RE CENTURY SUNSHINE GROUP HOLDINGS LTD AND OTHERS

HCMP 2137/2022

[2023] HKCFI 2041

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2137 OF 2022

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REASONS FOR DECISION

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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 Companies and the Scheme Creditors.

Background

2.  On 21 January 2003, the Company was incorporated in the Cayman Islands as an exempted company. The Company was listed on the Growth Enterprise Market of the Hong Kong Stock Exchange (“SEHK”) between 17 February 2004 and 31 July 2008. Since 1 August 2008, the Company has been listed on the Main Board of SEHK (Stock Code: 509). The Company is an investment holding company. The Company’s subsidiaries (together with the Company, “Group”) are principally located in Hong Kong, Mainland China, Bermuda and the British Virgin Islands (“BVI”).

3.  The Company’s key subsidiaries are:

(1)  Rare Earth Magnesium Technology Group Holdings Limited (“Rare Earth”), which is a Bermuda-incorporated entity listed on the Main Board of SEHK (Stock Code: 601);

(2)  New Bright Group Limited (“New Bright”), which is a BVI-incorporated entity;

(3)  Ming Xin Developments Limited (“Ming Xin”), which is a BVI-incorporated entity;

(4)  Long Xiang Enterprises Limited (“Long Xiang”), which is a BVI-incorporated entity;

(5)  Acronagrotrans Ltd (“Acro”), which is a BVI-incorporated entity; and

(6)  Century Sunshine Ecological Technology Limited (“CS Ecological”), which is a Hong Kong-incorporated entity.

4.  The Group was the first listed company in Hong Kong to specialise in the ecological fertiliser business in the Mainland. The Group’s key businesses consist of fertiliser business; metallurgical flux business; and magnesium products business.

5.  On 12 December 2002, New Bright was incorporated in the BVI. On 31 July 2014, Ming Xin was incorporated in the BVI. On 2 July 2015, Long Xiang was incorporated in the BVI. On 7 January 2000, Acro was incorporated in the BVI. On 5 July 2002, CS Ecological was incorporated in Hong Kong. All are intermediate investment holding companies.

The Companies’ financial difficulties

6.  The Group’s business suffered considerably due to the pandemic. The Group is balance-sheet solvent, but cashflow insolvent. As at 31 December 2022:

(1)  the Group’s net assets amounted to approximately HK$1,182,813,000; and

(2)  the Group’s net current liabilities amounted to approximately HK$2,048,557,000.

7.  As at 31 December 2022:

(1)  the Company’s net assets amounted to approximately HK$56,665,000;

(2)  the Company’s net current assets amounted to approximately HK$54,557,000; and

(3)  the Company’s total liabilities amounted to approximately HK$1,213,971,000.

8.  The Company’s indebtedness arises mainly from:

(1)  bank borrowings and other borrowings;

(2)  unsecured and unlisted interest-bearing bonds issued by the Company to an institutional investor and private investors in Hong Kong;

(3)  unsecured S$101,750,000 7.0% fixed rate notes issued by the Company under an SGD300,000,000 Multicurrency Medium Term Note Programme which are listed on the Singapore Stock Exchange (“Singapore Bonds”); and

(4)  loans granted to the Company by entities within the Group (“Intragroup Debts”).

9.  Other than the Singapore Bonds which are governed by Singapore law, the Company’s indebtedness is mainly governed by Hong Kong law.

New Bright

10.  As at 31 December 2022:

(1)  New Bright’s net liabilities amounted to approximately HK$1,416,000;

(2)  New Bright’s net current liabilities amounted to approximately HK$207,675,000; and

(3)  New Bright’s total liabilities amounted to approximately HK$263,115,000.

11.  New Bright’s indebtedness arises mainly from:

(1)  borrowings from an investor;

(2)  the Intragroup Debts; and

(3)  a guarantee in respect of the Company’s obligations under the Singapore Bonds (“Singapore Guarantee”).

12.  Other than the Singapore Guarantee which is governed by Singapore law, New Bright’s indebtedness is governed by Hong Kong law.

Ming Xin

13.  As at 31 December 2022:

(1)  Ming Xin’s net assets amounted to approximately HK$40,335,000;

(2)  Ming Xin’s net current liabilities amounted to approximately HK$1,590,731,000; and

(3)  Ming Xin’s total liabilities amounted to approximately HK$2,456,855,000.

14.  Ming Xin’s indebtedness arises mainly from:

(1)  the Intragroup Debts; and

(2)  the Singapore Guarantee.

15.  Other than the Singapore Guarantee which is governed by Singapore law, Ming Xin’s indebtedness is governed by Hong Kong law.

Long Xiang

16.  As at 31 December 2022:

(1)  Long Xiang’s net liabilities amounted to approximately HK$669,000;

(2)  Long Xiang’s net current liabilities amounted to approximately HK$669,000; and

(3)  Long Xiang’s total liabilities amounted to approximately HK$74,197,000.

17.  Long Xiang’s indebtedness arises mainly from:

(1)  bank borrowings;

(2)  the Intragroup Debts; and

(3)  the Singapore Guarantee.

18.  Other than the Singapore Guarantee which is governed by Singapore law, Long Xiang’s indebtedness is governed by Hong Kong law.

Acro

19.  As at 31 December 2022:

(1)  Acro’s net assets amounted to approximately HK$155,387,000;

(2)  Acro’s net current liabilities amounted to approximately HK$75,569,000; and

(3)  Acro’s total liabilities amounted to approximately HK$75,569,000.

20.  Acro’s indebtedness arises mainly from:

(1)  the Intragroup Debts; and

(2)  the Singapore Guarantee.

21.  Other than the Singapore Guarantee which is governed by Singapore law, Acro’s indebtedness is governed by Hong Kong law.

CS Ecological

22.  As at 31 December 2022:

(1)  CS Ecological’s net assets amounted to approximately HK$49,994,000;

(2)  CS Ecological’s net current assets amounted to approximately HK$314,862,000; and

(3)  CS Ecological’s total liabilities amounted to approximately HK$1,026,410,000.

23.  CS Ecological’s indebtedness arises mainly from:

(1)  bank borrowings;

(2)  the Intragroup Debts; and

(3)  the Singapore Guarantee.

24.  Other than the Singapore Guarantee which is governed by Singapore law, CS Ecological’s indebtedness is governed by Hong Kong law.

The Companies’ restructuring efforts

25.  In order to avoid a liquidation and to return the Companies and the Group to a solvent going concern, the Companies have been pursuing a Group-wide debt restructuring. The Companies’ efforts are in summary as follows:

(1)  On 14 July 2020, upon the Company’s application, the Cayman Court appointed the provisional liquidators on a soft-touch basis to assist in and facilitate the Company’s debt restructuring. On 28 August 2020, the Hong Kong Court recognised the Company’s soft-touch provisional liquidators. On 30 November 2020, the Singapore Court also recognised the Company’s soft-touch provisional liquidators.

(2)  On 16 July 2020, upon the respective companies’ application, the BVI court appointed soft-touch provisional liquidators over New Bright, Ming Xin, Long Xiang, and Acro.

(3)  The combined efforts of the Companies’ boards and soft-touch provisional liquidators have now led to the Schemes.

26.  Separately, another key subsidiary in the Group, Rare Earth, has successfully restructured its indebtedness through a scheme of arrangement sanctioned by me in 2022 (Re Rare Earth Magnesium Technology Group Holdings Ltd[1]).

Principal features of the Schemes

27.  The Schemes seek to discharge the Companies’ liabilities to essentially all general unsecured creditors, excluding the Intragroup Debts (clause 1 of the Schemes). The Intragroup creditors have undertaken to subordinate their claims to the full payment of the Admitted Claims under the Schemes (clause 9 of the Schemes). The Schemes also effect an ancillary discharge of guarantors (clause 2 of the Schemes). The Schemes achieve the practical effect that the Companies will be treated, for the purposes of the Schemes, as if they were a single entity and the Scheme Creditors were the creditors of that single entity (clause 13 of the Schemes).

28.  In return for the discharge of their Claims, the Scheme Creditors will be entitled to the Scheme Consideration Distribution over five years, consisting of (a) Term Extension Interest, (b) Interim Payment(s), (c) Term Extension Repayment(s), (d) Early Repayment(s), and/or (e) the Final Payment (clause 7 of the Schemes).

29.  The Scheme Consideration Distribution will be funded as follows:

(1)  The Scheme Assets will form the funds for the payment of (i) Term Extension Interest, (ii) Interim Payment(s), and (iii) Term Extension Repayment(s) (clause 10 of the Schemes). The Scheme Assets consist of (i) the Scheme Shares Proceeds, (ii) the Zhangzhou Land Proceeds, and (iii) the Shandong Hongri Dividend.

(2)  The Company will fund (i) any Early Repayment(s), and (ii) the Final Payment.

30.  To give additional comfort to the Scheme Creditors, the Scheme Administrators will implement an array of Monitoring Mechanisms to ensure the efficacy of the Schemes’ implementation.

31.  In the Company’s liquidation, the Scheme Creditors’ recovery is estimated to be approximately nil to 11.7 % (the recovery rate varies between the Companies), but the Scheme Creditors’ recovery under the Schemes is estimated to be approximately 100% of the principal at the fifth anniversary of the Scheme Effective Date (plus various interest payments during the Extended Term).

32.  As the Singapore Bonds and the Singapore Guarantee are governed by Singapore law, the Company is pursuing a parallel scheme of arrangement in Singapore, which will also discharge the Singapore Guarantee. The Singapore scheme of arrangement takes the form of a pre-pack scheme of arrangement under section 71 of the Insolvency, Restructuring and Dissolution Act 2018 of Singapore (“Pre-pack Scheme”). As a simplified procedure, the Pre-pack Scheme does not need a separate Scheme Creditors’ meeting. The Scheme Meetings convened by this Court will be used as evidence to indicate the creditors’ support for the Pre-pack Scheme.

The legal principles governing the sanction of a scheme

33.  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[2] 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.

I shall address the relevant ones in the following paragraphs.

Permissible purpose

34.  As in Singyes, the Schemes are a genuine debt restructuring of distressed companies. The Schemes also provide for the following two categories of ancillary discharge:

(1)  “Any rights of any Scheme Creditor to enforce any existing guarantees provided by anyone based on the Claims of Scheme Creditors will lapse” (clause 2 of the Schemes);

(2)  “[t]he Scheme Creditors also irrevocably and unconditionally forever discharges and waives any claim(s) they may have against the Company and/or the Scheme Participating Subsidiaries’ officers, directors, advisors, and/or representatives in relation to their participation and role in the preparation of this Scheme Document and the Singapore Scheme Document” (clause 1 of the Schemes).

35.  The discharge of third-party guarantees is uncontroversial: Re Unity Group Holdings International Ltd[3]. At the hearing of application for leave to convene a Scheme meeting I queried the inclusion in the Scheme of a release of the liability of directors and professional advisers for claims arising from the preparation and introduction of the Scheme. At the hearing of the petition Mr Ho brought to my attention the judgment of Snowden J in Re Virgin Active Holdings Ltd[4] which he explains in [73]:

“Finally, the Plans provide for a release of the professional advisers to the Plan Companies, the directors of the Plan Companies and various other persons involved in the Restructuring from any liability arising out of the negotiation and implementation of the Restructuring. Such a clause is not uncommon and can fall within the concept of a compromise or arrangement between a company and its creditors in their capacity as such: see Re Far East Capital SA [2017] EWHC 2878 (Ch) at [13]-[14] and Re Noble Group Ltd [2019] BCC 349 (sanction judgment) at [20]-[30].”

I accept that a waiver that protects officers and advisers from claims connected with a restructuring that is implemented through a scheme can properly be treated as forming part of a compromise achieved by a scheme.

Class composition

36.  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)  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[5]; Re Nasmyth Group Ltd[6].

37.  In identifying the comparator, the directors of the Companies, being advised by their professional advisers, are normally in the best position to identify what will happen if the Schemes fail: Re Fitness First Clubs Ltd[7].

38.  The Schemes 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[8]).

39.  As the Company is insolvent, the decision in Re Petropavlovsk Plc[9] is instructive:

“This is, in my view, a straightforward case and no scheme creditor has suggested that there should be separate classes. In an insolvent situation, all scheme creditors would be unsecured and would rank pari passu. Their legal rights are identical and they would receive the same rateable return. In circumstances where the purpose of the schemes is, so far as possible, to satisfy the scheme creditors’ claims against the scheme companies to their fullest extent, it is difficult to see any real difference between the rights of the scheme creditors which are to be released under the schemes and the rights which the scheme creditors would have under the schemes.”

Compliance with Convening Order

40.  The Convening Order has been complied with. This appears from the 2^nd Affirmation of Shum Sai Chit filed on 10 July 2023, confirming the circulation of the notice of the Scheme Meetings, Explanatory Statement and Scheme. The advertisement of the Scheme Meetings was duly placed in The Standard and Sing Tao Daily on 12 May 2023.

Statutory majorities

41.  During the Scheme Meetings held on 15 June 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.

42.  The following two matters were brought to my attention in respect of the Singapore Bonds.

43.  First, the Singapore Bonds were issued in global registered form and held by the Singapore Trustee. As is customary, the Singapore Trustee is not regarded as a Scheme Creditor and could not vote. Instead, in respect of the Singapore Bonds, the Scheme Creditors are the Singapore Bondholders, namely people “who hold an economic or beneficial interest as principal in the Singapore Bonds held through and shown on … the records maintained in book entry form by the SGX Clearing System at the Record Time”. This approach to voting by the underlying holders of a global note is well-established:

“The Scheme Creditors hold the beneficial interest in the Notes held through the Clearing Systems. As has been well-established in other cases, this constitutes them as contingent creditors with an entitlement to vote. Other parallel claims, for example the trustee under the trust deeds, will not vote so there is no double counting problem” (Re VEON Holdings BV [2022] EWHC 3473 (Ch) at [66] (Zacaroli J)).

See also Re Mongolian Mining Corp[10].

44.  Secondly, two of the Singapore Bondholders are in fact nominees themselves as they are brokers. In accordance with their clients’ instructions, they voted partially for and partially against the Schemes. For headcount purposes, the Chairman adopted the approach of treating these two Singapore Bondholders’ votes as two votes for and two votes against. This approach to calculating a nominee’s votes is well established, often known as the Equitable Life approach, as summarised by Snowden J in Re GW Pharmaceuticals Plc[11] at [29]–[30] and [37]:

“An … approach frequently adopted is that suggested in Re Equitable Life Assurance Society (No 1) [2002] BCC 319. A creditors scheme was proposed to compromise mis-selling and other claims of policyholders in a life assurance company. Some policyholders held their claims against the company as nominee or trustee for others. Lloyd J noted, at page 326, that he had been asked to direct that a particular scheme policyholder might vote different parts of the voting value of a particular policy in different ways…

Lloyd J therefore directed that a nominee which split its vote should be regarded as having voted once for and once against the scheme for the purposes of the headcount test. This approach was followed by Barma J in the Hong Kong Court of Appeal in Re PCCW Limited [2009] 3 HKC 292 at [193] …

I agree that, depending on the facts, the Equitable Life solution may be an appropriate one for the Court to adopt when giving directions for a court meeting under Part 26. It has been adopted many times in other scheme cases …”

45.  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[12].

46.  I accept that the Explanatory Statement satisfies the requirements of section 671(3).

Discretionary element: the “intelligent and honest man” test

47.  The Court should be slow to differ from the majority’s 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[13]. The primary object of the Schemes is that, upon the Schemes 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 Companies. I accept that the Schemes are those 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.

International dimension

48.  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[14]; Re Petropavlovsk Plc[15]).

49.  There is sufficient connection between the Schemes and Hong Kong. The present case is almost identical to Re China Oil Gangran Energy Group Holdings Ltd[16]:

“21. 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.”

50.  Further, the fact that most of the Claims are governed by Hong Kong law establishes a sufficient connection with Hong Kong: Re Petropavlovsk Plc[17] at [21].

51.  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].

52.  As regards Claims to be discharged under the Schemes which are governed by Hong Kong law, any dissenting creditors’ opposition should not hamper the effectiveness of the Schemes (e.g. Re China Bozza Development Holdings Ltd[18]).

53.  Claims under the Singapore Bonds and the Singapore Guarantee are covered by the Pre-pack Scheme to ensure international effectiveness. The Pre-pack Scheme’s sanction hearing is scheduled for 31 July 2023. As the Singapore Court no longer applies the Rule in Gibbs (Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux[19]; see Re Pacific Andes Resources Development Limited[20]). I asked Mr Ho at the hearing to convene the Scheme meeting why the parallel scheme was necessary. He told me that the Company had received advice that a Hong Kong scheme might not be treated as an insolvency process in Singapore entitled to recognition under the UNCITRAL Model Law. It is not necessary for me to comment further on this matter. I accept that if this is the advice the Company has received it is prudent to introduce a parallel scheme.

Conclusion and Disposition

54.  For the aforesaid reasons I will sanction the Scheme.