RE PA SHUN INTERNATIONAL HOLDINGS LTD

HCMP 1140/2023

[2023] HKCFI 3037

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1140 OF 2023

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REASONS FOR JUDGMENT

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1.  By petition dated 25 October 2023 (“Petition”), Pa Shun International Holdings Limited (百信國際控股有限公司) (“Company”) seeks the court’s sanction of the Scheme of Arrangement between the Company and all its creditors with unsecured claims (“Scheme”) under ss.673-674 of the Companies Ordinance (Cap. 622) (“CO”). The Scheme compromises all unsecured claims of the Company in return for staged payments by way of cash and issuance of shares over a period of 5 years. At the hearing, this Court sanctioned the Scheme. These are the reasons for my judgment.

Background

2.  The Company was incorporated in the Cayman Islands on 3 May 2011 and has since 17 September 2014 been registered as a non-Hong Kong company under Part 16 of the CO. The Company is an investment holding company and through its subsidiaries (together “Group”) engage in pharmaceutical distribution and pharmaceutical manufacturing businesses in the Mainland[1].

3.  Since 19 June 2015, the shares of the Company have been listed on The Stock Exchange of Hong Kong Limited (“SEHK”) (stock Code 00574). Trading of the shares has since 12 May 2022 been suspended[2].

4.  The Company and the Group are cash-flow insolvent. In the past few years, the Company suffered considerable losses which resulted in net current liabilities[3].

5.  The Company only managed to publish its audited 2021 Annual Results, 2021 Annual Report, 2022 Interim Results, 2022 Interim Report, 2022 Annual Results and 2022 Annual Report on 1 November 2023[4]. Prior to that, the Company has made available its interim results and financial statements for the 6 months ended 30 June 2023 (“Interim Results”) for inspection by the Creditors upon request and at the Scheme Meeting[5].

6.  Since 2020, various winding-up petitions have been presented against the Company. The extant petition in HCCW 191/2022[6] was dismissed at the hearing on 20 November 2023 upon the consent of all parties, following the sanction of the Scheme at the hearing on 1 November 2023.

7.  By application dated 20 July 2023, the Company applied for leave to convene a single meeting (“Scheme Meeting”) of all creditors of the Company with unsecured claims (“Creditors”) for the purpose of considering and approving the Scheme. By order dated 6 September 2023 (“Convening Order”), this Court gave directions for the Company to convene the Scheme Meeting.

8.  On 22 September 2023, the Notice of Scheme Meeting and the Scheme Document were advertised in two newspapers, couriered to the Creditors and uploaded on certain websites.

9.  On 18 October 2023, the Scheme Meeting was convened and held at which the majorities of the Creditors present and voting approved the Scheme, which represented 83.33% in number and 91.66% in value.

The Scheme

10.  The terms of the Scheme may be summarised as follows.

11.  In consideration of the right to participate in the Scheme, all unsecured debts, liabilities or obligations of the Company (“Claims”) shall be fully discharged and released with effect from the date on which the Scheme becomes effective (“Effective Date”) [7].

12.  The Creditors whose Claims have been admitted (“Admitted Claims”) are entitled to receive the following payments[8]:

(1)  An initial cash payment equivalent to 1% of the Admitted Claim, which shall be paid within 90 business days of the order sanctioning the Scheme (“Initial Cash Payment”);

(2)  Annual cash payments from 2024 to 2028, which shall be the higher of (a) HK$5 million for 2024, and HK$10 million for every year from 2025 to 2028, and (b) 55% of the net profit of the Company (if the net profit is more than RMB 20 million and less than RMB40 million) or 60% of the net profit (if the net profit is RMB40 million or more) (collectively “Yearly Payments”); and

(3)  If the Initial Cash Payment and Yearly Payments are insufficient to settle all Admitted Claims, the remaining balance will be settled by (“Outstanding Claims Settlement”):

(a)  issue of new shares of the Company to the Creditors (“Scheme Shares”), or

(b)  if the conditions for the issuance of Scheme Shares are not met, a lump sum cash payment in the amount then outstanding.

13.  As regards the Scheme Shares:

(1)  They shall be issued at a price determined by the Scheme Administrators with reference to the (a) closing price of the Shares quoted on SEHK, and (b) average closing price in 5 trading days before the date immediately after the Yearly Distribution Date for 2028[9].

(2)  The Creditors may elect to be the holders of the Scheme Shares or to receive cash proceeds from the disposal of the Scheme Shares by the Scheme Administrators on their behalf[10].

14.  The Yearly Payments and the Outstanding Claims Settlement are secured by the following:

(1)  A guarantee executed by the Company;

(2)  A fixed and floating charge over the assets of Toyot Pa Shun Medicine Factory Co Ltd (“Pa Shun Medicine (HK)”), which is an indirect wholly-owned subsidiary of the Company and holds all the operating subsidiaries of the Group in the Mainland; and

(3)  A share charge over the entire shareholding of Pa Shun Medicine (HK)[11].

15.  The Company may elect to make early repayment by, inter alia, allotting and issuing Scheme Shares subject to obtaining the approval of (1) over 50% in value of the outstanding Admitted Claims, (2) the shareholders, and (3) SEHK[12].

16.  The maximum amount of costs and expenses in connection with administering and implementing the Scheme (“Scheme Costs”) shall not exceed HK$ 10 million, unless the excess is approved by the “Scheme Creditors’ Committee”.

17.  The Scheme Administrators shall establish and control a special purpose vehicle (“SchemeCo”) to hold the assets subject to the Scheme. All property and funds received by SchemeCo and Scheme Administrators shall be held on trust and be applied to pay (1) any preferential claims; (2) Scheme Costs; and (3) Admitted Claims on a pari passu basis[13].

18.  The outstanding Admitted Claims shall become due and payable by the Company to the SchemeCo as a lump sum cash payment one year following the “Yearly Distribution Date” for 2028 if (1) necessary approvals for issuance of the Scheme Shares have not been obtained;[14] (2) the Scheme Shares could not be issued pursuant to the Scheme; (3) the listing of the Shares has been cancelled by the SEHK; or (4) the total market capitalisation of the Scheme Shares is less than the outstanding Admitted Claims[15].

19.  The above terms of the Scheme have taken into account the comments or concerns raised by this Court at the convening hearing, which include:

(1)  Interest: The Admitted Claim in the draft Scheme only included principal but not interest. The Company agreed to revise the definition of Admitted Claims to include interest.

(2)  Company’s covenants: The Explanatory Statement mentioned the existence of covenants relating to appointment of directors / auditors, restriction on share issuance, dividends, and sale of assets, which were omitted from the Scheme. These covenants subject to “applicable laws and the Listing Rules” have since been added to cl. 9 of the Scheme. Also, a covenant previously stated in the Explanatory Statement to be given by “Controlling Shareholders” concerning their voting rights has been modified such that it is the Company which shall covenant to use its best endeavours to procure the Controlling Shareholders (who are not party to the Scheme) to give the relevant covenants[16].

(3)  Adjudicator’s costs: Cl. 7.9 of the Scheme has been changed so that a Creditor seeking a review of the Scheme Administrators’ decision on the Admitted Claim is only liable for the Adjudicator’s costs if the amount determined by the Adjudicator does not exceed the amount determined by the Scheme Administrators by more than HK$ 50,000 or 10% of the Claim.

Discussion

20.  It is well established that in considering whether to sanction a scheme, the court will consider[17]:

(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. Whether scheme creditors fall into the same or different classes depends on whether their rights are “so dissimilar that they cannot sensibly consult together with a view to their common interest” (Re UDL Holdings (2001) 4 HKCFAR 358, §27(2), per Lord Millet NPJ). The court takes a broad approach to the composition of classes so as to avoid giving unjustified veto rights to a minority group of creditors;

(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.

21.  For the reasons set out below, it is an appropriate case for the court to sanction the Scheme.

22.  First, the Scheme is put forward to restructure the debts of the Company so as to restore its solvency, which is a permissible purpose of a scheme.

23.  Second, the Creditors have sufficiently similar legal rights and can consult together at a single meeting as they are unsecured creditors and do not have any preferential claims.

24.  As at 30 June 2023, there were 69 Creditors with total outstanding principal amount of HK$ 180,109,926[18]. Since then, 8 Creditors assigned their Claims to another Creditor (李維春), leaving 61 Creditors with Claims, inclusive of principal and interest, in the aggregate amount of HK$ 222,922,034. Amongst these Creditors:

(1)  41 of them with total outstanding principal of HK$ 91,300,000 are holders of bonds issued by the Company, and 8 of them have since assigned their Claims to 李維春.

(2)  7 of them with total outstanding principal of HK$ 27,680,122 are lenders of personal loans advanced to the Company.

(3)  The Company’s director, Yuan Hongbing, granted a loan facility of up to HK$ 5 million for settling professional fees associated with the Scheme.

(4)  18 Creditors with total claim of HK$ 5,329,804 are professionals involved in dealing with the Scheme.

(5)  2 Creditors hold guarantees provided by the Company in respect of the liability of the subsidiaries in the total principal amount of HK$ 50,800,000.

25.  Third, the Company has substantially complied with the Convening Order by providing the Notice of Scheme Meeting and the Scheme Document to the Creditors through the following means:

(1)  Advertisement in “The Standard” and “Sing Tao Daily” on 22 September 2023.

(2)  Made available the documents at the Company’s information agent, AOGB, at Tesbury Centre, Admiralty, together with the Interim Results and other accounts and records.

(3)  Sent by courier to each of the Creditors known to the Company on 22 September 2023.

(4)  Posted on website <irasia.com> on 25 September 2023 which directed visitors to <projects-aogb.com> and, in turn, directed the viewers to download documents from the information agent’s website <projects-aogb.com>.

26.  Mr Jason Yu (appearing with Mr Billy Liu), counsel for the Company, very properly draws to the Court’s attention that the Company had not fully complied with the Convening Order in that:

(1)  The Notice of Scheme Meeting and Scheme Document were sent to Creditors by courier as opposed to “by hand or prepaid surface mail” to those with known addresses in Hong Kong.

(2)  The Notice of Scheme Meeting and Scheme Document had not been emailed to the Creditors.

27.  The Company explains that the non-compliance was not deliberate. The Company decided to send the documents to the Creditors by courier so as to obtain a record of delivery, and no emails were sent because it believed that it would not be able to verify the validity of the email addresses.

28.  Mr Yu submits that this is an appropriate case where the court should waive the non-compliance with the Convening Order given that:

(1)  The Convening Order (at §4) foreshadowed the possibility of “accidental omission” to serve any Creditor and provides that “non-receipt” of the documents “shall not invalidate the proceedings” at the Scheme Meeting or any resolutions passed thereat[19].

(2)  The purpose of the court directing multiple means of service is to give notice of the Scheme Meeting and provide Creditors with sufficient information about the Scheme. The Creditors were given such information by courier and through the relevant websites. It is reasonable to assume that Creditors would have been monitoring the development of the restructuring through the websites from which the relevant documents could be found[20].

(3)  Delivery records of the courier show that all but 14 instances of delivery were successful. Of the Creditors to whom delivery failed, 9 of them participated in the Scheme Meeting and submitted Forms of Proxy. Of the remaining 5 Creditors who did not participate in the Scheme Meeting, one of them signed a Restructuring Agreement supporting the Scheme; and the rest are professionals whose claims are less than HK$ 600,000.

(4)  The Scheme would have met the requisite statutory majorities even if the Creditors who did not participate in the Scheme Meeting had voted at the Scheme Meeting in accordance with their last known stance on the Restructuring Agreement[21]. In that scenario, the Scheme would still have been approved by Creditors with 80% in value and 71.4% in number (30 out of 42).

29.  It seems to me that although the Company has not fully complied with the Convening Order, the Creditors have not been prejudiced as they had either received the documents through courier or websites, evidenced by their participation in the Scheme Meeting. As for the other 5 Creditors, they have either agreed to support the Scheme or are professionals involved in preparing the Scheme such that they must have notice of the Notice of Scheme Meeting and Scheme Document directed to be sent by the Company.

30.  For completeness, I have some doubt as to whether the argument set out in §28(4) above is right. The Company needs to comply with the directions given by the court regarding service of the documents so as to demonstrate that the Scheme Meeting was duly convened. This is because failure to give notice to the Creditors would in general render the Scheme Meeting to become not duly convened which, in turn, would affect the validity of the resolutions passed at the Meeting. It seems to me that it would not be sufficient for the Company to say that even if the Scheme Meeting were not duly convened, so long as the stance taken by the Creditors at the Restructuring Agreement meets the requisite majorities, the court should still sanction the Scheme. Such argument ignores the fact that the Scheme Meeting was convened for the purpose of allowing the Creditors to consider and approve the Scheme in the form tabled at the Meeting, and it is only if the Scheme in that form has been approved by the requisite majorities of Creditors at the Meeting that the court has jurisdiction to sanction the same. If the argument were right, it would mean that even if notice of the Scheme Meeting had not been sent to the Creditors, the court should still waive the breach and sanction the Scheme so long as the stance taken by the Creditors in the Restructuring Agreement meets the requisite majorities. I do not think this is right.

31.  Fourth, the Company has provided information on the effect of the Scheme in the Explanatory Statement which is reasonably necessary to enable the recipients to determine how to vote. This includes details of the terms and effect of the Scheme; risk factors and material interests of the Company’s directors. Further, the appendix to the Scheme Document contains a liquidation analysis (“Liquidation Analysis”) and estimated recovery of Creditors under the Scheme together with the limitations of the review, key assumptions and sources of information and explaining the methodology, which has been reviewed by Deloitte Advisory (HK) Ltd.

32.  The estimated recovery, as set out in Appendix 6, may be summarised as follows:

Estimates (HK$)	Estimated Scheme Recovery		Liquidation Analysis
	Optimistic Scenario	Conservative Scenario
Total Recoveries	187,109,926	79,620,360	25,819,260
Recovery for Creditors	180,109,926	71,317,661	24,516,561
Total Debts Owed	180,109,926	180,109,926	180,109,926
Estimated Recovery Rate for Creditors	100%	39.60%	13.61%

33.  Fifth, s.674(1)(a) of the CO provides that a creditor’s scheme must be approved by a majority in number representing at least 75% in value of the Creditors present and voting, in person or by proxy. The resolutions passed at the Scheme Meeting and the votes cast for and against the resolutions are as follows:

Resolution	For		Against
	Number	Claim value (HKD)	Number	Claim value (HKD)
Appointed the Chairman as proxy and did not attend Scheme Meeting	17	85,851,056	1	1,990,000
Appointed the Chairman as proxy and attended the Scheme Meeting but did not vote	7	64,687,859	-	-
Appointed the Chairman as proxy, attended the Scheme Meeting and voted	1	5,000,000	1	3,236,645
Appointed a proxy (other than the Chairman) to attend and vote	-	-	3	8,928,617
Total:	25 (83.33%)	155,538,915 (91.66%)	5 (16.67%)	14,155,262 (8.34%)

34.  The Scheme was approved by 83.33% (in number) and 91.66% (in value) of the Creditors present and voting at the Scheme Meeting.

35.  Sixth, the Scheme is one that an intelligent and honest man might reasonably approve. In general, the court should be slow to differ from the view of the majority who are better judges of whether it is in their interests to approve the Scheme, unless there is something glaringly wrong[22].

36.  Under the Scheme, the Creditors will have a potentially higher rate of recovery in respect of their Admitted Claims, which range from 100% in the optimistic scenario to 39.60% in the conservative scenario, both of which are much higher than the recovery rate in liquidation scenario. This is in addition to the benefit of receiving payment much more early than in liquidation scenario.

37.  The recovery of the Creditors is secured by the various security described in §14 above. If the Company is unable to meet its payment obligations under the Scheme, the Scheme Administrators may seek to wind up the Company and/or seize the Group’s operating subsidiaries in the Mainland through enforcing the charges against Pa Shun Medicine (HK). The Creditors would not be worse-off than if the Company were wound up

38.  Lastly, the Company is “a company is liable to be wound up under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32)” within the meaning of s.668(1) of the CO. For this purpose, the Company has to demonstrate that it has sufficient connection with Hong Kong so that the scheme, if approved, will have a substantial effect[23] given (1) its status as a registered non-Hong Kong Company; (2) its listing status on SEHK; (3) its bank account in Hong Kong and the funds deposited therein; (4) its principal place of business has been in Hong Kong; and (5) its intermediate holding subsidiaries including Pa Shun Medicine (HK) are incorporated in Hong Kong.

39.  Further, there is utility in the court sanctioning the Scheme[24] as all the Creditors are bound by the Scheme and all their Admitted Claims will be compromised and discharged under the Scheme:

(1)  The Claims of 7 Creditors[25] whose claims amount to HK$ 27.6 million are likely to be governed by the laws of the PRC[26]. These 7 Creditors participated at the Scheme Meeting and voted in favour of the Scheme.

(2)  Apart from these 7 Creditors, all the debts and liabilities of the Company are governed by the laws of Hong Kong. As such, the Creditors are subject to the in personam jurisdiction of the court.