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17 December 2019

Hsin Chong Group Holdings Limited – Listing Review Committee
 
On 11 December 2019, the Listing Review Committee heard an application by Hsin Chong Group Holdings Limited (the Company) for a review of the decision of the Listing Committee, set out in a letter dated 9 August 2019, cancelling the Company’s listing on the Main Board.
 
Having carefully considered all the facts and evidence, and all the submissions (written and oral) presented by the Company and the Listing Department, the Listing Review Committee decided that the Company’s listing should be cancelled under Rule 6.01A.
 
We set out below the Listing Review Committee’s reasons for its decision. Please note that this necessarily represents only a summary of the Listing Review Committee’s analysis, and does not purport to set out exhaustively the facts or address all of the arguments presented.
 
1. The Company has been engaged in building construction, civil engineering, electrical and mechanical engineering, the provision of property and facility management services, and the development of and investment in properties.
 
2. The Company’s shares have been listed on the Main Board since August 1991, although trading has been suspended since 3 April 2017.
 
3. The trading suspension arose pending the release of final results for the year ended 31 December 2016. These were published on 19 April 2017, but the Company’s then auditors (PwC) issued a disclaimer opinion due to issues including multiple uncertainties relating to going concern, and a lack of adequate documentary evidence relating to various payments totalling over RMB 1 billion.
 
4. PwC requested the audit committee of the Company to investigate these issues. In July 2017, Deloitte Advisory (Hong Kong) Limited was engaged to conduct an independent investigation. The findings were announced in January 2018.
 
5. The annual results for FY2017 were published on 23 March 2018. BDO Limited, which had replaced PwC as auditor in 2017, issued a disclaimer opinion. Since March 2019, the Company has failed to publish any financial statements required under the Listing Rules, including the annual results for FY2018.
 
6. The Company has been in financial difficulty. Amongst other things, it has substantial borrowing which is in default; receivers have been appointed over three of the Group’s subsidiaries, of which one has been placed into liquidation; the Company had recorded significant net losses in each of FY2016 and FY2017 and the first half of FY2018; a major contract, accounting for 90% of revenue in FY2017, was terminated in 2018; some bank balances of the Group’s subsidiaries have been frozen pursuant to PRC court orders; a number of winding-up petitions have been filed against the Company and its subsidiaries; and on 19 February 2019, individuals from RSM Corporate Advisory (Hong Kong) Limited were appointed as joint provisional liquidators (JPLs) of the Company and two subsidiaries.
 
7. Certain conditions were imposed on the Company that had to be met to the satisfaction of the Listing Department before the Company could resume trading. Amongst other things, these included requirements that the Company should:
 
  (a)    address all audit issues identified by PwC;
 
  (b) inform the market of all material information for shareholders and investors relating to the audit issues;
 
  (c) demonstrate that it has a sufficient level of operations or assets to warrant the continued listing of its securities under Rule 13.24;
 
  (d) demonstrate the directors meet the standard of competence under Rule 3.08;
 
  (e) have the winding-up petitions against the Company withdrawn or dismissed and the provisional liquidators discharged; and
 
  (f) publish all outstanding financial results and address any audit modifications.
 
8. On 30 July 2019, the Company submitted a resumption proposal, which set out a plan for fulfilling the resumption conditions. In summary, this included reacquiring Hsin Chong Aster Building Services Limited (Aster), which had been a wholly-owned subsidiary of the Company until 31 December 2018, when it was sold under a mortgagee sale triggered by the Company’s loan repayment default. Aster is licensed by the Government’s Development Bureau, Works Branch, as an approved supplier of material and specialist contractor for public work, although, at the time of submitting the resumption proposal, the licence was suspended due to a shortfall of working capital. The resumption proposal also included various initiatives to settle outstanding indebtedness (including by schemes involving the creditors of the Company) and to raise new funds (including through a subscription for new shares and an open offer).
 
9. The Company expected to be able to meet the Rule 13.24 requirements on completion of its resumption proposal.
 
10. The Company proposed to appoint Zhonghui CPA Limited as new auditors to prepare the outstanding accounts.
 
Applicable Listing Rules and guidance
 
11. The rules applicable to cancellation of listing were amended in 2018 and the current rules came into effect on 1 August 2018 (the Effective Date). Rule 6.01A(1) provides that "… the Exchange may cancel the listing of any securities that have been suspended from trading for a continuous period of 18 months."
 
12. Guidance Letter HKEX-GL95-18 (GL95-18) provides further guidance on long suspension and delisting. As noted in GL95-18, the objective of the amended delisting Rules is to keep the necessary trading suspension to the minimum, by facilitating timely delisting of issuers that no longer meet the continuing listing criteria. This, in turn, provides certainty to the market on the delisting process. The delisting Rules are also aimed at incentivising suspended issuers to act promptly towards resumption and deterring issuers from committing material breaches of the Rules.
 
13. Various transitional provisions are set out in Rule 6.01A(2). In the case of the Company, the relevant transitional rule is Rule 6.01A(2)(b)(ii), which applies to issuers which are not subject to a decision to commence the procedures to cancel a listing and a notice period for delisting immediately before the Effective Date, and when trading in that issuer’s securities has been continuously suspended for 12 months or more as at the Effective Date. Under that rule, the 18 month period referred to in rule 6.01A(1) commences 6 months before the Effective Date.
 
14. The practical effect of the above rules is that the Company’s listing could be cancelled if it had not resumed trading by 31 July 2019.
 
15. Paragraph 12 of GL95-18 emphasises that, under the Rules, the Exchange would cancel the listing of a long suspended issuer upon the expiry of the remedial period (prescribed or specific) if the issuer has not remedied the issues causing the suspension and re-complied with the Rules.
 
16. Paragraph 19 of GL95-18 notes that the remedial period may only be extended in exceptional circumstances.
 
The Listing Department’s recommendation to the Listing Committee
 
17. The Listing Department noted that the deadline of 31 July 2019 is a deadline to resume trading, not simply to submit a resumption proposal. The resumption proposal effectively involves the Company disposing all of its existing assets and liabilities, thereby effectively becoming a shell, and then reacquiring Aster, which would result in a listing of a newly-acquired business. This should be treated as a reverse takeover under Rule 14.06(6)(a).
 
18. In any event, the Listing Department recommended delisting, as the Company had failed to fulfil the resumption conditions, and there are no exceptional circumstances warranting an extension of the remedial period, as set out in GL95-18.
 
Listing Committee decision
 
19. The matter was considered by the Listing Committee on 8 August 2019. The Listing Committee decided to cancel the Company’s listing under Rule 6.01A as the Company had failed to resume trading by 31 July 2019.
 
Submissions to the Listing Review Committee
 
Submissions by the Company
 
20. The Company, represented at the hearing by one of the JPLs, submitted that the resumption proposal involved giving the Company a fresh start. It was recognised that the Company had been through a troubled period, but the resumption plan contemplated putting the existing assets and liabilities into a scheme, and then restoring Aster and its electrical and mechanical business as the Company’s key operations. The resumption plan could allow shareholders to get something back for their investment; the alternative would likely be a total loss.
 
21. The Company submitted that Aster has a sufficient level of operations and assets to satisfy Rule 13.24. Amongst other things, the Company noted that: Aster’s net assets had grown from $224 million at end of 2016 to $336 million at end of 2018; unaudited revenue and profit after tax for the first half of 2019 were $219 million and $4.8 million respectively; and that the suspension of Aster’s licence was raised in December 2019. The Company submitted that Aster is financially healthy, provided that Aster’s exposure under guarantees that Aster has given in favour of the Company and/or its associated companies can be addressed, and that exposure will be managed through the proposed schemes of arrangement and as part of the wider restructuring plan.
 
22. The Company submitted that the reacquisition of Aster was not a case of the Company moving into a new business area. On the contrary, the Company was simply settling with a creditor in order to bring back into the Group a business which had been part of the Group for many years, and had only left the Group because of the share pledge arrangements and the related default.
 
23. In relation to the schemes, the Company submitted that on 17 October 2019, an informal senior noteholders’ meeting was held, and certain senior noteholders indicated their wishes to form an informal steering committee to serve as their representatives in communicating with the Company.
 
24. In relation to the audit issues, the JPLs have completed their preliminary investigation and will submit a forensic accounting review report to the Listing Department. This should allow the audit issues, and any concerns relating to them, to be satisfactorily addressed.
 
25. By order of the court in Bermuda, the JPLs have full power over the Company as of 1 November 2019, and all the powers of the existing directors have ceased. Any directors found to be accountable for the audit issues will be removed prior to resumption, and new directors with appropriate experience will be appointed. This should address any concerns around management.
 
26. The Company is in the course of preparing the annual report for the year ending 31 December 2018 and will make a further announcement in this regard as and when appropriate. This should address any concern around the publication of results.
 
27. The Company submitted that the action plan set out in the resumption proposal is ongoing, but substantial progress has been achieved, and is expected to be achieved. In oral submission, the Company said that there was reasonable optimism that resumption could be achieved within eight months.
 
Submissions by the Listing Department
 
28. The Listing Department did not consider the steps taken by the Company to date to be adequate to resolve the resumption conditions. Amongst other things, the Listing Department noted that: the acquisition of Aster would be a reverse takeover requiring a new listing application, but no such application has been submitted; the schemes involving the creditors remain very preliminary; the annual results for 2018 and the interim results for 2019 have still not been published and the proposed auditors have not yet been appointed, and it remains uncertain when they will be published; and the forensic report regarding the audit issues is outstanding, so those issues remain unaddressed. Overall, the resumption plan remained at a preliminary stage and was dependent on numerous approvals, over which there was no certainty.
 
29. The Listing Department submitted that an issuer must have remedied all regulatory issues before the end of the prescribed remedial period, and resumption deadlines are not normally extended, as set out in GL95-18. Allowing the Company additional time would be contrary to policy and would encourage trading in shells.
 
Listing Review Committee’s views
 
30. Paragraph 12 of GL95-18 states in bold face that "the Exchange would cancel the listing of a long suspended issuer upon the expiry of the remedial period (prescribed or specific) if the issuer has not remedied the issues causing the suspension and re-compiled with the Rules. This remedial period sets a deadline referenced to the resolution of the relevant issues and resumption of trading, as opposed to submission of a resumption proposal as in the previous regime." The remedial period for the Company ended on 31 July 2019. The resumption proposal was submitted one day before this date. It was quite evidently highly conditional and none of the steps in its implementation had been implemented. So none of the issues which had caused the suspension of trading in the Company’s securities had been remedied within the remedial period.
 
31. Paragraph 19 of GL95-18 makes it clear that "the Listing Committee may only extend the remedial period in exceptional circumstances." The circumstances that GL95-18 envisages will permit the Listing Committee to grant an extension are when the steps for a resumption of trading have been substantially implemented and there is a sufficient certainty that trading will be resumed but due to factors outside the issuer’s control, generally procedural in nature, it cannot meet the planned timeframe and requires a short extension. The circumstances which would allow an extension simply do not exist in this instance. While some progress has been made on developing the resumption proposal, notably the restoration of Aster as an approved supplier by the Hong Kong Government following the provision of a bank facility, and progress had been made on the due diligence of Aster by the proposed subscriber, the resumption proposal is far from complete and an extension would cut across the policy on long suspensions introduced by the Exchange in 2018 which requires an issuer to address the causes of suspension within a reasonably short period or face the cancellation of its listing. This policy, therefore, puts on notice advisers, shareholders, creditors and new money providers that a rescue attempt of a company in financial difficulties, whose securities have suspended from trading, will have to be implemented within a comparatively short time frame to hold out any prospect under the present regime of being implemented successfully.
 
32. In this matter there were additional regulatory uncertainties which may have prevented the resumption proposal from being implemented. It was accepted that the resumption proposal will constitute a reverse takeover offer and, accordingly, the Company will be treated as a new applicant for listing with all the demands that involves. For example, it was unclear how the Company will be able to meet the requirement for a continuity of ownership, as required by Rule 8.05, when the resumption proposal envisaged the introduction of a new majority shareholder on completion.
 
33. There were also further difficulties in meeting the resumption conditions set by the Exchange. While the Company on completion of its resumption proposal will only own Aster and its troubled operations will be transferred to a special purpose vehicle for the benefit of scheme creditors, so public shareholders would have no real interest in them or their past performance, the Listing Department was adamant that any resumption of trading will require the Company, amongst other conditions imposed for a resumption of trading, to address all the audit issues identified by PwC and to publish all outstanding financial results and address any audit modifications. It was unclear to the Listing Review Committee when such conditions could be fulfilled or even whether they are capable of being fulfilled.
 
Decision
 
34.    In the light of the reasons set out above, the Listing Review Committee decided to uphold the Listing Committee’s decision that the Company’s listing should be cancelled under Rule 6.01A.
 
Please note that decisions of the Listing Review Committee do not represent binding precedents, and do not constrain the discretion of or otherwise bind the Exchange or other committees (including without limitation the Listing Review Committee in respect of other matters).