Trustee alleges HSBC actions scuttled sale of China Fishery's Peru assets
A lawsuit suit filed by CFG Peru trustee William A. Brandt, Jr., has accused Hong Kong and Shanghai Banking Corporation (HSBC) of malicious behavior that contributed to the insolvency of seafood giant China Fishery.
The lawsuit was filed on 29 June, the same day as a separate lawsuit alleging that HSBC forced Hong Kong-based China Fishery and its subsidiaries, including Pacific Andes and CFG Peru Singapore, to make so-called “avoidable transfers” worth more than USD 22.6 million (EUR 19.4 million), directly contributing to its bankruptcy filing in 2016.
Brandt was appointed by U.S. Bankruptcy Court Judge James Garrity in November 2016 to act as an impartial arbiter for the restructuring of CFG Peru’s assets and business during China Fishery’s Chapter 11 reorganization. CFG Peru is a holding company for three anchovy fishing and processing operations in Peru, and is considered the most lucrative asset of China Fishery, which at one time was ranked as the 12th-largest seafood company in the world.
Brandt’s suit claims HSBC’s conduct gives rise to common law claims for negligence, breach of duty, and tortious interference. The 46-page complaint, the public portion of which is partially redacted to protect sensitive materials, outlines a narrative that alleges HSBC led an effort to undermine Pacific Andes’ operations and valuation, either out of malice or gross negligence.
In his role as trustee, Brandt had the ability to issue subpoenas and compel witnesses to testify as to HSBC’s role in the actions that led to China Fishery's Chapter 11 filing. However, due to opposition from HSBC, Brandt only received that permission from the judge overseeing the case in June 2018, and his special powers were nullified after he filed suit. His lawsuit stems from that investigation, as well as public documents made available through the bankruptcy filing and independent research he conducted as he sought to sell CFG Peru’s assets, he told SeafoodSource in an interview.
“I needed some documents from HSBC less and less as time went on, while other documents I needed to see and hadn’t seen before, and others I never got – I only had a couple of weeks before my deadline. If you were a cynic, you might be wondering why HSBC was stalling for time,” he said. “When we realized we had to file the complaint, we had enough substance for the case to stand on its merits.”
Brandt’s suit primarily argues that the value of CFG Peru was hurt by HSBC's actions. In a financial analysis performed in September 2015, auditing firm Deloitte and Touche valued China Fishery’s Peruvian business at USD 1.69 billion (EUR 1.45 billion), and a separate analysis by China Citic Bank pegged the value of the Peruvian business at USD 1.7 billion (EUR 1.46 billion). The suit claims that China Fishery received indications of interest in a sale of the CFG Peru’s assets for USD 1.7 billion in the fall of 2015, and that in November 2015, China Fishery’s management was in advanced negotiations with two investment groups regarding the acquisition of some or all of the CF Group. Furthermore, the suit claims China Fishery officials had also received signals from a group of lenders that included HSBC, Rabobank, Standard Chartered Bank, China Citic Bank, and DBS Bank, indicating they all would soon approve an extension of credit to the company.
However, HSBC – acting alone and without the knowledge or approval of its fellow creditors – initiated an action in a Hong Kong court on 25 November, 2015, seeking the winding up of China Fishery and the appointment of joint provisional liquidators (JPLs), according to the lawsuit.
“The appointment of the Hong Kong JPLs and the specter of liquidation altered the environment in which the sale was being conducted, inviting lower bids,” Brandt alleges in the lawsuit. “The JPLs’ appointment also damaged the prospects for a value-maximizing sale for the Peruvian Business. In November 2015, two investors interested in acquiring the CF Group for as much as USD 1.7 billion were in discussions with the Pacific Andes Group. A memorandum of understanding was expected to be signed on November 26, 2015. HSBC commenced the proceedings the day before, on 25 November, 2015, and scuttled those negotiations.”
Furthermore, HSBC’s actions scared away local lenders in Peru, forcing China Fishery to accept financing at a much higher cost and with painful stipulations, Brandt alleges.
“The timing of HSBC’s pursuit of such an extraordinary remedy could not have been worse,” the lawsuit claims. “The Peruvian Business was rebounding from the effects of El Niño, the second fishing season for 2015 was about to commence, and the Peruvian Business was at the typical low-point of its cash position for the year and could not operate without the assistance of Peruvian banks. After the Hong Kong JPLs were appointed, local banks refused to provide financing, restricting operations and impeding the Peruvian Business’ ability to realize the quota allotted to it by the Peruvian government."
China Fishery continued to solicit bids for its Peruvian assets, and by 1 June, 2016, seven non-binding expressions of interest had been received, with more than half of the bids considered to be worth progressing to the second round of the sale process, Brandt said. However, all of the offers were for less than USD 1.7 billion.
“One of the expressions of interest was for USD 1.5 billion [EUR 1.29 billion] – USD 200 million [EUR 172 million] below the pre-appointment indication of interest that nearly resulted in a memorandum of understanding – but the indicating party refused to take the necessary next steps to sign a ‘process letter’ to proceed to the next round of the sale process. The remaining non-binding expressions of interest that were received were for much lesser amounts,” the lawsuit claims. “Had the indications of interest totaling approximately $1.7 billion immediately prior to the Hong Kong JPLs’ appointment on 25 November, 2015 ripened into binding agreements, the resulting sale would have provided for substantial recoveries to the creditors of the CF Group and the Pacific Andes Group. Instead, the accelerated sale process instituted and enforced by HSBC resulted in substantially lower bids that ascribed significantly less value to the Peruvian Business than would have been realized absent HSBC’s interference. HSBC bears responsibility for the harm and value depletion its interference caused.”
In his suit, Brandt said HSBC’s conduct “exceeded the boundaries of commercial reasonableness, damaged CFG Peru’s equity interest in the Peruvian OpCos – the sale of which is the cornerstone of the U.S. restructuring effort – and diminished recovery prospects for the CF Group’s (and Pacific Andes Group’s) creditors, including CFG Peru.”
In the lawsuit, Brandt further claims that HSBC is guilty of failing to disclose all material facts to the Hong Kong court that provisionally appointed the JPLs – a decision that was reversed four months later by the same court.
Brandt alleges that damages resulting from HSBC’s actions totaled at least USD 45 million (EUR 38.7 million) in lost revenue and profit and increased financing costs, as well as at least USD 200 million (EUR 172 million) in lost valuation for the company. In his suit, Brandt also asked that the USD 100 million owed by China Fishery to HSBC should be disallowed “given the extent to which HSBC exceeded the confines of permissible conduct and the damage it caused.”
“Equity dictates that HSBC forfeited any entitlement to a recovery from the estates,” Brandt wrote in his suit.
In his interview with SeafoodSource, Brandt said that while HSBC is currently the only defendant in the suit, more may be added in the future.
“Yes, I do, believe there will be other banks added,” he said. “As to whether they acted in bad faith, the simplest way to answer is that complaint speaks for itself.”
HSBC has not responded to a list of questions from SeafoodSource sent to a company spokesperson on the afternoon of Monday, 2 July. SeafoodSource has not received a response to its questions as of the morning of Tuesday, 3 July. Any remarks issued by the bank will be published once received.
In the suit, Brandt stated that he believed the case would be an important one for arbitrating the future actions of creditors.
“While courts traditionally afford lenders latitude when pursuing the repayment of their debts, there are limitations,” Brandt wrote. “This case will be cited for enforcing those limits in the face of unbridled overreach.”
Photo courtesy of HSBC