Shareholder disputes and seizure of assets have hit two Hong Kong companies with debt troubles: Hong Kong Airlines and CWT International. A major shareholder of both firms is Chinese private conglomerate HNA Group which is struggling to reduce billions of dollars of debt.
The city’s third largest airline, where HNA holds a 29% stake, is wracked by legal action. One party includes former director Zhong Guosong, who owns 27% of the airline, and Chinese private equity firm Frontier Investment Partner, which owns 34%. The other side includes chairman Hou Wei.
On Tuesday, a summons was issued from the Hong Kong High Court against seven defendants. These include Hong Kong Airlines, a Hong Kong company called Grand City Capital Investment and two individuals, Zhang Ziyan and Zeng Jun. The former is a a director of Frontier Investment and the latter is is a director in the finance department of Hong Kong Airlines.
The writ wants to halt the HK$546.6 million ($69.7 million) sale of 172.5 million shares in the airline to Grand City. The sale was initiated on April 11 and authorized by Zhang. The writ also seeks to bar Zeng from acting as a director of Hong Kong Airlines and from “intermeddling” in Hong Kong Airlines’ business.
The plaintiffs are Frontier Investment Partner and Hong Kong Airlines Consultation Services, a subsidiary of the airline.
Earlier this month, Hong Kong Airlines issued a writ in the High Court against four defendants including its chairman Hou, its president Wang Liya, and two directors Sun Jianfeng and Tang Kit. It sought to prevent the four senior executives from undertaking any transactions or agreements without the approval of the entire board of directors.
On Tuesday, Hong Kong Airlines confirmed the receipt of this court order against its four senior executives.
“The orders are temporary, pending further confirmation by the court and are subject to change. In any event, they do not affect the day-to-day operations of the airline. There are no changes to our management,” said Hong Kong Airlines on Tuesday.
On April 18, Hong Kong Airlines admitted: “The recent dispute among the company’s shareholders has seriously disrupted the order and operation of our office. As a result, we had to hire third-party security personnel and lawyers to assist us in dealing with the situation.”
“The extraordinary situation at Hong Kong Airlines represents a serious crisis, threatening the survival of the airline,” said Jason Wright, founding managing director of Hong Kong risk consultancy Argo Associates.
The dispute is creating a paralysis within the organisation that makes it difficult to resolve the debt issues, he said. “The current situation also risks undermining confidence in the airline among passengers, which will further increase financial pressure.”
An HNA spokesman said: “Our highest priority is to see the governance issues at Hong Kong Airlines resolved and support operations at the airline, and we are working diligently to that end.”
Creditors filed for recovery of arrears in a Hong Kong court on February 22 against Hong Kong Airlines. On April 15, the Hong Kong Air Transport Licensing Authority (ATLA) said that Hong Kong Airlines has partly repaid this debt. It has asked the airline to further clarify how it will improve its financial situation.
Meanwhile, CWT International, where HNA owns a majority stake, has lost most of its assets totaling HK$24.6 billion because it failed to repay debt by 0900 on April 17. The next day, creditors seized 100% of its wholly owned subsidiary CWT, its properties in the US and its golf courses in China. These assets represented “the vast majority” of its total assets, CWT International said. CWT is engaged in logistics, commodity marketing, engineering and financial services.
“It is difficult to see how CWT International can continue to operate given that most of its assets appear to have been seized; however, it will also be in the interests of creditors for these seized assets to remain at least semi-operational in order to maximize their value,” Wright said.
HNA is monitoring the situation at CWT International closely and remains committed to meeting its financial obligations at the group level, the HNA spokesman said. “We have made substantial progress in sharpening our strategic focus, reducing debt, and strengthening our balance sheet and we will continue to do so.”
By the middle of last year, HNA’s debt stood at Rmb657.4 billion ($97.9 billion). The private Chinese firm’s heavy debt was a result of its $40 billion spending spree on overseas assets in previous years.
“The problems at HNA’s subsidiaries are indicative of the tensions and issues within the wider group,” Wright commented.