RE CENTURY SUN INTERNATIONAL LTD

HCMP 759/2021

[2021] HKCFI 2928

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 759 OF 2021

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D E C I S I O N

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Introduction

1.  On 23 June 2021 I made an order that Century Sun International Limited (“Company”) have liberty to convene a meeting of its unsecured creditors for the purpose of considering and approving a proposed scheme of arrangement restructuring the Company’s unsecured debt.  The Scheme meeting was held on 29 July 2021.  A majority in number of Scheme Creditors attending and voting at the meeting representing 76.9% of the unsecured debt voted approved the Scheme.  The statutory majority required by section 674 of the Companies Ordinance, Cap 622 (“Ordinance”), was, therefore, obtained.  On 20 August 2021 the Company issued a Petition seeking the Court’s sanction of the Scheme.  Two Scheme Creditors, SES Germany GmbH and New Skies Satellites B.V., appeared before me through counsel to oppose the Petition.  The objections that were advanced at the hearing before me were in summary as follows:

(1)  The class was not properly constituted.

(2)  The result of the meeting did not fairly represent the views of the class by virtue of materially different interests amongst them in the Scheme being sanctioned.

(3)  The explanatory statement was inadequate and in the form presented to Scheme creditors was not one a honest, rational creditor would support.

Background to the Scheme

2.  The Company was incorporated in Hong Kong in January 2011. The Company is part of a media group headquartered in the Mainland (“Group”) headed by StarTimes Communication Network Technology Co. Ltd (“Parent”).  The Group is engaged primarily in the businesses of large-scale television broadcasting system integration; network investment and operation; programme integration, translation, dubbing, production and distribution; and digital TV technology research and development.

3.  The Company’s business is in the field of international digital television, consisting of broadcasting content procurement, production, delivery and related services, procurement and resale of satellite bandwidth, fibre circuits, uplink and other digital transmission services.  Typically the Company would purchase digital television programmes from international suppliers, re-package the programmes from different suppliers, and offer programme packages to the Company’s ultimate customers overseas via companies affiliated to the Group.  The Company’s key ultimate customer base is in Africa and its main source of revenue comes from the sale of digital television and internet video services to companies affiliated to the Group which in turn provide the services to the ultimate customers throughout Africa.  After years of business development, the Company currently has more than 30,000,000 ultimate customers in Africa, accounting for more than 30% of the market share in the Pan-African region.

4.  Although the Group is still operating, the Company is suffering from financial distress because of its unique business in international transmission bandwidth and digital television programme focusing on the African market.  The Company’s heavy investment and operating costs coupled with an unstable revenue stream at the early development stage accounted for the significant accumulated losses in its early years.  On 14 July 2020, the Company was subject to a winding-up petition in Hong Kong (HCCW 214/2020) (“Petition”). The Petitioner is a supplier of television programmes.  As the Company has become profitable since 2018, the Company has been pursuing a debt restructuring in order to return to a solvent going concern.  The Company’s restructuring efforts have led to the Scheme.

5.  The Scheme Creditors’ recovery under the Scheme is estimated to be about 30%, whereas in a liquidation the Scheme Creditors’ recovery is estimated to be about 14%.

6.  The Scheme Creditors may be divided into two categories:

(1)  creditors who are companies affiliated to the Group accounting for about 65% of the Company’s indebtedness; and

(2)  creditors who are not affiliated to the Group (“External Scheme Creditors”) accounting for about 35% of the Company’s indebtedness.

Principal features of the Scheme

7.  The Scheme seeks to discharge the Company’s general unsecured debts and in return the Scheme Creditors will be entitled to a pro rata distribution of the Scheme Funds in the sum of approximately HK$284.2 million.

8.  Upon the completion of the Scheme:

(1)  the Company’s debts to the Scheme Creditors amounting to approximately US$121 million will be discharged;

(2)  the Company’s existing contracts with the Scheme Creditors will be terminated; and

(3)  the Scheme Creditors’ claims against the Third-Party Obligors will be discharged (Clause 2.4 of the Scheme), such as the Opposing Creditors’ claims against Century Sun (Mauritius) Co Ltd (“CS Mauritius”) (a joint obligor) and the Parent (a guarantor).

9.  In case there are creditors holding secured debts and preferential debts, these creditors will participate in the Scheme only to the extent of the unsecured, non-preferential portion of their claims.

10.  The governing law of the unsecured debts to be discharged under the Scheme may be divided into three categories:

(1)  approximately 50% of the contracts with the External Scheme Creditors are governed by English law;

(2)  the remaining about 50% of the contracts with the External Scheme Creditors are governed by the laws of the country of the Scheme Creditors, including French law, New York law and Swiss law; and

(3)  all the contracts with the Company’s associated companies have no governing law.

11.  The Company is not pursuing any parallel scheme in any jurisdiction.

Principles governing sanction of the Scheme

12.  The general principles, which guide the Court in deciding whether a scheme should be sanctioned are uncontroversial.  In Re China Singyes Solar Technologies Holdings Limited[1] I summarise them:

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

(b) 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;

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

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

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

(f) 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

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

13.  There is no dispute that the Scheme is for a discernible purpose, that the meeting was convened in accordance with the order giving leave to convene a meeting of Scheme Creditors, that statutory majorities were obtained or that despite much of the debt being governed by foreign law the Scheme, if sanctioned, would probably be effective to achieve its intended aim of restructuring the Company’s debt.  What is controversial is the constitution of the classes, whether the result of the meeting satisfactorily represented the interests of the Scheme Creditors, the adequacy of the information contained in the Explanatory Statement and, related to the latter consideration, was the Scheme as presented was one an intelligent and honest creditors acting in accordance with his interests as a member of the class might reasonably approve.  I shall deal with the objections in that order, but before doing so it will be helpful if I explain the additional right that the Opposing Creditors say they have, which is relevant to the constitution of the class and the ability of the Scheme Creditors to fairly vote in one class.

Discharge of third party guarantees

14.  On 29 May 2020 the Company, a related company CS Mauritius and New Skies Satellites B.V. signed an assignment and assumption agreement pursuant to which CS Mauritius assumed the liabilities of the Company under a master service agreement and a service level agreement.  On 9 May 2020 the Company, CS Mauritius and SES Germany GmbH signed similar agreements.  These agreements allow the Opposing Creditors the right to pursue their debts against CS Mauritius.

15.  It is a common feature of recent schemes that they contain a provision that releases third party rights, commonly guarantees of the debt sought to be compromised given by associated companies of the company, whose debt is the subject of the scheme.  The reason for this is that in order for the scheme to be effective it will be necessary for the business group of which the company is part to be released from liability.  In [8]–[9] of China Singyes[2] I explain this.

“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.”

16.  An early case in which it was established that a scheme can properly affect the rights of creditors against third parties is Re Apcoa Parking Holdings GmbH[7]. In Re Swissport Fuelling Ltd[8] Miles J explains in detail the development of the practice in England:

“44. The usual context in which this arises is where the company propounding the scheme is the borrower and there are also guarantors in the same group of companies. A scheme may operate to release or modify the obligations of guarantors, as otherwise the creditors could claim against the guarantors, which would, in turn, be able to make what is called a ricochet claim against the borrower, thereby defeating the purpose of the scheme.

45. That the scheme may be used to effect releases of guarantees, usually by the appointment of an attorney for the scheme creditors, is shown by cases such as Re Noble Group Ltd and Re Apcoa.

46. The same approach has been taken in cases where two companies are jointly and severally liable as primary obligors for the same debt: see Re Lecta Paper UK Ltd [2020] EWHC 382 (Ch), [2021] 1 BCLC 511, a claim by joint obligors to a claim for contribution.

…

50. Steps of an analogous kind have been taken in previous schemes, which have been sanctioned by the court.  These include: Re Ai Scheme Ltd [2015] EWHC 1233 (Ch), Re Codere Finance (UK) Ltd [2015] EWHC 3778 (Ch), [2016] All ER (D) 27 (Jan), Re NN2 Newco Ltd, Re Politus BV [2019] EWHC 1917 (Ch), [2019] All ER (D) 12 (Aug), and Re Lecta Paper UK Ltd [2020] EWHC 382 (Ch), [2021] 1 BCLC 511 (the sanction hearing).  These cases show that there is nothing abusive about steps being taken with a view to attracting the jurisdiction of the English court for a scheme of arrangement where this is in the interests of creditors.”

17.  As is apparent from these passages the practice has developed to the extent that it is now established in England that jurisdiction is not limited to releasing third-party guarantees.  The same approach is applicable where two companies are jointly liable as co-obligors for the same debt. If this were not to be the case, one of the principal obligors would remain liable for the entire debt, and may be entitled to claim a contribution from the scheme company, a form of ricochet claim that is capable of defeating the purpose of the scheme.  Thus, it is now established that in the case of two principal debtors, a scheme proposed by one can effectively provide for a release in favour of both the principal obligors in just the same way as a scheme proposed by a principal debtor can provide for an effective release of claims against a guarantor[9].

18.  A scheme may also release any claims or purported claims by the scheme creditors against other third parties, including directors, legal advisors, financial advisors and various other intermediaries. This is appropriate and may be upheld as part of an arrangement within the meaning of the scheme legislation, where the release is of any claims against the persons involved in the preparation, negotiation or implementation of the scheme itself and their legal advisors[10].

19.  The release of third-party rights which is permissible is limited to those that are necessary in order to give a scheme efficacy.  As Patten LJ explains in Re Lehman Brothers International (Europe)[11] (which is referred to in the passage from China Singyes quoted above) “It seems to me that an arrangement between a company and its creditors must mean an arrangement which deals with their rights inter se as debtor and creditor. That formulation does not prevent the inclusion in the scheme of the release of contractual rights or 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.”  It must be correct that the release of a third party right is required in order to give the Scheme efficacy.  It would not be permissible for a company to include releases that are not necessary and represent an attempt by third parties, probably associated with the debtor company, to exploit a fortuitous opportunity to escape unrelated liabilities.

20.  In the present case the release of the liabilities of CS Mauritius is intended to facilitate the return of the Group to financial viability.  It is, therefore, consistent with the principles that I have discussed for the Scheme to release CS Mauritius’s lability to the Opposing Creditors, as it does in Clauses 2 and 8, along with discharging any right of set-off that the Opposing Creditors might otherwise have against CS Mauritius.  The Opposing Creditors have not argued otherwise. As I have mentioned their objections arising from the discharge of guarantees has a different focus the first of which concerns the constitution of classes.

Constitution of the Class

21.  Division 2 of Part 13 of the Ordinance, which provides for the introduction and sanction of a scheme of arrangement, applies (s669) to creditors or any class of creditors.  The principles, which govern whether the creditors of a company should vote on a scheme as one or more than one class are explained comprehensively by Lord Millett NPJ in [27] of his judgement in the Court of Final Appeal’s decision in UDL[12].  As is apparent from sub-paragraph (3) of [27] what is relevant is the similarity or otherwise of a creditor’s legal rights against a company.  As Parker J notes in [57] of his judgment in In the matter of Ocean Rig UDW Inc & others[13], for the purposes of determining the constitution of classes, rights that a creditor may have against a third party are not relevant.  In the present case the Opposing Creditors argue that they should have voted in a separate class because they have guarantees from third parties of the Company’s liabilities and the Scheme purports to release those rights.  The basis upon which it is suggested that the Opposing Creditors’ rights arising under agreements with a third party should be taken into account in determining the constitution of the class is that in various authorities it is stated that the starting point is the identification of the appropriate comparator.  In Re KB (Asia) Limited[14] I say this: “As Lewison J explains in Re The British Aviation Insurance Co Ltd [2006] BCC 14 at [82], which was decided after UDL Argos, in deciding whether the classes of creditors were correctly identified, the starting point is to identify the appropriate comparator.  Where a company is insolvent (as is the present case) or insolvent liquidation is the only alternative to the scheme, then insolvent liquidation is the comparator.”  As I understand the argument the Opposing Creditors suggest that in the event of an insolvent liquidation they will have different rights to the other Scheme Creditors, because in the event of a liquidation the Opposing Creditors would have, in addition to the right to prove in the liquidation, the right to enforce their guarantees.  In my view this is not relevant to the constitution of classes as the rights under the guarantees are not rights against the Company.  This will be the position both before and after a winding up order is made.  It is, however, relevant to the last of the considerations explained by Lord Millett NPJ in the passage I have quoted.  It is to that subject that I now turn.

Did the approval of Scheme fairly reflect the interests of Scheme Creditors?

22.  The majority of the debt compromised by the Scheme is    inter-company debt.  Scheme Creditors, who are also subsidiaries of, or associated with the Company, account for around 67% of the debt to be compromised by the Scheme. The Opposing Creditors argue that it can be inferred that the Group creditors are motivated by additional reasons such as advancing the wider business plan of the Group.  It may well be that the boards of the Group creditors see other advantages to the Scheme being implemented other than a better return than that which is likely to be achieved if the Company is put into liquidation. However, that is not the test.  The test is whether because of their additional interests their views cannot be regarded as fairly representative of the class.  The Opposing Creditors identify reasons why the Group creditors may have an additional interest in the Scheme being implemented, but they do not point to any reasons for concluding that their decision to support the Scheme as an alternative to liquidation is not fairly representative of the views of unsecured Scheme Creditors generally.  It cannot be the case that simply because there are reasons why a creditor may perceive advantages in supporting a scheme, which are irrelevant to other creditors, that their opinion should be viewed as likely to be atypical of the class and thus should be discounted. What is necessary, absent direct evidence of a creditor’s motives for supporting a scheme, is for matters to be identified from which it can reasonably be inferred that a creditor in voting for the scheme was not primarily motivated by an assessment of whether or not the benefits of the scheme were more attractive than the likely outcome if the company were to go into liquidation.  I agree with Mr Ho that the focus is on why the creditor supports a scheme rather than why a creditor might not.  For this reason one way of testing whether or not there is reason to think that the creditor was unrepresentative of the class, is to ask whether there is anything that suggests if the creditor, whose motive is impugned had not had the “special interest” in question, he would have voted differently.  The Opposing Creditors have not pointed to anything, which suggests that Group creditors would have voted differently but for their relationship with the Company.  This is in contrast with the Opposing Creditors apparently voting against because they thought that they would lose their rights against CS Mauritius, although in fact it has subsequently been clarified that they will retain that right under a new agreement that has been signed.  I, therefore, do not consider that the Group creditors’ vote, or any part of it, should be discounted.

Explanatory Statement

23.  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[15].  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[16]. 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[17].

24.  The Opposing Creditors take various points on the adequacy of the Explanatory Statement and have been fairly undiscerning in doing so rather than choosing the most substantial flaws, which are what I shall address.  The Explanatory Statement is dated 2 July 2021 and is brief, running to just 25 pages with 9 pages of appendices, which consist mainly of formal documents plus a list of creditors.  It informs Scheme Creditors that audited statements for the years ending 31 March 2013 to 2019 are available for inspection.  There is reference to unaudited accounts for the year ending 31 March 2020 on page 12, which show a profit of US$5 million.  There is no explanation of why there are no audited financial statements available for the subsequent two financial years.  There is a short table spanning pages 4 and 5 (although it is barely half a page in length) containing what purports to be a comparison of a scheme scenario and a liquidation scenario.  Both contain minimal information and the liquidation scenario is not supported by the type of independent verification that I referred to in the previous paragraph.

25.  The Explanatory Statement falls far short of providing the type of information required.  I am prepared to accept that the Scheme was put forward in good faith and, subject to further submissions, make an order convening a further meeting[18] and directing that an adequate explanatory statement be produced prior to it addressing the two major issues I have discussed and the various miscellaneous ones identified by the Opposing Creditors.  I will give the Company leave to restore the Petition for a case management conference to consider what directions it wishes if it intends to proceed.  I will make an order nisi that the Company pays the Opposing Creditors costs of and occasioned by the hearing of the Petition on 8 September 2021 with a certificate for two counsel such costs to be taxed if not agreed and paid forthwith.