RE JINRO (HK) INTERNATIONAL LTD

HCMP 1503/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1503 OF 2004

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REASONS FOR JUDGMENT

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1. This is a petition presented by Jinro (H.K.) International Limited ("the Company"), acting by its provisional liquidators, for sanction of a scheme of arrangement ("the Scheme") with some of its creditors ("the Scheme Creditors") under section 166 of the Companies Ordinance, Cap. 32. I have granted the relief sought at the conclusion of the hearing and these are the reasons for judgment.

The background

2. The Company was incorporated in Hong Kong on 28 February 1996 with a nominal capital of US$9,450,000.00, comprising 9,450 shares of US$1.00 each, all of which are paid up or credited as paid up. It was principally engaged in the distribution of alcoholic beverages manufactured by associated companies in Korea. It is part of a sizeable group of companies ("the Jinro Group") headed by its parent company in Korea, known as Jinro Limited ("Jinro Korea"). The core business of the Jinro Group relates to the manufacture, distribution and sale of alcoholic and other beverages.

3. Jinro Japan Inc. ("Jinro Japan"), a company incorporated in Japan in 1988, is recorded in the books and records of the Company and Jinro Korea, as a wholly owned subsidiary of the Company, with all the issued shares of Jinro Japan ("the Shares") being inscribed in the name of the Company. However, the Company is currently in dispute with Jinro Korea involving litigation in Korea ("the Dispute") as to which of them in fact owned the Shares.

4. Within the Jinro Group, there has always been significant financial and trading dependence of the Company and Jinro Japan on Jinro Korea, as they would rely on Jinro Korea and its associated companies to supply them with the alcoholic beverages for distribution.

5. The Jinro Group has been in considerable financial difficulties for a significant period of time. Jinro Korea is currently undergoing a corporate reorganisation under the Corporate Reorganisation Act of Korea. Such a reorganisation is court led and entails the Korean Court appointing a receiver over the debtor company to manage the process. The creditors of Jinro Korea and the Korean Court have approved a restructuring plan dated 19 April 2004 ("the Restructuring Plan").

6. A creditor's petition to wind up the Company was heard in Hong Kong in March 2003 and it was determined that the petitioners do have locus to present the petition. Rather than seeking an order to wind up the Company immediately, the petitioning creditors applied for provisional liquidators to be appointed to explore alternatives, such as rescue or restructuring, which might bring about greater recovery to the creditors than a compulsory liquidation. On 9 July 2003, provisional liquidators were appointed for the Company and the winding-up petition has since been adjourned on several occasions for the provisional liquidators to explore with the Korean receiver the possibility of a group-wide restructuring. It has always been recognised that greater value to creditors of the Company would be achieved by a group-wide restructuring, given the dependence of the Company and Jinro Japan on Jinro Korea and other members of the Jinro Group.

7. As the Scheme forms part of the group-wide restructuring process and is intended to interlock with the Restructuring Plan and facilitate its efficient and expeditious implementation, it is necessary to have a broad understanding of the Restructuring Plan.

The Restructuring Plan

8. The objective of the Restructuring Plan is to implement a group-wide restructuring of the Jinro Group by seeking to compromise the claims of actual and contingent creditors. It may be divided into two components.

9. The first and primary component is the effective sale of the entire Jinro Group (including Jinro Japan) by the identification of potential third party investors through a merger and acquisition bidding process ("the M & A Option"), subject to the monitor of the Korean Court. In order to maximise the chances of a successful sale, it is necessary to present or package the Jinro Group in an attractive manner. This requires the resolution of the Dispute on an amicable basis. The parties to the Dispute have agreed to an informal stay of the proceedings in Korea, pending the implementation of the Restructuring Plan.

10. In the event the M & A Option should fail to materialise within the prescribed period of one year from the date of approval of the Restructuring Plan (unless such period is extended), the second component of the plan would come into play. This provides for a rescheduling of the indebtedness over a very significant period of time, up to and including year 2013. The treatment of the creditors under the second component is broadly as follows:

(1)	25% of the confirmed principal would be converted into equity in the final year of reorganisation;
(2)	75% of the confirmed principal would be repaid in equal instalments for four years from 2010 to 2013;
(3)	pre-commencement interest would not be paid; and
(4)	post-commencement interest would not be paid.

11. Even though there is advice from Korean lawyers that such treatment is in some respects already more favourable than the general corporate reorganisation practice in Korea, it is understandable that the creditors under the Restructuring Plan would favour the M & A Option, as this could result in more expeditious repayments.

The Scheme

12. In broad terms, the Scheme aims to achieve a result where the Jinro Group as a whole (including Jinro Korea, Jinro Japan and the Company) is sold to a third party for value. Such value will be channelled back to the creditors of Jinro Korea. The Scheme Creditors, who are also creditors of Jinro Korea, will look to such value for their return, agreeing meanwhile to subordinate their rights to prove in the liquidation of the Company. The other unsecured creditors of the Company, who have no recourse against Jinro Korea ("the Single Recourse Creditors"), will prove with priority in the liquidation of the Company.

13. The Scheme only seeks to effect a compromise with those creditors of the Company that have an interest in either a series of Floating Rate Notes issued by the Company and guaranteed by Jinro Korea ("the Notes") or those with an interest in a bilateral loan to the Company guaranteed by Jinro Korea ("the Pusan Debt"). The basis for this is that it is intended that the M & A Option will be effected and the Scheme Creditors will be paid out of the proceeds of the M & A Option. The total estimated claims of the Scheme Creditors amount to approximately 69.9% of the overall indebtedness of the Company.

14. An outline of the Scheme may be given as follows:

(1)	a special purpose vehicle company ("the SPV") will be established in Ireland to maximise the tax efficiency of the Scheme;
(2)	the claims of the Scheme Creditors against Jinro Korea ("the Scheme Liabilities") will be assigned by the Scheme Creditors to the SPV. The SPV will become holder of the "Scheme Assets" on trust for the Scheme Creditors. The Scheme Assets will include (i) the rights assigned by the Scheme Creditors in respect of guarantees given by Jinro Korea in relation to the Notes and the Pusan Debt; and (ii) the rights relating to the Shares and the conduct of any proceedings concerning the Dispute;
(3)	the Noteholders, who form the majority of the Scheme Creditors, shall use their best endeavours to effect certain amendments to the Note documentation;
(4)	as part of the Restructuring Plan, all parties involved with the Jinro Group will make efforts to sell the business of the Jinro Group to the highest bidder, with the parties disputing the ownership of the Shares agreeing to give whatever comfort is reasonably required by a potential purchaser that good title to Jinro Japan will be obtained by it. Subject to various protection mechanisms contained in an escrow and settlement agreement and the Scheme, the Shares will be released and delivered to the relevant investor to complete the M & A Option;
(5)	on completion of the M & A Option, (i) the SPV will receive its share of the proceeds of the M & A Option; (ii) the SPV will pay in priority the Scheme Expenses, which include the payment to the Company of a sum of US$475,794.00 ("the Underwritten Amount"), representing in effect the reimbursement of the monies originally paid by the Company to purchase the Shares; and (iii) the available distributable amount will then be determined having regard to the available property and proper provision for expenses and liabilities;
(6)	a distribution will be made from time to time using the whole of the available distributable amount as at the time of payment to the Scheme Creditors pro rata according to their original claims. A distribution can take the form of payment of cash, the granting of options, issuance of securities or in specie distribution. After meeting payments of the Scheme Creditors, any surplus funds held by the SPV will be transferred to the Company;
(7)	the Company will be put into liquidation concurrently with the implementation of the Scheme and a regulating order under section 227A of Cap. 32 will be sought, as it is envisaged that this would be the most efficient way of dealing with the remaining creditors, not least because certain avenues of recovery will only be capable of being dealt with by liquidators, such as preference claims, which would be paid in full. A further effect of the liquidation of the Company will be to crystallise the guarantee claims in Korea under the Korean law; and
(8)	the Scheme Creditors shall not be able to assert any claim against Jinro Korea in respect of liabilities covered by the Scheme, nor shall they be able to assert any claim against the Company or prove in its liquidation in respect of any liability until the Single Recourse Creditors of the Company have been paid in full from the liquidation.

15. Thus, the Single Recourse Creditors, whose aggregate claims are estimated at about 30.1% of the total indebtedness of the Company, are to benefit from the Scheme in this way:

(1)	the Scheme Creditors shall postpone their rights to prove against the Company until the Single Recourse Creditors have been paid in full; and
(2)	in the event that the M & A Option successfully completes, the Single Recourse Creditors will be paid the Underwritten Amount.

The Scheme meeting

16. On 2 July 2004, I gave leave for a meeting of the Scheme Creditors to be held and directed that notice of the meeting was to be given at least five business days before the appointed day for the meeting. I further ordered that copies of the explanatory statement, the Scheme, the voting and proxy forms be served personally or sent by post to each of the Scheme Creditors at their registered or last known addresses. The order also provided that the provisional liquidators were to make available for inspection copies of the legal advice given by lawyers in Korea and Japan in relation to the Dispute, subject to the signing of an appropriate confidentiality agreement by the Scheme Creditor requesting inspection.

17. The length of the notice given for the Scheme meeting was shorter than usual, owing to the pressure of time generated by the schedule of the Restructuring Plan. I allowed this as there were only nine prospective Scheme Creditors identified at the time, they are international financial institutions and investment banks with good communication systems, and the majority of them have been involved with the proposed restructuring for some time and have been updated regularly on the progress by the provisional liquidators. Further, save for one Scheme Creditor, the others are Noteholders or otherwise have an interest in the Notes. The Notes are registered with Euroclear and Clearstream and communication can be made easily and efficiently. Out of the nine Scheme Creditors identified, six had agreed to short notice for the meeting and the remaining three had not indicated dissent.

18. For reasons which are not necessary to go into, subsequently the provisional liquidators decided to hold the Scheme meeting later than expected. Pursuant to the order made on 2 July 2004, the provisional liquidators have on 10 July 2004 served the notice convening the Scheme meeting on 20 July 2004 on the Scheme Creditors and notices of the meeting were also published in one English newspaper and one Chinese newspaper circulating in Hong Kong on 15 July 2004.

19. The Scheme meeting was duly held on 20 July 2004. Seven out of ten Scheme Creditors attended either in person or by proxy. The resolution submitted at the meeting was that the Scheme should be approved subject to one modification. This arose from the fact that the guarantee claims against Jinro Korea of two Scheme Creditors, Stonehill Institutional Partners, L.P. and Stonehill Offshore Partners Limited (collectively "Stonehill"), have not yet been registered and accepted in the Restructuring Plan. It is believed that the reason for non-acceptance is procedural and that these claims would be accepted in due course by Jinro Korea. The Scheme was proposed to be modified to include within the definition of Scheme Liabilities an exception in respect of Stonehill such that they would be regarded as Scheme Creditors, subject to the provision that Stonehill shall not be entitled to receive any distributions from the SPV until such time as their claims shall have been fully registered and accepted in the Restructuring Plan.

20. At the hearing of the petition, the provisional liquidators have placed before me the draft modifications to be made to the Scheme arising out of the Stonehill claims and I have approved the modifications.

21. The resolution was approved by the required statutory majority in number representing not less than 75% in value of the class of creditors present and voting. The result of the voting was as follows:

	Total	For	Against
Number of Scheme Creditors present in person or by proxy and voting at the meeting	7	6	1
Percentage	100%	85.7%	14.3%
Value of claims of Scheme Creditors present in person or by proxy and voting at the meeting	US$72,088,887.00	US$67,683,440.00	US$4,405,447.00
Percentage	100%	93.9%	6.1%

22. The only Scheme Creditor who voted against the resolution later indicated to the provisional liquidators that he agreed in principle that the M & A Option should be pursued, and only voted against the resolution because he was concerned that under Korean law and procedure, foreign guaranteed creditors would appear to be treated less favourably and more should be done to improve their position. As to this, the provisional liquidators had explained that they believe they had at this stage exhausted all avenues of negotiation with the Korean receiver to improve the return of foreign guaranteed creditors. Further, as mentioned earlier, the provisional liquidators have been advised by Korean lawyers that the treatment of guarantee claims under the Restructuring Plan is in some respects more favourable than the general corporate reorganisation practice in Korea.

23. I should also mention that out of abundance of caution, although there is no compromise in the Scheme with the Single Recourse Creditors, the provisional liquidators have sent this petition, the composite Scheme document, the affidavit filed in support of the petition with the report of the result of the Scheme meeting to all the Single Recourse Creditors they have been able to identify. There are a total of ten such creditors, four of which are related to the Company. Save for two creditors with addresses in the United Kingdom, the others have all received the documents on 22 or 23 July 2004. The creditors who are in the United Kingdom were notified by fax on 22 July 2004 of the petition and the background of the Scheme.

24. The provisional liquidators did not receive any notice of intention to appear from any creditor, whether Scheme Creditor or Single Recourse Creditor, and no other party has appeared at the hearing of the petition.

The jurisdictional requirements

25. For the jurisdiction to sanction a scheme of arrangement to be invoked, the court must be satisfied that these statutory requirements have all been complied with:

(1)	the scheme meeting was duly notified and properly convened;
(2)	the creditors were given sufficient information and explanation of the scheme and its effects, to enable them to make a reasonable judgment as to how to vote at the scheme meeting;
(3)	the class or classes of creditors have been properly constituted; and
(4)	the requisite majority of creditors, being a simple majority in number representing three-quarters in value of those present and voting, have voted in favour of the scheme.

Here, I am satisfied that the requirements in (1), (2) and (4) have been complied with. What needs to be considered is whether it is right and proper that the Scheme meeting should be convened for one class of creditors only.

26. The principles for the constitution of a class are set out in UDL Argos Engineering & Heavy Industries Co. Ltd. v. Li Oi Lin [2001] 3 HKLRD 634 at 647E to 648B. The test is based on "similarity or dissimilarity of legal rights against the company" and "the question is whether the rights which are to be released or varied under the Scheme or the new rights which the Scheme gives in their place are so different that the Scheme must be treated as a compromise or arrangement with more than one class."

27. Section 166(1) of Cap. 32 provides that "where a compromise or arrangement is proposed between a company and its creditors or any class of them, ... the court may, ... order a meeting of the creditors or class of creditors ...". Whether to summon more than one meeting and who should be summoned to which meeting would turn on the question posed by the statutory language: between whom is the proposed compromise or arrangement to be made (Re Hawk Insurance Co. Ltd. [2001] 2 BCLC 480 at 511h, 512b to c, 518h)?

28. In this instance, the Scheme constitutes a compromise or arrangement between the Company and those creditors whose rights under the Notes or the Pusan Debt have been guaranteed by Jinro Korea. The feature common to the Scheme Creditors is that they have dual recourse, a claim against the Company as the primary obligor, and against Jinro Korea as the guarantor. In view of the undisputed insolvency of the Company, the rights and interests of the Scheme creditors, assessed by reference to their rights in a liquidation (Re Telewest Communications Plc [2004] EWHC 924 at paras. 29 and 30), are sufficiently similar for them to be required to vote together in one meeting. It should also be noted that whereas the creditors included within a class must have similar rights, not all creditors with similar rights have to be joined in a class; "the proposer of a scheme is free to select the creditors to whom a scheme of arrangement should be put, provided that the rights of the creditors and the effect of the scheme on those rights are not so dissimilar as to make it impossible for those creditors to consult together with a view to acting in their common interest" (Sea Assets Ltd. v. Perusahaan Perseroan (Persero) PT Perusahaan Penerbangan Garuda Indonesia [2001] EWCA Civ 1696, paras. 44, 51 and 66).

29. I accept the submission made by Mr. Godfrey Lam for the provisional liquidators that the Scheme does not involve a compromise between the Company and the Single Recourse Creditors, in the sense the words "compromise" and "arrangement" have been understood in this context (In re NFU Development Trust Ltd. [1972] 1 WLR 1548 at 1555C to D). Under the Scheme, the right of the Single Recourse Creditors to prove in the liquidation of the Company for the debts owed to them and to participate pari passu in the distribution of the assets of the Company is not compromised or altered to their detriment. As far as the Single Recourse Creditors are concerned, the incidental effect upon the implementation of the Scheme on their interests would be as follows:

(1)	they would gain priority over the Scheme Creditors to prove in the liquidation of the Company; and
(2)	they would be able to share in the Underwritten Amount injected into the Company on completion of the M & A Option.

30. What they would receive under the Scheme would be in the nature of a concession, which would enhance the effectiveness of their existing right to prove in the liquidation, without affecting or modifying that right to their detriment in any way. The assent or dissent of the Single Recourse Creditors to the Scheme would be immaterial (In re Tea Corporation Ltd. [1904] 1 Ch. 12 at 24; In re British & Commonwealth Holdings Plc (No. 3) [1992] 1 WLR 672 at 680C and H). This being the case, the court ought not to interfere with a valid and sensible commercial decision to leave the Single Recourse Creditors out of the Scheme.

31. As for the proposal to settle the Dispute with Jinro Korea concerning the ownership of the Shares, the compromise envisaged is between the Company and Jinro Korea, not between the Company and its creditors. The power to compromise the litigation concerning the Dispute is not a power to be conferred by the Scheme, that power would lie within the powers of the provisional liquidators in an order made on 1 September 2003.

The exercise of the discretion

32. I have been referred by Mr. Lam to various authorities on the approach to be adopted by the court in considering whether to sanction a scheme of arrangement. I do not propose to set out the relevant extracts except to give the citation:

(1)	In re English, Scottish and Australian Chartered Bank [1893] 3 Ch. 385 at 409;
(2)	Re UDL Argos, supra. at 646C;
(3)	Re Equitable Life Assurance Society [2002] 2 BCLC 510 at 520g to 521a.

33. In essence, the question is whether "the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve". The court does not simply act as a rubber stamp and accept the resolution passed by the majority, but at the same time, the court would be slow to differ from the meeting, unless something is brought to its attention there has been some material oversight or miscarriage.

34. The Scheme is intended to interlock with and facilitate the efficient and expeditious implementation of the Restructuring Plan, to bring about a group-wide restructuring by seeking to compromise the claims of actual and contingent creditors. The primary element of the Restructuring Plan is the effective sale of the entire Jinro Group by the M & A Option, which would result in more expeditious repayments to the creditors under the Restructuring Plan. There is good reason why the Scheme Creditors, who would have recourse to Jinro Korea, would favour the M & A Option.

35. From the point of view of other creditors of the Company, the exercise by the provisional liquidators of their power to compromise the litigation concerning the Dispute would mean that Jinro Japan would not form part of the assets for distribution in the winding up of the Company. However, the prospect of any realisation from Jinro Japan is doubtful and would depend on at least three assumptions:

(1)	that there are sufficient funds to support the litigation with Jinro Korea, which may have to take place in both Korea and Japan;
(2)	that the Company is ultimately successful in the litigation; and
(3)	that Jinro Japan is still worth some value at the end of the day notwithstanding the apparent ability of Jinro Korea to terminate any distribution arrangements with it.

36. The Scheme provides for benefits to the Scheme Creditors and the Single Recourse Creditors as mentioned earlier. In addition, it provides for the payment by the SPV of the substantial Scheme Expenses, including the costs of the petitioning creditors and the remuneration of the provisional liquidators. This would indirectly preserve the value of the assets of the Company for distribution to the creditors.

37. I am satisfied that the Scheme is such that an intelligent and honest person, as a member of the Scheme Creditors, and acting in respect of his interest, would reasonably approve. There is no reason not to respect the commercial judgment of the Scheme meeting.

38. For the above reasons, I have sanctioned the Scheme as modified in the draft submitted to me.