RE SAMSON PAPER HOLDINGS LTD

HCMP 1227/2021

[2021] HKCFI 3288

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1227 OF 2021

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D E C I S I O N

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Application

1.  On 1 September 2021 I made an order that Samson Paper Holdings 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 30 September 2021.  A majority in number of Scheme Creditors attending and voting at the meeting representing 94.6% 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 21 October 2021 the Company issued a petition seeking the court’s sanction of the Scheme.  The petition was heard by me today.  It was unopposed.

Background to the Scheme

2.  The Company was incorporated in Bermuda on 10 July 1995 and was registered in Hong Kong as a non-Hong Kong Company on 27 December 1995.  The Company has been listed on the Main Board of the Stock Exchange of Hong Kong (“HKEX”) since 1 December 1995.  The Company is an investment holding company whose direct or indirect subsidiaries (together with the Company, the “Group”) are principally engaged in (i) paper manufacturing; (ii) paper trading including sale of paper and cardboard, office supplies and consumables and supplies for paper manufacturing; (iii) fast moving consumer goods business; (iv) property investment and development; and (v) other businesses including trading of consumable aeronautic parts and the provision of related services, and provision of logistic services and marine services.

3.  The Company and the Group are both balance sheet insolvent:

(1)  Based on the Company’s unaudited management accounts, as of 31 March 2021, the book value of the Company’s total assets is around HK$545 million and the book value of the Company’s total liabilities is around HK$3,227 million, resulting in net liabilities of around HK$2,682 million.

(2)  Based on the Group’s unaudited management accounts, as of 31 March 2021, the book value of the Group’s total assets is around HK$1.4 billion and the book value of the Group’s total liabilities is around HK$3.8 billion, resulting in net liabilities of approximately HK$2.4 billion.

4.  The trading of the Company’s shares has been halted since 2 July 2020.

5.  With a view to restructuring the Company’s debts, to rescue the Company’s listing status and to achieve a holistic restructuring of the Group’s liabilities, on 30 July 2021, the Company, the Joint and Provisional Liquidators and Xiamen C&D Paper & Pulp Co., Ltd and Zhejiang Xinshengda Holding Group Co., Ltd (collectively, the “Investors”) entered into the Restructuring Agreement setting out the definitive terms of the Proposed Restructuring, which comprises the following aspects:

(1)  The reorganisation of the share capital of the Company, which may include, inter alia, reduction of the nominal value of the issued shares, reduction of the entire amount standing to the credit of the share premium account of the Company, consolidation and/or cancellation of authorised but unissued share capital of the Company, and increase in authorised share capital of the Company.

(2)  The subscription for shares in the Company by the Investors at a consideration of the Hong Kong dollar equivalent of RMB100 million (the “Subscription Proceeds”), representing approximately 70% of the enlarged share capital of the Company.  The Subscription Proceeds shall be used for restructuring indebtedness of the Company under the Scheme or such other purpose as agreed by the parties.

(3)  Reorganisation of the Group, which involves, inter alia, the incorporation of various special purposes vehicle(s) in Hong Kong and in the PRC as well as the transfer of certain subsidiaries of the Group (“Scheme Subsidiaries”) to a special purpose company to be incorporated to hold assets for the purposes of the Scheme (“SchemeCo”).

(4)  The allotment and issue of shares of the Company to the qualifying shareholders on the date which such shareholders are entitled to on the basis to be agreed between the Investors and the Company. The number of shares shall represent no more than 4% of the enlarged share capital of the Company.

(5)  The Scheme, which essentially involves:

(i)      The injection of the Subscription Proceeds (after deducting costs and expenses for the implementation of the Proposed Restructuring) into the Scheme, which would be distributed as dividends to the Scheme Creditors under the Scheme.

(ii)     The issue of the Company’s shares to the Scheme Creditors, representing approximately 17% of the enlarged share capital of the Company. The Scheme Creditors shall have the right to require the Investor Entity or any third party nominated by the Investor Entity to repurchase the shares at a minimum price of HK$0.121056 within the 12-months period after completion of the Proposed Restructuring.

(iii)    The transfer/assignment of the Scheme Subsidiaries, inter-company receivables (due from the Scheme Subsidiaries to the companies retained) and certain rights and claims to the SchemeCo which will be realised and distributed to the Scheme Creditors.

6.  If the Proposed Restructuring is successfully implemented, the Group including the Company will continue as a going concern, there will be a resumption of the trading in the Company’s shares, and all outstanding debts owed by the Company will be compromised under the Scheme.

Principle Features of the Scheme

7.  Broadly speaking, the Scheme will compromise and release the Creditors’ claims against the Company.  In return, the Scheme Creditors will become eligible to receive a distribution of funds under the Scheme.  All unsecured claims and the unsecured claims of Preferential and Secured Creditors will be compromised under the Scheme, but without prejudice to the rights of any creditors to enforce any guarantees or security interest against the Scheme Subsidiaries.  The SchemeCo shall accept and assume liability in place of the Company for all of the Creditors’ claim, in each case on a limited recourse basis up to the extent of their respective pari passu share of the net realisable assets of the SchemeCo (after payment of all costs and expenses).

8.  Upon the Scheme becoming effective, the Scheme Administrators can realise and distribute, pari passu, any assets and funds received by SchemeCo: Clause 3 of the Scheme.  The dividends which the Scheme Creditors shall be entitled to receive include:

(1)  The Scheme cash consideration, i.e. Hong Kong dollar equivalent of RMB85 million, being the Subscription Proceeds after costs and expenses for implementation of the Proposed Restructuring, shall be made available for distribution to the Scheme Creditors.

(2)  240,482,142 shares, representing approximately 17% of the enlarged share capital of the Company upon completion, which can be sold back to the Investors at a minimum price of HK$0.121056 within the 12-months period after completion.

(3)  Cash, bank balances, receivables (including all intercompany receivables) of the Company, and the rights and claims of the Company against third parties, which will be transferred to the Scheme Administrators and/or the SchemeCo and realised and distributed to the Scheme Creditors.

(4)  The shares and assets of the Scheme Subsidiaries, which shall be transferred and/or assigned to and held by the SchemeCo and be realised and distributed to the Scheme Creditors.

9.  The expected recovery rate of the Scheme Creditors under the Scheme (excluding any claims against third parties, i.e. at the Company level only) is approximately 4.2% to 7.1%.  If the Scheme is not approved and implemented, it is likely that the Group (including the Company) would be placed into insolvent liquidation.  The expected recovery rate of the Creditors in a liquidation scenario is likely going to be nil.

Principles Governing Sanction of the Scheme

10.  The general principles, which guide the Court in deciding whether a scheme should be sanctioned are well-known.  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.”

11.  The Scheme is clearly for a discernible and permissible purpose, namely, the restructuring of debt[2]. The meeting was convened in accordance with the order giving leave to convene a meeting of Scheme Creditors and the necessary statutory majorities were obtained.

12.  I am also satisfied that the Scheme was adequately explained in the explanatory statement and that the restructuring of the Company’s unsecured debt was a proposal that an intelligent and honest creditor acting in accordance with his interests as a member of the class of unsecured creditors might reasonably approve.  In particular, given its listing on the HKEX there is clearly sufficient connection between the Scheme and Hong Kong to justify the court exercising jurisdiction over the proposed restructuring.

Additional Matters

13.  The only additional matters which require comment are the following.  The Company’s shares remain suspended.  If the Company fails to comply with the Listing Division of the HKEX’s requirements by the end of this year then the Company may be put in the first stage of delisting. As I explain in Re Burwill Holding Limited[3], if a company’s status has developed to the point where its listing status has been cancelled and it has entered into the review process it will not be appropriate for the court generally to sanction a scheme until the review process has been completed. However the Company has not yet entered the delisting phase and in my view the court can properly sanction the scheme all else justifying it doing so.

14.  One distinct component of the restructuring as originally proposed in the scheme involved an open offer. It was originally proposed that the investors would under-write any offer shares not taken up by qualifying shareholders.  However, in response to the HKEX’s inquiries, the Company now proposes that an independent third party licenced corporation (which will be engaged by the Investors) will act as the under-writer in place of the Investor.  It will be appreciated that this does not affect the terms of the Scheme or their implementation.

15.  On 26 October 2021 the HKEX raised a further query concerning the Scheme because in the case of the Scheme Creditors who opt to receive cash, the Scheme Administrators may, in order to raise the necessary funds, sell the creditors’ shares in the open market or, I assume if the market is illiquid or perhaps the price dropped below HK$0.121056, exercise a put option, which requires the investor to purchase the shares at HK$0.121056.  The HKEX has queried this arrangement because it could result in the Investor holding more than 75% of the issued shares and, consequently, the free-float requirement would not be met.  It is, therefore, proposed that the Scheme is amended to provide that in place of the put option the Scheme Administrators would place the shares with an agent for sale to sell to independent third parties and any shortfall in the price would be made up by the Investor.

16.  The Scheme provides, as is conventional, in Clause 17.1 a provision, which provides for amendment of the terms of the Scheme at the sanction hearing:

“The Company may, at any hearing to sanction this Scheme, consent on behalf of all Creditors to any modification of this Scheme or any terms or conditions which the High Court may think fit to approve or impose and which would not directly or indirectly have a material adverse effect on the interests of any Creditor under this Scheme.”

17.  There are no authorities in Hong Kong considering how such Clauses operate.  There are English authorities considering provisions that are in much the same terms.  The most recent that counsel are aware of is [16]–[18] of the decision of Trower J in Re Aon Plc[4].

“16. Clause 10 of the scheme is drafted in wide terms to permit modifications where the Company and Aon Ireland consent and the court approves. The test for court approval is not spelt out in clause 10, but Mr Thornton submits that the question is whether the proposed modification would be likely to cause a hypothetical reasonable shareholder to take a different view in relation to the scheme. The cases normally cited on this point (Re Jessel Trust Limited [1985] BCLC 119 and Re Minster Assets plc [1995] BCLC 200) are not, strictly speaking, authority on precisely the same question (in that they are not concerned with modifications to an approved scheme), but the way in which Mr Thornton has described at test is well-established and has much to recommend it.

17. I would add that there is also some assistance in the judgment of Lloyd J in In the matter of Equitable Life Assurance Society [2002] BCC 319, where he said the following:

‘102. …The [modification] provision is salutary, because there may be some immaterial error or oversight, or change of circumstances, that needs to be corrected or covered. But it would be quite wrong to use the provision so as to foist on a class of creditors something substantially different to what has been approved at the relevant meetings.’

18. I am satisfied that what is contemplated would not have caused any reasonable shareholder to take a different view in relation to the scheme if it had been put before them.  I am also satisfied, looking at the matter having in mind the test articulated by Lloyd J in Equitable Life, that there has been a material change of circumstance and the present situation is far removed from anything that might properly be described as ‘foisting’ on creditors something substantially different to what has been approved at the relevant meeting.  I am content to approve this modification.”

18.  As the revised arrangement does not prejudice Scheme Creditors and has the same result as that originally contemplated by the Scheme I can see no reason not to permit the necessary amendment, which I have discussed with counsel and agreed the form of.

19.  Finally, the Company has given the conventional undertaking to do what is required of it to facilitate the implementation of the Scheme.

Order

20.  I will make an order in the terms of the draft presented to the court subject to a minor amendment to [2] which will provide for the final form of the Scheme to appended to the order as Schedule 1.