RE CHINA BOZZA DEVELOPMENT HOLDINGS LTD

HCMP 179/2023

[2023] HKCFI 1620

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 179 OF 2023

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D E C I S I O N

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The application

1.  The Company seeks the Court’s sanction under section 673 of the Companies Ordinance (Cap. 622) (“Ordinance”) of a scheme of arrangement between the Company and its Creditors.

2.  The resolution of the Scheme Meeting was carried by a majority in number of the Scheme Creditors present and voting, in person or by proxy, holding 95.04% of the Scheme Debts voted.

3.  The Scheme seeks to restructure the Company’s indebtedness in order to return the Company to a solvent going concern. Absent restructuring, the Company would be liquidated. A successful restructuring would give the Scheme Creditors a higher recovery the Scheme Creditors’ recovery under the Scheme is estimated to be approximately (i) under the Cash Entitlement—5.5% of their Admitted Claims, (ii) under the Promissory Notes—21.8% of their Admitted Claims, and (iii) under the Scheme Shares—14.0% of their Admitted Claims, whereas in a liquidation the Scheme Creditors’ recovery is estimated to be approximately nil to 9.12%.

Corporate background

4.  On 10 June 2009, the Company was incorporated in the Cayman Islands. The Company’s shares were listed on the GEM Board of the Stock Exchange of Hong Kong Limited (“Stock Exchange”) on 8 October 2009, and the listing has been transferred to the Main Board of the Stock Exchange since 16 May 2011. Trading of the Company’s shares has been suspended since 4 October 2021. The Company is in the process of seeking a resumption of trading of its shares. The Company is an investment holding company with operating subsidiaries in Hong Kong and the Mainland (together, “Group”). The Group is principally engaged in (a) the plantation and sale of ginseng; (b) forestry management; and (c) investment holding.

The Company’s financial difficulties

5.  Mainly due to the onset of the pandemic in 2020, the Company has endured a few years of financial difficulties. The Company is balance-sheet and cashflow insolvent. As at 30 June 2022:

(1)  the Company’s total assets amounted to approximately RMB 45 million;

(2)  the Company’s total liabilities amounted to approximately RMB 448 million;

(3)  the Company’s net current liabilities amounted to approximately RMB 389 million; and

(4)  the Company recorded net liabilities of approximately RMB 402 million.

6.  The Company’s indebtedness arises mainly from:

(1)  unsecured interest-bearing bonds issued by the Company (“Bonds”);

(2)  unsecured promissory notes issued by the Company (“Notes”);

(3)  loans granted to the Company by entities within the Group.

7.  All of the Company’s indebtedness is governed by Hong Kong law. The holders of the Bonds (“Bondholders”) and Notes are mainly individuals. The Company’s financial difficulties caused the Company to default on its borrowings. As a result, the Company has received nine statutory demands or demand letters from certain Bondholders.

The Company’s restructuring efforts

8.  In order to avoid a liquidation and to return the Company to a solvent going concern, the Company has been pursuing a debt restructuring. As part of the Company’s restructuring efforts, the Company obtained a Cayman court order in December 2020 for the appointment of soft-touch provisional liquidators (“PLs”). With the PLs’ assistance, the Company’s on-going restructuring efforts have now led to the Scheme. The Scheme will be partially funded by a cash injection of approximately HK$30 million by an investor (“White Knight”) through a subscription agreement whereby the White Knight would subscribe for the Company’s shares at the total consideration of HK$60 million.

Principal features of the Scheme

9.  The Scheme seeks to discharge the Company’s liabilities to essentially all general unsecured creditors (Clause 1 of the Scheme). In return, the Creditors will be entitled to a pro rata distribution of:

(1)  HK$30 million generated from the White Knight’s subscription;

(2)  140,000,000 Scheme Shares issued by the Company at the issue price of HK$0.55 per Scheme Share; and

(3)  Promissory Notes issued by the Company in the principal amount of HK$120 million (Clause 18 of the Scheme).

10.  In the Company’s liquidation, the Creditors’ recovery is estimated to be approximately nil to 9.12%, but the Creditors’ recovery under the Scheme is estimated to be approximately:

(1)  under the Cash Entitlement—5.5% of their Admitted Claims;

(2)  under the Promissory Notes—21.8% of their Admitted Claims; and

(3)  under the Scheme Shares—14.0% of their Admitted Claims.

11.  As the Creditors’ claims are governed by Hong Kong law, the Company does not need any parallel scheme of arrangement in any jurisdiction.

The legal principles governing the sanction of a scheme

12.  In considering whether to sanction a scheme, the Court applies some well-established principles which were recently restated in Re China Singyes Solar Technologies Holdings Ltd[1] such that the Court would consider in particular the following:

(1)  whether the scheme is for a permissible purpose;

(2)  whether creditors who were called on to vote as a single class had sufficiently similar legal rights such that they could consult together with a view to their common interest at a single meeting;

(3)  whether the meeting was duly convened in accordance with the Court’s directions;

(4)  whether creditors have been given sufficient information about the scheme to enable them to make an informed decision on whether or not to support it;

(5)  whether the necessary statutory majorities have been obtained;

(6)  whether the Court is satisfied in the exercise of its discretion that an intelligent and honest man acting in accordance with his interests as a member of the class within which he voted might reasonably approve the scheme; and

(7)  in an international case, whether there is sufficient connection between the scheme and Hong Kong, and whether the scheme is effective in other relevant jurisdictions.

13.  Taking the above criteria in turn:

Permissible purpose

14.  As in Singyes[2], the Scheme is a genuine debt restructuring of a distressed company.

Class composition

15.  In considering whether creditors are properly classified, the test is whether creditors who are called on to vote as a single class have sufficiently similar legal rights that they could consult together with a view to their common interest at a single meeting. The relevant principles may be summarised thus:

(1)  First, the overarching question is whether the pre and post-scheme rights of those proposed to be included in a single class are so dissimilar as to make it impossible for them to consult with a view to their common interest. If that is the case, separate meetings must be summoned.

(2)  The second principle is that it is the rights of creditors, not their separate commercial or other interests, which determine whether they form a single class or separate classes. Conflicting interests will normally only ever arise at the sanction stage as a question for consideration.

(3)  The third principle is that the court should take a broad approach to the composition of classes, so as to avoid giving unjustified veto rights to a minority group of creditors, such that the test for classes becomes an instrument of oppression by a minority. The court should be careful to avoid unnecessary proliferation of classes because by ordering separate meetings the court might give a veto to a minority group.

(4)  The fourth principle is that the court has to consider, on the one hand, the rights of the creditors in the absence of the scheme and, on the other hand, any new rights to which the creditors become entitled under the scheme. If, having carried out that exercise, there is a material difference between the rights of the different groups of creditors, they may, but not necessarily will, constitute different classes. Whether they do so depends on a judgment as to whether such a difference makes it impossible for the different groups to consult together with a view to their common interest.

(5)  In applying the above test, the starting point is to identify the appropriate comparator: that is, what would be the alternative if the scheme does not proceed.

See Re China Oil Gangran Energy Group Holdings Ltd[3]; Re Nasmyth Group Ltd[4].

16.  I accept that the Scheme correctly placed the Scheme Creditors in one class because the Claims are the Company’s general unsecured debts (e.g. Re Hong Kong Airlines Ltd[5]).

Compliance with Convening Order

17.  The Convening Order has been complied with. This appears from the 2^nd Affirmation of Fei Phillip filed on 1 June 2023, confirming the circulation of the notice of the Scheme Meeting, Explanatory Statement and Scheme. The advertisement of the Scheme Meetings was duly placed in The Standard and Sing Tao Daily on 25 April 2023.

Statutory majorities

18.  During the Scheme Meetings held on 18 May 2023, the Scheme Creditors duly voted in favour of the Scheme. The requirements under section 674(1)(b) of the Ordinance that the Scheme be approved by a majority in number representing at least 75% in value of the Scheme Creditors present and voting in person or by proxy have been satisfied.

Information provided to Scheme Creditors

19.  To satisfy the requirements of section 671(3) of the Ordinance, an explanatory statement must be sufficiently informative:

“A company is under a duty to include in the explanatory statement all the information necessary to enable the creditors to form a reasonable judgement on whether the scheme is in their best interests or not, and hence how to vote. The extent of the information required to be provided will, of course, depend on the facts of the particular case. Necessarily, the duty extends to the company providing up to date information, or an adequate explanation of why it has not done so, that will allow a creditor to contrast what is to be anticipated if the scheme is approved, and the outcome if it is not. A company is required to provide specific financial information to support its predicted outcomes, and I would normally expect it to have its views independently verified by an insolvency practitioner or other suitable professionals” (Re Century Sun International Ltd [2021] HKCFI 2928; [2021] HKCLC 1477 at [23] (Harris J) (footnotes omitted)).

See also Re Virgin Active Holdings Ltd[6].

20.  In my view the Explanatory Statement satisfies the requirements of section 671(3):

(1)  The Explanatory Statement makes clear that the Scheme is an alternative to the Company’s liquidation.

(2)  The Explanatory Statement estimates the likely returns for Creditors in a liquidation and under the Scheme, together with the likely timescales for such recoveries.

(3)  The Explanatory Statement explains the Company’s business rationale for avoiding a liquidation, hence the Board’s recommendation for the Scheme.

Discretionary element: the “intelligent and honest man” test

21.  The Court should be slow to differ from the majority views, as it normally acts on the principle that businessmen are much better judges of what is to their commercial advantage than the court could be: Re Allied Properties (HK) Ltd[7].

22.  The primary object of the Scheme is that, upon the Scheme becoming effective, the Claims will be discharged and in return the Scheme Creditors will be entitled to the relevant Scheme consideration. The Scheme consideration provides the Scheme Creditors with a much better return than in an insolvent liquidation of the Company.

23.  Therefore, in respect of the Scheme Creditors, the Scheme is one that an intelligent and honest person acting in accordance with his interests as a member of the class within which he voted might reasonably approve.

24.  The Scheme’s effectiveness is subject to the Restructuring Framework Agreement having become unconditional. The Court may properly sanction the Scheme because the Court may sanction a scheme which is subject to conditions and the condition about the effectiveness of the Restructuring Framework Agreement is commonplace (Re Hong Kong Airlines Ltd[8]).

International effectiveness

25.  There are two aspects to the international dimension. The first concerns the Court’s jurisdiction over a scheme promoted by a foreign company. Where a foreign company promotes a scheme, it is well established that the Court has to consider whether there is sufficient connection between the scheme and Hong Kong (Re China Oil Gangran Energy Group Holdings Ltd[9]; Re Petropavlovsk Plc[10]).

26.  There is sufficient connection between the Scheme and Hong Kong. The present case is almost identical to Re China Oil Gangran Energy Group Holdings Ltd[11]:

“The Scheme clearly has strong and sufficient connection with Hong Kong, in particular, because the Company is listed in Hong Kong and a principal purpose of the Scheme is to protect that listing, it is a registered non-Hong Kong company, and managed from Hong Kong. Further, essentially all of the Scheme Claims are governed by Hong Kong law.”

27.  Secondly, in an international case, the Court would consider whether the scheme is effective in other foreign jurisdictions of practical importance because it would not be a proper exercise of discretion to sanction a scheme that serves no purpose. In practice whether or not a jurisdiction is of practical importance to the efficacy of a scheme sanctioned in Hong Kong will commonly be determined by the following considerations:

(1)  Is a material amount of debt to be compromised by the scheme governed by the law of a jurisdiction other than Hong Kong?

(2)  Even if there is some doubt as to whether or not a scheme will compromise a proportion of the debt, is there any reason to think that the creditors will take action in a jurisdiction which will not recognise a scheme as compromising the debt?

(3)  The amount of the debt involved. If, for example, the amount of debt that is not governed by Hong Kong law is less than the cost of introducing a parallel scheme it makes more sense to exclude that debt from the scheme and settle it separately if it is ever pursued.

See China Oil at [21]–[23].

28.  As the Claims to be discharged under the Scheme are governed by Hong Kong law, any dissenting creditors’ opposition should not hamper the effectiveness of the Scheme (e.g. Re Unity Group Holdings International Ltd[12]).

Conclusion

29.  The Court will also consider whether there is any defect in the scheme which may hinder its operational effectiveness. This explained in a recent decision of Leech J in Re AGPS Bondco Plc[13].

“The Court will not sanction a scheme or restructuring plan where there is a ‘blot’ or ‘roadblock’ which prevents it from taking effect. Put another way, the Court will not sanction a scheme or plan which will not have the effect which the plan company and creditors intend it to have... This may be because of a technical or legal defect which means that it cannot take effect according to its own terms or it may be because it would infringe some mandatory provision of law… It may also be because there is some other flaw which makes the plan or scheme inoperable …”

30.  The present Scheme is conventional. Although the Company’s shares have been suspended for more than 18 months, the Stock Exchange has not decided to delist the Company (cf. Re Grand Peace Group Holdings Ltd[14]). The Scheme clearly has utility and achieves its intended purpose.

31.  I will make an order in the terms of the draft order handed up to me during the hearing sanctioning the Scheme.