RE E-HOUSE (CHINA) ENTERPRISE HOLDINGS LTD

HCMP 1209/2023

[2023] HKCFI 3117

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1209 OF 2023

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REASONS FOR JUDGMENT

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1.  By Petition dated 15 November 2023, E-House (China) Enterprise Holdings Limited (易居(中國)企業控股有限公司) (“Company”) seeks the court’s sanction of a scheme of arrangement between the “Scheme Creditors” (as defined in the Scheme) and the Company (“Scheme”) pursuant to s.674 of the Companies Ordinance (Cap. 622) (“CO”). At the hearing, this Court sanctioned the Scheme. These are the reasons for my judgment.

A. BACKGROUND

A1. The Company and the Group

2.  The Company was incorporated in the Cayman Islands on 22 February 2010. It has 1,749,059,530 issued shares, all of which were fully paid up[1].

3.  The shares in the Company have since 20 July 2018 been listed on the Main Board of The Stock Exchange of Hong Kong Limited (“SEHK”) (stock code: 02048)[2].

4.  The Company is an investment holding company. The primary business of the Company carried on by its direct and indirect subsidiaries (together “Group”) is real estate agency services, real estate data and consulting services, and real estate brokerage network services in the Mainland and in Hong Kong.

5.  Prior to implementation of the “Internal Restructuring” (as described in §§27-30 below), the Company holds:

(1) 70.23% in TM Home Limited, a company incorporated in the Cayman Islands (“TM Home”). The remaining 29.77% shareholding in TM Home is held by Alibaba Investment Limited, another company incorporated in the Cayman Islands; and

(2) through intermediate holding companies, 100% indirect equity in Shanghai CRIC Information Technology Co. Ltd (上海克而瑞信息技術有限公司), a company established in the Mainland (“Shanghai CRIC”).

6.  A simplified structure of the Group is as follows[3]:

7.  The business of the Group may broadly be divided into 4 segments[4]:

(1) “Leju Segment” held by Leju Holdings Limited (“Leju”), a company listed on New York Stock Exchange. It principally provides online-to-offline real estate services. TM Home holds 55.7% shareholding in Leju.

(2) “E-commerce Segment” held by TM Home (Hong Kong) Limited (“TM Home HK”). It carries on real estate intermediary and e-commerce business. TM Home HK indirectly owns 100% equity in Shanghai TM Home E-Commerce Limited (“TM Home WFOE”), which operates Tmall Haofang platform business with Zhejiang Tmall Network Co., Ltd. (“Tmall Network”), a subsidiary of Alibaba Group Holding Limited, under a business cooperation agreement.

(3) “CRIC Group” held by Shanghai CRIC. It operates real estate data and consulting business.

(4) “Fangyou Business” held by BVI subsidiary E-House (China) International Property Development Limited (易居(中國)地產發展國際有限公司) (“E-House BVI”). It has 125 subsidiaries which carry on real estate agency services and information and consultancy services.

A2. Financial Position of the Company and the Group

8.  Since the second half of 2021, the Mainland’s real estate industry has experienced unprecedented challenge and turmoil. This affected many Mainland property developers, including the Group’s clients. The Group has been adversely affected by this downturn, with resulted in reduced revenue, difficulty in raising funds, decreased cash flows and tightening of supervision of financing activities and cash balances[5]. The Company defaulted in its obligations to pay the principal and interest on the maturity date of the 2022 Notes. This in turn resulted in cross-defaults on the Convertible Note and the 2023 Notes[6].

9.  The Group has been actively engaging negotiations with its customers, suppliers and lending banks with a view to stabilise its credit lines and day-to-day operations. It further implemented measures to reduce capital expenditure and other expenses[7].

10.  The Company is grossly insolvent in that[8]:

(1) According to its audited accounts, as at 31 December 2022, the Company had total assets and total liabilities of RMB 1,587,454,000 and RMB 5,511,348,000 respectively, and net liabilities of RMB 3,923,894,00.

(2) According to its unaudited accounts for the 6 months ended 30 June 2023, as at 30 June 2023, the Company had total assets and total liabilities of RMB 1,494,432,000 and RMB 5,934,268,000 respectively and its net liabilities was increased to RMB 4,439,836,000.

11.  The liabilities of the Company may be classified into the following categories[9]:

(1) “Noteholders” being persons holding a direct or beneficial interest as principal under 2 series of notes (1) due 2022 issued under an indenture dated 18 October 2019 (“2022 Notes”) and (2) due 2023 issued under an indenture dated 10 December 2020 (“2023 Notes”) (together “Old Notes”)[10]. The outstanding principal of the Old Notes is US$600,000,000. The Old Notes were until their maturity dates[11] listed on SEHK. The Old Notes are guaranteed by 4 subsidiaries of the Company, which are intermediate holding companies within Fangyou Business[12] and CRIC Group[13] (collectively “Subsidiary Guarantors”).

(2) “CB Holder” is Alibaba.com Hong Kong Limited. It holds a convertible note in the principal amount of HK$1,031,900,000 (“Convertible Note”) pursuant to a note instrument dated 4 November 2020[14]. The Convertible Note is also guaranteed by the Subsidiary Guarantors.

(3) “Other Unsecured Liabilities” of RMB 131,163,000, which comprise:

(a) RMB 112,922,000 due to other companies within the Group which are repayable on demand (“Intragroup Liabilities”); and

(b) RMB 18,241,000 being other payables incurred in the ordinary course of business such as consulting fees, legal fees, tax payable and payroll expenses (“Business Expenses”).

12.  The Group is also insolvent in that according to its audited consolidated accounts[15]:

(1) As at 31 December 2022, the Group had total assets and total liabilities of RMB 5,850,953,000 and RMB 10,878,825,000, i.e. net liabilities of RMB 5,027,872,000.

(2) As at 30 June 2023, the Group had total assets and total liabilities of RMB 4,994,660,000 and RMB 10,902,149,000 respectively, i.e. net liabilities of RMB 5,907,489,000.

A3. 2022 Scheme

13.  On 31 March 2022, the Company conducted an exchange offer in respect of the Old Notes. As less than 90% of the Old Notes were tendered, the exchange offer was not proceeded with. The Company sought to implement a restructuring of the Old Notes by way of a scheme of arrangement in the Cayman Islands (“2022 Scheme”). The 2022 Scheme was sanctioned by Mr Justice Segal on 9 November 2022[16]. The reasons for sanctioning the 2022 Scheme were set out in Re E-House (China) Enterprise Holdings Limited, 17 November 2022.

14.  Despite the sanction, the Company did not implement the 2022 Scheme. This was said to be owing to further deterioration of the Mainland real estate market in Q4 of 2022, which resulted in the Company being unable to pay the cash portion of the scheme consideration, and the amount due under the Convertible Note[17].

A4. Proposed Restructuring

15.  The Company proposed the Scheme to restructure and compromise the debts owed to the CB Holder and the Noteholders (together “Scheme Creditors”), but not the Other Liabilities. The Company believes that upon implementation of the Scheme, the Company and the Group will be able to restore their solvency and avoid having to go into liquidation[18].

16.  With a view to obtaining the support of the Scheme Creditors, the Company entered into a restructuring support agreement dated 2 April 2023 with the CB Holder (“RSA (CB)”), and a restructuring support agreement dated 2 April 2023 (“RSA”) with Noteholders who consented to the terms of the RSA[19].

17.  The Scheme is linked to and inter-conditional with an identical scheme put forward in the Cayman Islands[20]. Leave to convene the scheme meetings for the Cayman Scheme was granted by Mr Justice Segal on 4 October 2023.

18.  At the directions hearing on 26 September 2023, this Court raised a number of matters regarding the draft Composite Document (which included the draft Explanatory Statement and the draft Scheme) and required the Company to address those matters by revising the Composite Document. Leave was given to the Company to convene separate meetings (“Scheme Meetings”) of (1) the CB Holder and (2) the Noteholders for the purpose of considering and, if thought fit, approving the Scheme (“Convening Order”). The Company has addressed the matters raised by this Court[21], as discussed further below.

B. PRINCIPAL FEATURES OF THE SCHEME

19.  The purpose of the Scheme is to compromise and release the claims of the Noteholders and the CB Holder against the Company and the Subsidiary Guarantors.

20.  Under the Scheme, the Scheme Creditors will receive 2 kinds of consideration: (1) Cash Consideration at 6% of their claims; and (2) Share Consideration, being interests in Leju Segment, TM Home and CRIC Group.

B1. Cash Consideration

21.  The Cash Consideration amounts to RMB 337 million[22], which exceeds the recovery rate of 3.6% to 4.4% in liquidation scenario[23].

22.  The Cash Consideration is to be funded by the proceeds of a Rights Issue of 2,098,871,436 “Rights Shares”[24], which will raise HK$465 million in net proceeds, all of which will be applied towards payment of the Cash Consideration[25].

23.  On 19 June 2023, Mr Zhou Xin, a director of the Company interested in 22.8% of the shares in the Company, entered into an underwriting agreement with the Company, pursuant to which Mr Zhou agreed to subscribe for all the Rights Shares that are not subscribed, placed or paid for by 11 March 2024 (“Completion Date”).[26]

24.  The Rights Issue is conditional upon, amongst other things, approval by independent shareholders.[27] The Rights Shares are expected to be issued and tradable on or before the Restructuring Effective Date (“RED”), which is expected to be 12 March 2024[28].

B2. Share Consideration: Internal Restructuring of the Group

25.  The Share Consideration represents 65% equity interest in TM Home which, in turn, holds 3 segments, namely (1) 55.7% shareholding in Leju (i.e. Leju Segment); (2) 100% shareholding in TM Home HK (i.e. E-Commerce Segment); and 100% equity in Shanghai CRIC (i.e. CRIC Group).

26.  The Noteholders through Creditor SPV[29] will hold 54.207% in TM Home, while the CB Holder will hold 10.793% in TM Home. The intention is for the Company to sell the 65% shares in TM Home or assets held by TM Home (“Share Sale”) at the highest possible price by August 2024, and to distribute the sale proceeds to the Scheme Creditors in proportion to their claims.

27.  To give effect to the new structure, prior to the RED, the Group will implement an Internal Restructuring, which involve the following transfers:

(1) The entire equity of Shanghai CRIC will be transferred to TM Home (to be renamed “Tianji Home”); and

(2) E-House BVI, which holds Fangyou Business, will be transferred away from TM Home to other subsidiaries of the Company, so that the Company will continue to operate Fangyou Business independently.

28.  These above transfers are carried out at nominal value and are not intended to be quid pro quo for each other (i.e. it is not the case it is thought the transfers are of equivalent value)[30].

29.  The Company will set up a “Management SPV”[31] prior to the RED, which will hold a 15% shareholding in TM Home. As explained by the Company[32]:

(1) the Management SPV will be held by members of senior management of TM Home, who are responsible for managing the business of the CRIC Group and TM Home and may include directors of the Company;

(2) the purpose is to incentivise senior management of TM Home to work diligently, in order to enhance the value of TM Home’s assets and hence the price of the Share Sale to the benefit of the Scheme Creditors; and

(3) the value of 15% stake in TM Home as at 15 November 2023 is RMB 478,087,350.

30.  Upon the Scheme becoming effective on the RED, the corporate structure of the Group will become[33]:

B3. Share Consideration: Liquidity

31.  The Share Consideration, its liquidity and the rights of the Noteholders over such Consideration were raised by this Court at the directions hearing. The Company explains that the Noteholders can choose to realise the Share Consideration through the following means[34]:

(1) Noteholders can sell their shares in Creditor SPV subject to the restrictions in the Articles of Association and TM Home Shareholders’ Agreement[35], which give pre-emptive right to other shareholders to purchase the shares, and absolute discretion to the board to veto the transfer.

(2) Creditor SPV and CB Holder can sell their shares in TM Home subject to the terms of TM Home Shareholders’ Agreement, which restricts sale of shares to any competitors of TM Home[36].

(3) The Company undertakes to use reasonable endeavours to sell or procure the sale, for cash, of no less than 65% of the shares in TM Home, or assets held by TM Home, by 31 August 2024.

(4) In the meantime, transitional arrangements have been put in place for TM Home WFOE to cooperate with Tmall Network to carry out the Tmall Haofang platform business until 31 August 2024 under a new business transition agreement[37].

(5) If the Share Sale cannot take place by 31 August 2024, the Company will continue to seek a purchaser for TM Home, including by way of auction[38].

32.  Further:

(1) With respect to §31(1)-(2) above, the Noteholders’ shares in Creditor SPV and the CB Holder’s shares in TM Home are shares in private company, and there may not be a market for them.

(2) As for §31(3)-(5) above, the Company cannot give any assurance that the Share Sale will be consummated.

33.  The Company has provided full explanation to the Scheme Creditors about (1) the restrictions on the sale of the Share Consideration; (2) the Share Sale may not be consummated; and (3) the value of the Share Consideration in different scenarios[39].

B4. Comparison of recovery under liquidation and Scheme

34.  According to the analyses set out in the Composite Document:

(1) The estimated recovery to Scheme Creditors, including recoveries from their claims against the Subsidiary Guarantors, is 3.6-4.4%[40].

(2) If the Scheme is implemented (excluding the 0.25% Instruction Fee under the RSA / RSA (CB)), the estimated recovery to Scheme Creditors is from 36.3% (without Share Sale) to 43.8% (with Share Sale). The latter rate reflects the fact that the sale of 65% shares in TM Home is a sale of a majority interest.

35.  The recovery rate under the Scheme is the sum of the following[41]:

Consideration	Market Value[42] / Estimated Recovery (RMB)	Recovery Rate
Cash Consideration	337,266,000	6%
Share Consideration
23.53% effective interest[43] in Leju	45,558,000 to 56,947,000	0.8% to 1%
65% effective interest in TM Home HK	967,322,000 to 1,209,153,000[44]	17.2% to 21.5%
65% effective interest in Shanghai CRIC	690,047,000 to 862,559,000 [45]	12.3% to 15.3%
Total	2,040,193,000 to 2,465,925,000	36.3% to 43.8%

36.  Kroll (valuer) has considered the restrictions on the marketability of the 65% equity in TM Home, but is unable to quantify the impact[46].

B5. Blocked Scheme Creditors

37.  The issue arising from the applicable sanctions regimes affecting the Noteholders or its custodian, or who are Russian Persons (“Blocked Scheme Creditors”) was considered at length by Segal J’s E-House (China). The Company has adopted mechanisms for those Noteholders who were not entitled, able or permitted to submit instructions or settle through Euroclear Bank SA/NV and Clearstream Banking S.A. (“Clearing Systems”) due to such sanctions regimes[47]. The Company does not have information as to whether any Noteholders are Blocked Scheme Creditors unless they come forth and identify themselves as such creditors. As at the date of Cheng 1^st, 6.4% of the Noteholders have identified themselves as Blocked Scheme Creditors[48].

B6. Released Claim

38.  The Scheme provides for release of the following entities or persons, who are not parties to the Scheme:

(1) Subsidiary Guarantors: As observed in Re Century Sun International Ltd [2021] HKCFI 2928 (1^st sanction) at §§15-17, it is a common feature of recent schemes that the guarantees given by associated companies of the company (subject to the scheme) are released, where it is necessary for the business group of which the company forms part to be released from liability and restore to solvency.

(2) Claims arising out of, relating to or in respect of the preparation, negotiation or implementation of the Schemes^[49]: This is permissible if the release of the relevant third parties is required to give efficacy to the scheme. It would not be permissible for a company to include releases that are not necessary and represent an attempt by third parties to exploit a fortuitous opportunity to escape unrelated liabilities (Re Century Sun (1^st sanction) at §§18-19).

39.  To address the concern raised by this Court, it has been made clear in the Explanatory Statement that the Scheme shall not “prejudice or impair any rights of any Scheme Creditor … which arise as a result of a failure by the Company or any party to the Schemes to comply with the terms of the Schemes or any Restructuring Document”, and shall not “prejudice or impair any claims or causes of action of any Scheme Creditor against the Company arising from fraud, gross negligence or wilful misconduct”[50].

B7. Other Liabilities

40.  The creditors of the Other Unsecured Liabilities are not subject to the Scheme and their claims will not be compromised under the Scheme. This does not pose as an impediment to the court sanctioning the Scheme for the following reasons:

(1) A company may select the creditors with whom it wishes to enter into an arrangement. However, if a company excludes too many creditors, it may make the scheme unworkable or impractical to implement and this may itself provide a reason for refusing to sanction the scheme (Re Lamo Holding BV [2023] EWHC 1558 (Ch) at §34).

(2) The reasons given by the Company for not including the Other Unsecured Liabilities are[51]:

(a) The Intragroup Liabilities can be set off, albeit not completely, against the amounts owed by the companies within the Group. In any event, the Company will procure the relevant group companies not to enforce or seek repayment of the debts for at least 12 months from the RED; and

(b) The Ordinary Business Expenses will be paid out of the Company’s funds.

(3) The Other Unsecured Liabilities represent about 2.21% of the total liabilities of the Company, and their nature is different from the claims of the Scheme Creditors. There is no inequality in treatment between the Scheme Creditors and the creditors of the Other Unsecured Liabilities.

(4) Upon implementation of the Scheme, the Company will be able to restore its solvency and its assets will exceed liabilities (which include the Other Unsecured Liabilities)[52].

41.  The above terms and disclosures have reflected the changes made to the draft Composite Document after the directions hearing in response to the queries and comments raised by this Court at the directions hearing. These include:

(1) The effect of the Internal Restructuring and the basis of the transfer of Fangyou Business at nominal consideration. Illustrate by way of corporate structure charts before and after the Restructuring, so that the Scheme Creditors can readily see which segments will be held by TM Home after the Restructuring[53].

(2) The interest of the directors and senior management in Management SPV and the basis for awarding them with 15% shares in TM Home[54].

(3) What will happen if TM Home cannot be sold by 31 August 2024[55].

(4) The basis for excluding the Other Unsecured Liabilities from the Scheme, and whether the exclusion will have any adverse impact on the solvency of the Company after the RED[56].

(5) Further disclosures on the scope of the Deeds of Release insofar as they go beyond releasing the claims of the Scheme Creditors and the Subsidiary Guarantors, and revising the release to make clear that it does not prejudice or impair any rights of Scheme Creditors which arise as a result of the failure to comply with the terms of the Scheme or any Restructuring documents or any claims arising from fraud, gross negligence or wilful default[57].

(6) The returns analyses on the Scheme and the liquidation scenario to be presented in dollar amounts (not just as percentages of the debts being compromised), and the need to consider the lack of marketability on the sale of 65% shareholding in TM Home[58].

(7) The reason for seeking recognition of the Cayman Scheme under Chapter 15 of the US Bankruptcy Code in circumstances where the Company has no assets in the US[59].

42.  The Explanatory Statement and the Scheme have also been revised following Segal J’s comments, which include (1) disclosure on the risk that the Company may not proceed with the Scheme, and (2) provision stating that court’s approval is required if the Company modifies or terminates the Scheme after the RED[60].

C. DISCUSSION

43.  As summarised in Re North Mining Shares Co Ltd (in liquidation) [2023] HKCFI 2439 at §16, the function of the court at the hearing of a petition to sanction a scheme is to consider:

(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 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 whether or not to support it;

(5) Whether the necessary statutory majorities have been obtained; and

(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.

44.  For the reasons explained below, each of the requirement is satisfied.

C1. Permissible Purpose

45.  The purpose of the Schemes is to compromise and discharge the liability of the Company and the Subsidiary Guarantors under the Old Notes and the Convertible Note. This is a permissible purpose of a scheme of arrangement (Re North Mining at §18).

C2. Classification of Creditors

46.  In considering the issue of class, it is the rights of creditors, not their separate commercial or other interests, which determine whether they form a single class or separate classes. 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 (Re North Mining at §19).

47.  The starting point is to identify the appropriate comparator: what would be the alternative if the scheme does not proceed. The directors of the company, being advised by their professional advisors, are normally in the best position to identify what will happen if the scheme fails (Re Century Sunshine Group Holdings Ltd [2023] HKCFI 2041 at §37).

48.  The board of directors believes that an insolvent liquidation of the Company (and resulting group-wide liquidation) is the most likely alternative outcome if the Scheme does not proceed[61]. Hence, the appropriate comparator is an insolvent liquidation.

49.  The Convening Order gave leave to the Company to convene 2 separate meetings for the Noteholders and the CB Holder to consider and approve the Scheme, given that their rights against the Company are different[62]:

(1) The Share Consideration given to the Noteholders and the CB Holder are different. The CB Holder will receive directly shares in TM Home, whereas the Noteholders’ interest in TM Home will be held indirectly through Creditor SPV.

(2) Under the TM Home Shareholders’ Agreement, the CB Holder enjoys some rights not shared by Creditor SPV. These include:

(a) The CB Holder’s prior written consent is required before any shares in TM Home can be transferred or issued to transferees who are competitors of TM Home.

(b) The CB Holder has direct rights to appoint 1 director to the board of TM Home. While Creditor SPV has rights to appoint 2 directors, the Noteholders can only exercise their rights through the appointed directors.

(3) The CB Holder has materially different interests in the Company and TM Home compared to those of the Noteholders. In particular, the CB Holder’s associated company (i.e. TM Home Minority Shareholder) is an existing shareholder of TM Home and has received an incentive/instruction fee of US$1,275,000 as part of the broader restructuring. The CB Holder itself is a substantial shareholder of the Company.

(4) The Convertible Note is governed by Hong Kong law while the Old Notes are governed by New York law, and their terms are different. This, however, is not a reason for concluding that the right of the CB Holder qua unsecured creditor is different from that of the Noteholders.

50.  The issue as to the propriety of a lock-up agreement and the “consent fee” payable under such agreement has been considered by Snowden J (as he then was) in Re ColourOz Investment 2 LLC [2020] BCC 926 at §§97-103, and may be summarised as follows:

(1) The purpose of a lock-up agreement is to provide the company with comfort that there is sufficient support for the scheme before it embarks upon an application under s. 674 of the CO. The consent fee is designed to provide a material inducement to creditors to engage with the proposals at an early stage and provide a commitment as to their voting intentions before the court process (§97). However, a creditor who received a consent fee should not be made subject to any obligation to vote in favour of a scheme.

(2) In principle, a consent fee of this nature will not fracture a class provided that it is made available to all scheme creditors, and it does not induce creditors to commit to vote in favour of a scheme which they might otherwise reject (§98).

(3) The court would need to be satisfied that the amount of the consent fee, looked objectively, would not have the effect of persuading a creditor to vote in favour of a scheme which it considered to be against its interest (§§99-100).

(4) If it is shown that the lock-up agreement did have a serious impact on the way in which creditors voted, the court could consider whether the classes had been wrongly constituted or whether the discretion should be exercised against sanctioning the scheme (§§100-101).

(5) In assessing the materiality of a consent fee to the decision which creditors has to make, the court would consider the size of the fee as compared to the predicted returns offered to all creditors under the scheme and the returns in a liquidation. It is not appropriate simply to look at the percentage of the fee bears to the face value of the debt held by the creditors (§§102-103).

51.  In the present case, all Consenting Creditors under the RSA are entitled to receive an Instruction Fee equal to[63] 0.25% of the principal amount of the eligible Old Notes plus interest up to 30 June 2023. Similarly, under the RSA (CB), the CB Holder is entitled to an Instruction Fee at 0.25% of the principal amount of the Convertible Note plus interest up to 30 June 2023.

52.  I do not consider the Instruction Fee will fracture the class as it was offered to all Scheme Creditors[64].

53.  As regards the impact of the consent fee on voting, viewed objectively, the relatively modest consent fee (0.25%), as compared to the estimated returns under the Scheme (36.3% to 43.8%) and the liquidation scenario (3.6%to 4.4%), could not have affected the voting intention of the Consenting Creditors. In any event, there is no evidence to suggest that the RSA and RSA (CB) had any serious impact on the way in which the Consenting Creditors voted.

C3. Compliance with Court’s Directions

54.  The Company has complied with §2 of the Convening Order in that the notice convening each of the Scheme Meetings (“Notice”) was:

(1) Announced on SEHK news website on 10 October 2023[65];

(2) Published on the Company’s website on 10 October 2023[66];

(3) Published on the dedicated Scheme website on 10 October 2023;

(4) Advertised in The Standard (in English) and Hong Kong Economic Times (in Chinese) on 11 October 2023.

55.  However, §3 of the Convening Order had not been complied with, as the Composite Document[67] was not posted or couriered to the Scheme Creditors. Instead, the Notice was sent to the Scheme Creditors electronically in the following manner:

(1) By email to the CB Holder and the Blocked Scheme Creditors who had identified themselves to the Company at the RSA stage[68].

(2) As for the Noteholders:

(a) D.F. King Ltd (“Information Agent”) delivered to the Clearing Systems the Notice and an electronic link to the Scheme website where the Explanatory Statement and its appendices were available to download (“Electronic Link”), for onward transmission to the Noteholders[69].

Each of the Clearing Systems confirmed that the Notice and the Electronic Link were released to all of the non-Blocked Scheme Creditors through the usual communication channels adopted by the respective Clearing System[70].

(b) The Information Agent also sent an email with the Notice and the Electronic Link directly to each of the 432 Noteholders for whom it had an email address, who together hold 69.9% of the aggregate principal amount of the Old Notes.

(3) The Company is not aware any emails sent to non-Blocked Scheme Creditors having been “bounced back”[71].

56.  I accept the Company’s explanation that the omission to send the Notice in the manner required by the Convening Order was accidental[72]:

(1) The Convening Order was provided to the Information Agent alongside with the convening order made by the Cayman court on 5 October 2023. The Company had not drawn to the attention of the Information Agent that the method of dispatching the Composite Document was different.

(2) The Company and the Information Agent later became occupied with addressing substantive queries raised by the Scheme Creditors regarding the Scheme.

(3) The Company overlooked the need to remind the Information Agent about the need to deliver printed copies of the Composite Document to the Scheme Creditors.

57.  §4 of the Convening Order provides that “accidental omission” to serve any Scheme Creditor and “non-receipt” of the documents “shall not invalidate the proceedings at the Scheme Meetings or any resolutions passed thereat”, which is a common feature of a convening order[73].

58.  Despite the non-compliance with §3 of the Convening Order, I am satisfied that the Scheme Creditors had received the Composite Document through the means described in §54 above, having regard to the following matters:

(1) The Notice stating that the Composite Document can be obtained from the Company’s solicitors have been advertised and announced on SEHK website, the Company’s website and the Scheme website. The Notice and the Electronic Link have been made available to the Noteholders electronically. No Noteholder has approached the Company or the Information Agent to request for the Composite Document[74]. It reasonable to assume that the Noteholders would monitor the restructuring developments from websites from which relevant documents could be accessed[75].

(2) The CB Holder must have received the Composite Document as it voted at the Scheme Meeting.

(3) The Noteholders representing 92% in value of the claims under the Old Notes voted in accordance with the voting instructions contained in the Composite Document[76].

(4) Many of the Noteholders had participated in the 2022 Scheme and were familiar with receiving the Composite Documents through electronic means[77].

59.  For the above reasons, it is appropriate for the court to exercise its discretion to waive the Company’s non-compliance with §3 of the Convening Order.

C4. Explanation of Scheme

60.  An explanatory statement should be sufficient to enable the Scheme Creditors to exercise a reasonable judgment as to whether the Scheme is in their interests, and to reach a sensible decision as to its benefits. In this connection, the Scheme Creditors are assumed to be intelligent and can be expected to read the explanatory statement as a whole (Re Winsway Enterprises Holdings Ltd [2017] 1 HKLRD 1 at §21).

61.  The Explanatory Statement sets out the details in relation to the Internal Restructuring and the reasons for implementing the Scheme. These include the background to the Company and the Internal Restructuring, explanation of the Scheme, risk factors and the Liquidation and Scheme Analysis. As stated above, the explanation includes the specific matters which the court required the Company to disclose, explain or address.

C5. Approval by Requisite Majorities

62.  The Scheme has been approved by the CB Holder. Further, 602 out of the 614 Noteholders present and voting, in person or by proxy, representing 94.11% in value of the claims, voted in favour of the Scheme. The requisite statutory majorities are met[78].

C6. Views of an Intelligent and Honest Man

63.  The Scheme is one which an intelligent and honest man might approve. This is borne out by the votes at the Scheme Meetings. The 602 Noteholders who voted in favour of the Scheme represented 83.62% of the total claims under the Old Notes[79].

64.  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 UDL Holdings Ltd (2001) 4 HKCFAR 358 at §25; Re North Mining at §27). The Liquidation and Scheme Analysis shows that the Scheme Creditors would obtain a higher return under the Scheme than they would be in a liquidation of the Company, even if one only takes into account the Cash Consideration (with a recovery rate of 6%).

C7. International Dimension

65.  To justify the court exercising its jurisdiction to sanction a scheme in respect of a foreign company, it is necessary to demonstrate a sufficient connection between the Scheme and Hong Kong, i.e. the “jurisdiction issue”. This requirement is met, as the Company is listed in Hong Kong and has been registered as a non-Hong Kong company.

66.  The court would also consider the “utility issue” i.e. whether the Scheme is effective in other foreign jurisdictions of practical importance, because the court would not act in vain and would not exercise its powers to sanction a scheme which does not serve any useful purpose (Re Hong Kong Airlines Ltd [2022] HKCFI 3792 at §30; Re North Mining at §36).

67.  In the present case:

(1) The Convertible Note is governed by Hong Kong law, and the CB Holder has voted in favour of the Scheme.

(2) The Old Notes are governed by New York law. The Company intends to file a petition for recognition of the Scheme sanctioned by the Cayman court under Chapter 15 of the Bankruptcy Code. This is done pursuant to the advice received by the Company, which opines that it is necessary for the Cayman Scheme to be recognised under Chapter 15, so that the discharge of the liability of the relevant Subsidiary Guarantors (i.e. 2 out of the 4 Subsidiary Guarantors, which are BVI companies) under the Old Notes and the Guarantees can be effective under BVI law[80].

(3) The Company also adduced opinions on New York law, which confirms that the US Court will only recognise the Scheme sanctioned by the Cayman court, which is considered to be the centre of main interest of the Company.

C8. Discretion

68.  The court sanction a scheme subject to the satisfaction of conditions which remain unsatisfied at the sanction hearing, where these conditions will be satisfied within a reasonably short period of time (cf. E-House (China) at §121). Even if the Scheme contains components which carry some degree of uncertainty given its complexity, that by itself may not constitute a reason for the court to withhold sanction (Hong Kong Airlines at §§27-29).

69.  Here, the Company has been taking steps to satisfy the conditions precedent for the Scheme to become effective (as stated in Clause 7.1 of the Scheme)[81]. Amongst those which have not been satisfied:

(1) Completion of the Rights Issue is expected to be consummated by mid-March 2024, after approval by independent shareholders at an extraordinary general meeting and approval by the SFC and SEHK[82].

(2) Application for recognition under Chapter 15 is expected to be filed shortly after the sanction hearing.

70.  For all the above reasons, it is an appropriate case for the court to exercise its discretion to sanction the Scheme. The Company is directed to file the sanction order with the Companies Registry within 7 days of the order.