitioners' rights at that time, the discussions were on the timing and terms on which the Company and the Jinro group would repay the indebtedness under the 2001 Notes by repurchasing these Notes at a discount. On the evidence of Mr Walter Kim, the discussions centred on the debts that the Goldman Sachs companies claimed against the Jinro group of companies, the latter's restructuring plans for meeting its debt obligations and the treatment of claims arising out of corporate guarantees provided by the parent company to members of the Jinro group. At the time of the discussions, and for the reasons given by Mr Walter Kim, the Jinro group did not conduct due diligence on, or determine the validity of, any of the claims raised by the Goldman Sachs entities. According to Mr Walter Kim, the validity of the petitioners' claims was never discussed in the meetings.

15. I am not satisfied on the above evidence that there was an extant dispute at the time the discussions took place and that the discussions were made in a genuine attempt to settle that dispute. There were merely requests for accommodation when there was no challenge to the petitioners' rights. The without prejudice privilege cannot be invoked in these circumstances.

16. The second period of the negotiations covered the period after the statutory demand was served. They are different from the earlier discussions in that by then, the Jinro group had by two letters in November 2001 raised a dispute to the petitioners' claim. Further, the letter in question dated 7 December 2001 (which the petitioners seek to put into evidence) was marked "without prejudice". At the requests of both parties, I have looked at that letter de bene esse.

17. It was contended by Mr Bartlett, who appeared for the petitioners, that the letter is admissible evidence under an exception to the without prejudice privilege, in that "the exclusion of the evidence would act as a cloak for perjury ... or other 'unambiguous impropriety'" (see Unilever Plc. v. Proctor & Gamble Co. [2000] 1 WLR 2436 at 2444, per Robert Walker LJ). For the expression "unambiguous impropriety", which has become part of the legal lexicon in this context, see Forster v. Friedland, unreported, English Court of Appeal, 10 November 1992, per Hoffmann LJ and Foskett's The Law and Practice of Compromise, op. cit. at paras 27-28 to 27-44. It was submitted by Mr Bartlett that the letter should be admitted as evidence as this would show that the positive assertion made by Mr T S Kim on oath that the Company has never admitted liability to the petitioners is perjured evidence.

18. The exception of "unambiguous impropriety" to pierce the veil of without prejudice privilege should only be applied in the "clearest cases of abuse of a privileged occasion", otherwise "the value of the without prejudice rule would be seriously impaired if its protection could be removed by anything less than unambiguous impropriety" (Unilever, supra. at 2444; Forster v. Friedland, supra.). As Simon Brown LJ stated in Fazil-Alizadeh v. Nikbin, unreported, English Court of Appeal, 25 February 1993, "There are powerful policy reasons for admitting in evidence as exceptions to the without prejudice rule only the very clearest of cases. Unless this highly beneficial rule is most scrupulously and jealously protected, it will all too readily become eroded."

19. It does not appear to me that the statements made in the without prejudice letter of 7 December 2001 contain an unambiguous acknowledgment of the debt of the petitioners so that it is clear that the assertion in the 1st affirmation of Mr T S Kim must be false. I hold that the exception of unambiguous impropriety does not apply in this instance for that letter to be admitted as evidence and I order that the last sentence of paragraph 71 and paragraph 72 of the 3rd affidavit of Mr Fergus, which made reference to that letter, be struck out.

Expert or opinion evidence

20. I have been taken by Mr Carolan to each of the paragraphs complained of in the 3rd affidavit of Mr Fergus. He informed me that only the parts in that affidavit as identified in paragraph 10 of his skeleton submissions would be objected to, not the paragraphs as stated in the summons issued by the Company. In the course of his submissions, he withdrew his objection to some of the paragraphs, after it was shown by Mr Bartlett that what the Company has found as objectionable is merely a paraphrase of the explanatory documents published by Euroclear on the operations and procedure of the system, which have been exhibited to the 3rd affidavit of Mr Fergus.

21. I accept the submissions of Mr Bartlett that the Company's objection is ill founded and that the application to strike out should be refused for one or more of these reasons.

22. Firstly, I am of the view that some of the paragraphs complained of (paragraphs 17, 18, 19, 23, 27, 35) do not constitute opinion evidence but are merely factual descriptions of how the Euroclear system works. The evidence was given on the basis of Mr Fergus' experience in the trading and transfer of debt securities. The fact that Mr Fergus has expertise in the field does not transform his evidence into expert or opinion evidence (Koninklijke Philips Electronics NV v. Wealth Full Technology Ltd. [2002] HKEC 740).

23. Secondly, if I were wrong about this in that the evidence given is opinion evidence, such evidence is admissible, either under section 58(2) of the Evidence Ordinance, Cap. 8 (if Mr Fergus is not an expert) or by virtue of O. 38 r. 36(2) (if Mr Fergus is an expert). Section 58(2) provides that "where a person is called as a witness in any civil proceedings a statement of opinion by him on any relevant matter on which he is not qualified to give expert evidence, if made as a way of conveying relevant facts personally perceived by him, is admissible as evidence of what he perceived". O. 38 r. 36(2) provides that the restrictions on adducing expert evidence in O. 38 r. 36(1) do not apply to evidence which is permitted to be given by affidavit. It is provided in O. 38 r. 2(3) that in any cause begun by petition, evidence may be given by affidavit unless the court otherwise directs and subject to any direction as to cross-examination.

24. Thirdly, insofar as some of the statements complained of are statements of belief (paragraphs 56, 57 and 58), based on Mr Fergus' experience and the Euroclear documents he referred to and exhibited, they are admissible on that basis.

25. Fourthly, insofar as some of the statements complained of may be regarded as comments or legal submissions (paragraphs 25, 54, 56), I would regard them as transgressions of a minor nature and I would not have exercised my discretion in this instance to strike out these paragraphs.

Orders

26. For the above reasons, I have made an order that save for the last sentence of paragraph 71 and paragraph 72 of the 3rd affidavit of Mr Fergus, which is to be struck out, the summons issued by the Company is dismissed. I have ordered that two-thirds of the costs of the petitioners in this application are to be borne by the Company in any event.

Representation:

Mr Jeremy Bartlett, instructed by Messrs Herbert Smith, for the petitioners

Mr Paul Carolan, instructed by Messrs Freshfields Bruckhaus Deringer, for the Company

The Official Receiver, attendance excused