RE CHINA SINGYES SOLAR TECHNOLOGIES HOLDINGS LTD

HCMP 1882/2019

[2020] HKCFI 467

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1882 OF 2019

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R E A S O N S   F O R   D E C I S I O N

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Introduction

1.  On 5 December 2019 I heard the Petition of China Singyes Solar Technologies Holdings Limited (“Company”) for sanction of a scheme of arrangement under s673 of the Companies Ordinance, Cap 622 (“Ordinance”) between it and the class of holders of unsecured debt described in [3] (“Scheme”).  I made an order sanctioning the Scheme.  These are my reasons.

2.  The Company was incorporated in Bermuda, is registered in Hong Kong as a non-Hong Kong company, and has been listed in Hong Kong.  The Company is a holding company of a number of subsidiaries (incorporated in the British Virgin Islands, Hong Kong and the Mainland) (together, “Group”).  The Company is an investment holding entity and conducts its operations primarily through its Mainland subsidiaries.  The Group is one of the largest curtain wall installation and solar engineering, procurement, and construction companies in the Mainland.  Since June 2018, the Group’s financial condition deteriorated seriously, which led to the Company defaulting on some of its Mainland and offshore debt obligations, including the existing debt securities, described in the next paragraph; which I shall refer to as the “Existing Debt Securities”.

3.  The Existing Debt Securities consist of:

(1)  the RMB930,000,000 5% US$ settled convertible bonds due 2019 (“Convertible Bonds”) issued by the Company and constituted by a trust deed dated 8 August 2014 between (among others) the Company and the Hongkong and Shanghai Banking Corporation Limited (“HSBC”) (as trustee) which is governed by English law;

(2)  the US$160,000,000 6.75% senior notes due 2018 (“2018 Notes”) issued by the Company and constituted by an indenture dated 18 October 2017 between (among others) the Company and HSBC (as trustee) which is governed by New York law;

(3)  the US$260,000,000 7.95% senior notes due 2019 (“2019 Notes”) issued by the Company and constituted by an indenture dated 15 February 2017 between (among others) the Company and HSBC (as trustee) which is governed by New York law.

4.  The Company’s obligations under the 2018 Notes and the 2019 Notes are guaranteed by a number of the Company’s subsidiaries (“Subsidiary Guarantors”).  On 8 August 2019, Deutsche Bank AG, Hong Kong Branch (“DB”) presented a winding-up petition against the Company on the basis of claims arising from two term sheets between DB and the Company in connection with two proposed secured loan facilities.  DB and the Company have recently reached a settlement and the winding-up petition has been dismissed.

5.  Although the Scheme was drafted to cover the DB claims, in light of the parties’ settlement and dismissal of the Petition, the Scheme now seeks to compromise only the Existing Debt Securities. Specifically, the Existing Debt Securities will be cancelled in exchange for:

(1)  US$41,400,000 in cash (“Notes Cash Consideration”); and

(2)  new senior guaranteed notes due 2022 issued by the Company in principal amount equal to the aggregate amount outstanding in respect of the Existing Debt Securities less US$50,000,000 (being the sum of: (i) the amount of the Notes Cash Consideration; and (ii) the aggregate amount of the consent fee payable under a restructuring support agreement (“RSA”).

6.  Subject to certain exceptions (such as claims relating to negligence, breach of fiduciary duty and fraud), the Scheme will result in the release of any claims which the Scheme creditors might have against a number of parties, including the Subsidiary Guarantors, the Company’s affiliates, and their personnel.

The legal principles governing sanction of a scheme

7.  In considering whether to sanction a scheme, the Court applies some well-established principles which were recently restated in Re Mongolian Mining Corp [1] and Re Da Yu Financial Holdings Ltd [2] and in particular considers 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 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.

Release of Third Party Rights

8.  In addition the court will consider whether there is a defect in a scheme, which makes it unlawful or in some way inoperable.  As I mentioned in [6] the Scheme provides for a release of guarantees given by the Subsidiary Guarantors of the debts of the Company compromised by the Scheme.  Necessarily this effects a third party right in the sense that the Scheme purports to compromise a contractual right that a Scheme creditor has against a third party rather than the Company.  Is this permissible?

9.  Part 13, Division 2 of the Ordinance provides for a company to make compromises sanctioned by the court with its creditors or any class of creditors [3]. As Patten LJ explains in [60] of Re Lehman Brothers International Europe [4]:“scheme of arrangement between a company and its creditors must mean an arrangement which deals with their rights inter se as debtor or creditor”.  However, he goes onto state that this “does not prevent the inclusion in the Scheme of the release of contractual rights of action against related third parties necessary in order to give effect to the arrangement proposed for the disposition of the debts and liabilities of the company to its own creditors”[5].  As a consequence claims against third parties under, for example, guarantees may be comprised by a scheme provided (to borrow again the language of Patten LJ at [63]) the release of the claims is “merely ancillary” to the arrangement between the company and its creditors [6]. This is the case with the release of the subsidiaries’ liabilities to Scheme creditors under the guarantees of the Company’s liabilities that they have given.  The releases are necessary in order to prevent a creditor from undermining the Scheme by attempting to recover from the Company’s subsidiary what it could not recover from the Company as a consequence of the Scheme.  It is, therefore, permissible for the Scheme to include such a provision and it will be effective as a consequence of the court sanctioning the Scheme.

Other Considerations

10.  The other criteria can be dealt with briefly.  The Scheme involves a genuine debt restructuring and is clearly for a permissible purpose.  Class composition is more complex.

11.  As the Existing Debt Securities were issued in the form of global notes, this gives rise to a split between legal and beneficial ownership of the Existing Debt Securities.  The Scheme Creditors are the beneficial owners of the Existing Debt securities.  The legal character of the global note structure is as follows (see Re Swiber Holdings Ltd [7]; Re Noble Group Ltd (No 1) [8]):

(a)  One or more notes representing the entire principal amount of a series are placed with a common depository or a nominee for a clearing system.

(b)  The issuer makes a covenant to pay that is typically either expressed in favour of the “holder” of the notes or a trustee where the notes are constituted by a trust deed.

(c)  Legal ownership of the notes passes by registration and the legal owner is the nominee of a common depositary.  The depository that holds the global notes holds the notes for one or more clearing systems.  The clearing systems hold their interests on trust for persons who hold accounts with the clearing systems.  These account holders hold the beneficial interest in the notes on their own account, or for clients who are either the ultimate beneficial owners or intermediaries holding their interests for the ultimate beneficial owners.

12.  It has now become established that schemes often treat beneficial owners of global notes as direct creditors.  The analysis is that because the beneficial noteholders can acquire direct rights against the issuer in some (even remote) circumstances, the underlying beneficial noteholders can properly be classified as contingent creditors of the issuer, and arrangements should be made to enable them to vote so as to enfranchise those with the ultimate economic interest in the debt.  See Re Mongolian Mining Corp [9]; Re Noble Group Ltd (No 1) [10]. The ownership structure of the Existing Debt Securities is the same as the global note structure reviewed in the authorities.  Accordingly, each beneficial owner of the Existing Debt Securities can and should properly be regarded as a contingent creditor of the Company for the purposes of the scheme jurisdiction.

13.  In accordance with market practice, HSBC in its capacity as trustee of the Existing Debt Securities has given an undertaking to the Company that it would refrain from voting at the Scheme meeting to avoid double counting of votes in respect of the Existing Debt Securities.

14.  The Scheme creditors properly voted as a single class because:

(a)  the Scheme creditors are all general unsecured creditors of the Company;

(b)  the Scheme creditors are entitled to be given the same Scheme consideration; and

(c)  there are no separate class disputes or conflicts of interest.

15.  An associated issue arose during the course of the hearing of the Petition.  Two Scheme creditors attended.  They did not object to the Scheme, but they did object to the fact that having failed to sign the RSA dated 19 July 2019, to which a significant proportion of the Scheme creditors had agreed, they would not receive the consent fee, effectively an enhanced return, if the Scheme is sanctioned, which is calculated with a formula contained in the Scheme.  The explanation one of them gave for not signing is that at the time he was invited to sign the RSA he did not have enough financial information about the Company in order to make an informed decision whether or not to agree to it.  The other creditor’s explanation for failing to sign was that the invitation to sign the RSA was sent to a wrong address and did not reach her in time.  This issue fell away as the Company agreed to pay on an ex gratia basis the consent fee to the creditors during the hearing before me.  As I explained in [15] of my decision in Mongolian Mining [11] the payment to some, but not all Scheme creditors, of an enhanced payment of this sort does not fracture the class.

16.  I am satisfied that the Explanatory Statement adequately explained the Scheme and its advantages to Scheme creditors and the Scheme is one that an intelligent and honest creditor acting in accordance with their interests as a member of the class might reasonably vote for.

17.  I am also satisfied that the Scheme has sufficient connection with Hong Kong, in particular because the Company is listed here, registered here, managed from Hong Kong and the Existing Debt Securities were listed in Hong Kong. 

Utility of the Scheme

18.  The debt restructuring is transnational and will be effective in the relevant jurisdictions:

(1)  The Scheme is effective in its place of incorporation because there is a parallel scheme in Bermuda.

(2)  Although the Convertible Bonds are governed by English law, there is no need to seek recognition of the Scheme in England.  This is because 100% of the holders of the Convertible Bonds voted in favour of the Scheme.  Accordingly, there is no issue about the “Gibbs rule” because “there is an exception to the rule if the relevant creditor submits to the foreign insolvency preceding.  In that situation, the creditor is taken to have accepted that his contractual rights will be governed by the law of the foreign insolvency proceeding” (Re OJSC International Bank of Azerbaijan [12]). Therefore, the Scheme will be effective in England.

(3)  The 2018 Notes and the 2019 Notes are governed by New York law.  I accept that there is no need to seek recognition of the Scheme under Chapter 15 of the US Bankruptcy Code for these reasons:

(i)  More than 99% of the holders of the 2018 Notes and the 2019 Notes voted in favour of the Scheme.

(ii)  There are examples of Chapter 15 recognition despite a very high percentage of voting in favour of a scheme (eg Re NN2 Newco Ltd [13]).  However, there is no invariable rule that a Chapter 15 recognition is necessary whenever New York law-governed debts are compromised.

(iii)  Where the circumstances so warrant, the Court may take a robust approach to the notion of international effectiveness: Re Perusahaan Perseroan (Persero) PT Perusahaan Penerbangan Garuda Indonesia [14].  In Garuda, an English scheme in respect of an Indonesian company was sanctioned despite the existence of dissenting creditors and despite the fact that there was no parallel scheme in Indonesia or formal recognition of the English scheme in Indonesia.

(iv)  Ultimately, the guiding principle is that the Court should not act in vain or make an order which has no substantive effect or will not achieve its purpose.  The principle does not require either worldwide effectiveness or worldwide certainty.  Thus it does not require that the Court must be satisfied that the scheme will be effective in every jurisdiction worldwide: its focus is on jurisdictions in which, by reason of the presence there of substantial assets because of which creditors might make claims, it is especially important that the scheme be effective.  The Court will sanction the scheme provided it is satisfied that the scheme would achieve a substantial effect: Re Lehman Brothers International (Europe) (No 10) [15].

(v)  In the present case, the Scheme will achieve a substantial effect even without Chapter 15 recognition.  The Company does not know the identity of the remaining Scheme creditors who did not vote and has no reason to believe that any of them would try to enforce their pre-Scheme claims in the United States.  Especially in view of the overwhelming Scheme creditors’ support of the Scheme, I accept that the risk of adverse enforcement by a dissenting Scheme creditor in the United States is de minimis.

Conclusion

19.  For these reasons I am satisfied that the Scheme should be sanctioned and I approved the form of order put before me at the Petition hearing on 5 December 2019.