RE SINO OIL AND GAS HOLDINGS LTD

HCMP 252/2023

[2024] HKCFI 1135

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 252 OF 2023

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J U D G M E N T

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1.  This is a rare case where a substantial number of creditors instructed counsel to appear at the hearing of the petition for sanction of a scheme of arrangement between the company and all the unsecured creditors.

2.  The scheme of arrangement is between Sino Oil and Gas Holdings Ltd (“Company”) and its Creditors[1] (“Scheme”). The Petition was presented by the Company on 15 December 2023 and was scheduled to be heard by Anthony Chan J on 29 December 2023. However, 2 days before the hearing, 35 Creditors (collectively “OCs”) filed evidence and submissions in support of their application for adjournment of the Petition for 8 weeks so that they can properly advance their grounds of opposition. After hearing the parties’ arguments, the Judge acceded to the OCs’ application and adjourned the Petition to a date to be fixed as soon as possible. In view of the state of the Judge’s diary, the Petition was listed to be heard before this Court on 29 February 2024.

3.  After hearing the parties’ arguments, this Court indicated that it would not sanction the Scheme. The Company asked for time to consider whether it would withdraw the Petition. By letter dated 14 March 2024, the Company informed the court that it would continue to pursue the application and sought leave to file further affirmation[2] and written submissions to address the questions and concerns raised by the court at the hearing on 29 February 2024. No justification had been put forward by the Company as to why the court should re-open the matter, and leave was refused.

A.  BACKGROUND

A1.  Company

4.  The Company was incorporated in Bermuda and was registered as a non-Hong Kong company on 25 November 1999. The shares of the Company have since 9 February 2000 been listed on the Main Board of The Stock Exchange of Hong Kong Ltd[3].

5.  The Company has authorised share capital of HK$1,000,000,000 divided into 10,000,000,000 shares of HK$0.1 each of which 3,345,439,069 have been issued[4].

6.  The Company is an investment holding company and through its direct and indirect subsidiaries engaged in the business of exploration, development and production of coalbed methane, raw coal washing and sale of raw and cleaned coal, and exploitation and sale of crude oil and natural gas[5].

7.  One of the principal assets of the Company is Orion Energy International Inc.[6] (“OEI”), which has entered into and made investment pursuant to a production sharing contract with a partner in the Mainland for joint exploration and development of coalbed methane (“CBM”) and the operation of Sanjiao CBM project in the Mainland for 30 years in 2010. The CBM project is described as a long-term investment with a long payback period of more than 10 years and a capital intensive project which requires a significant amount of upfront investment.

8.  Based on the latest audited accounts of the Company, as at 31 December 2022:

(1)  The total assets and total liabilities were HK$3,407.5 million and HK$2,412.0 million respectively.

(2)  The current assets and current liabilities were HK$1.88 million and HK$2,274.7 million respectively, and the Company was cashflow insolvent.

9.  The Company’s debts, as at 31 December 2022, may be classified into 3 categories[7]:

(1)  HK$1,847.9 million due and payable under the convertible bonds issued to Crescent Spring Investment Holdings Ltd (“CS”) (“CS Bonds”)[8]. CS held security in the form of 100% equity in OEI, Power Great Ltd, Soperton Ltd and SOG Capital Ltd (collectively “Security”). Amongst the Security, the market value of 100% equity in OEI alone, as at 30 June 2022, was HK$1,296 million[9].

(2)  HK$566.3 million due and payable under the corporate bonds issued to more than 100 individuals since early 2015 (collectively “Corporate Bonds”). The OCs are some of the holders of the Corporate Bonds.

(3)  HK$8.9 million owed to miscellaneous creditors (“Other Debts”).

10.  The financial performance of the Company has since 2019 deteriorated and by 2021, the Company could not repay the amounts due and payable under the bonds issued[10].

11.  On 17 August 2022, a winding up petition was presented by a bondholder against the Company in HCCW 281/2022. The hearing of the petition was adjourned pending determination of the application for sanction of the Scheme.

A2.  Procedural history

12.  By originating summons issued on 17 February 2023, the Company applied for leave to convene a meeting of the Creditors to consider and approve the Scheme.

13.  On 24 March 2023, the Company and “Holdco” (as defined in §26(1) below) entered into the Term Sheet which sets out the key terms of the Restructuring. On 14 August 2023, the Company and “Investor 1” (as defined in §26(1) below) entered into Restructuring Framework Agreement setting out detailed terms of the Restructuring.

14.  The originating summons was heard by Anthony Chan J on 31 August 2023 at 2:30pm with 30 minutes reserved. The learned Judge naturally relied on the submissions made by Mr John Hui[11] on behalf of the Company, and gave directions to convene the Scheme Meeting and service of the Scheme Document, which is a 95-page document and comprises a Letter from the Board (6 pages) (“Letter”), an Explanatory Statement (35 pages) (“ES”), the Scheme (23 pages), Appendix 1 to 7 (16 pages).

15.  According to the list of creditors prepared by the Company[12], there were 137 Creditors entitled to vote at the Scheme Meeting. Except CS and Bright Achieve Investments Ltd, all Creditors are natural persons and most of them are holders of the Corporate Bonds.

16.  The Scheme Meeting was held on 8 December 2023 and was attended by 94 Creditors of which 14 attended in person and 80 by proxy. Amongst them, 64 Creditors (representing 84.21% in value) voted for the Scheme while 30 Creditors (representing 15.79% in value) voted against the Scheme. The Scheme was therefore approved by the requisite majorities of the Creditors present and voting at the Scheme Meeting[13].

B.  RESPONSIBILITY OF LEGAL REPRESENTATIVES

17.  Before dealing with the merits of the application, it is necessary to remind the practitioners of their role and responsibility when dealing with restructuring and scheme of arrangement which requires sanction of the court.

18.  Very often a restructuring of the debts of an insolvent company involves a number of commercial agreements and arrangements between the company and multiple parties, and a scheme of arrangement between the company and its unsecured creditors. The agreements and scheme are inter-conditional and only become effective as and when the company obtains sanction from the court on the scheme. The agreements, arrangements and scheme often involve variation of existing rights and/or creation of new rights as against the company, and changes in the corporate and/or shareholding structure in the company. The changes in rights are normally implemented through a series of transactions entered or to be entered into by the company and the relevant parties, and the terms of the transactions are usually complex and not easy to follow or understand.

19.  The scheme documents coming to the court are getting more and more prolix and often exceeds 100 pages. It is not informative and, indeed, counter-productive for the company to produce a lengthy scheme document setting out the detailed commercial terms of the restructuring and the scheme, and repeating the same terms in more than one sections in the same document. Such document would not assist the creditors in understanding the key terms and effect of the restructuring and the scheme so as to decide whether it is in their interest to vote for the scheme, which is the very purpose for which the scheme document is prepared. Nor would it assist the court in understanding the restructuring and the scheme and discern whether there are issues or matters which need to be addressed or explained by the company before the scheme meeting. The problem is exacerbated by the fact that no meaningful summary is provided by the company as one would expect to see in a document of that length.

20.  The problem would not be as acute if the legal representatives in particular counsel, abide by their duty and provide a fair and full summary on the key terms of the restructuring and the scheme and their effect on the creditors in the skeleton arguments lodged for the convening hearing which is almost invariably heard on an ex parte basis.

21.  Given the nature of the hearing, it is the duty of counsel for the company to draw to the attention of the court, at the convening hearing, whether there are terms which are novel, unusual or potentially objectionable, and whether there are issues which have been or may be raised by the creditors so that the court can consider whether further steps need to be taken by the company to address the issues and if necessary, amend the scheme document to remove or address those issues before directing a meeting to be convened for the creditors to consider the scheme.

22.  The reminder is necessary as it seems to be the attitude of some legal representatives involved in the preparation of the restructuring and scheme document that they can include any terms, irrespective of whether they are novel, unusual or potentially objectionable, without drawing to the attention of the creditors and the court the existence of such terms.

23.  The court would not be able to properly discharge its function in scrutinising and sanctioning the scheme unless the legal representatives acting for the company discharge their duty of making full and frank disclosure to the court at the convening hearing. This is particularly so when unlike the position in the UK, the company is not required to issue any notice to the creditors to inform them of the purpose and effect of the scheme and the issues which the company will draw to the attention of the court in advance of the convening hearing. In the UK, the duty to draw issues relevant to the application in particular those which might lead the court to refuse to sanction the scheme is stated in Practice Statement (Companies: Schemes of Arrangement under Part 26 and Part 26A of the Companies Act 2006) issued on 26 June 2020 in §§6-7:[14]

“6 It is the responsibility of the applicant, by evidence in support of the application or otherwise, to draw to the attention of the court at the hearing for an order that meetings of creditors and/or members be held (‘the convening hearing’):

a. any issues which may arise as to the constitution of meetings of members or creditors or which otherwise affect the conduct of those meetings;

b. any issues as to the existence of the court’s jurisdiction to sanction the scheme;

c. (in relation to a Part 26A scheme) any issues relevant to the conditions to be satisfied pursuant to section 901A of the 2006 Act and, if an application under section 901C(4) of the 2006 Act is to be made, any issues relevant to that application; and

d. any other issue not going to the merits or fairness of the scheme, but which might lead the court to refuse to sanction the scheme.

7 Where an application is made to convene a meeting or meetings in respect of a scheme which gives rise to any of the issues identified in paragraph 6 above, unless there are good reasons for not doing so, the applicant should, prior to the convening hearing, take all steps reasonably open to it to notify any person affected by the scheme of the following matters:

a. that the scheme is being promoted,

b. the purpose which the scheme is designed to achieve and its effect,

c. the meetings of creditors and/or members which the applicant considers will be required and their composition,

d. the other matters that are to be addressed at the convening hearing, including the issues identified in paragraph 6 above,

e. the date and place fixed for the convening hearing,

f. that such persons are entitled to attend the convening and sanction hearings, and

g. how such persons may make further enquiries about the scheme.

It is the responsibility of the applicant to ensure that such notification is given in a concise form and is communicated to all persons affected by the scheme in the manner which is most appropriate to the circumstances of the case.”

24.  As regards the requirement to present a full and fair summary, the court expects the company and its legal representatives to explain the key terms and effect of the restructuring and the scheme, and illustrate the changes on the financial position and the corporate and shareholding structure of the company, before and after the restructuring, in a way which can readily be understood by the creditors. This requires a succinct and clear summary possibly with charts or tables for comparison purpose so that it can be incorporated as part of the document to be sent to the creditors.

25.  In future, where a restructuring is conditional upon a scheme becoming effective or where the terms of the restructuring would have an impact on the return to the creditors under the scheme, the company is expected to include a full and fair summary on the keys commercial terms and effect of the restructuring and the scheme in the scheme document. If no such summary has been included, the court would direct the company to provide such summary to the creditors alongside with the scheme document for the purpose of convening the scheme meeting.

C.  RESTRUCTURING

C1.  Overview

26.  The Company has secured the agreement of Investor 1 and Investor 2 to participate in the Restructuring (as defined in §27 below):

(1)  TRCE Investment (Hong Kong) Ltd, a company incorporated in Hong Kong (“Investor 1”), which is wholly owned by Top Resource Energy Co Ltd (天壕能源股份有限公司), a company established in the Mainland (“Holdco”).

(2)  China LiDai International Asset Investment Ltd (中國注禮國際產業投資有限公司), a company incorporated in the BVI (“Investor 2”), which is wholly owned by Dr Dai Xiaobing (“Dr Dai”). Dr Dai has been the Chairman of the Board and CEO of the Company since 2011 and 2020 respectively.

(3)  A new “JV Company” will be incorporated with Investor 1 and Investor 2 holding 60% and 40% shareholdings respectively.

27.  The Company proposed a restructuring which seeks to arrange and compromise the debts owed by the Company in the following ways (“Restructuring”)[15]:

(1)  In respect of the CS Bonds (HK$1,847.9 million):

(a)  The value of the Security was agreed between the Company, CS and the Investors at HK$1,014 million, which amount is adopted as the value of the “secured portion” of the amount owed under the CS Bonds (“Secured Portion”).

(b)  The unsecured portion is the balance of the amount owed under the CS Bonds after deducting the Secured Portion, that is, HK$833.9 million (“Unsecured Portion”).

(c)  The Company and CS shall enter into a deed to amend the conversion price of the CS Bonds from HK$0.168/share to HK$0.1/share[16], and extend the maturity date to 5 years from the date the Scheme becomes effective (“Effective Date”).

(d)  On the Effective Date, CS will convert HK$397.3 million (i.e. 39.2%) of the Secured Portion into new shares to be issued by the Company; and the remaining 60.8% of the Secured Portion (i.e. HK$616.7 million) will be acquired by the JV Company (“Acquired CS Bonds”)[17]. In other words, the JV Company will become a secured creditor of the Company for HK$616.7 million.

(e)  The Unsecured Portion will be treated as a “Claim”[18] under the Scheme.

(2)  In respect of the Corporate Bonds, all of them will be compromised and discharged under the Scheme.

(3)  The issue of convertible bonds in the principal amount of HK$1,323.4 million and a conversion price of HK$0.1/share, to be issued by the Company to the Investors (“Cash CB”). The Investors will convert a portion of the Cash CB into new shares to be issued by the Company.

C2.  Picture presented by the Company

28.  The above summary cannot be found in the Scheme Document. Instead, other than describing the purpose and effect of the Scheme in the Letter (described in §29 below), the rest of the Scheme Document is replete with details of the various parts of the Restructuring, and the terms and figures in relation to each parts. The very dense description is hard to grapple even for lawyers and the court. There is no attempt on the part of the Company to describe in a succinct or intelligible manner, the key commercial terms of the Restructuring and the changes on the liabilities and equity of the Company before and after such Restructuring. These matters are particularly pertinent in light of:

(1)  the unusual features of the Restructuring and their effect on the return to the Creditors (as discussed in §§36-44 below); and

(2)  1/3 of the return to the Creditors under the Scheme is represented by the “Scheme Shares”[19] to be issued by the Company, the value of which depends on (a) whether the Company will become “debt free” after the Restructuring, and (b) the number of new shares to be issued under the Restructuring.

29.  In the Letter, the Restructuring and the Scheme is described in this way:

(1)  Under “Proposed Restructuring”, after reciting the current financial position of the Company, it states:

“If the Company’s debts are not restructured to ease its financial difficulties and liquidity problems, the Company will eventually have to be put into liquidation. In such event, the Creditors will likely receive nil or a very low return, and any dividends in liquidation will only be recovered after a lengthy realisation process.

…

In order to maintain management continuity in the Company after the Proposed Restructuring, Investor 1 has on 6 November 2023 entered into JV Agreement with Investor 2, which sets out the terms and conditions of the establishment of the JV Company to participate in the Proposed Restructuring in the manner as set out in Section 3 below. The JV Company will acquire the Acquired [CS Bonds] and the right to convert the same into shares of the Company.”

(2)  Under “Purpose and effect of the Scheme”, after reciting the various agreements are conditional upon, amongst others, the Scheme taking effect, it states:

“Under the Scheme, all Claims held by the Creditors against the Company shall be compromised and discharged. In return, each Scheme Creditor will be entitled to a share of the Dividends, which consists of the Cash Dividends and the Scheme Shares.

The Company will issue the Cash CB to the Investors in exchange for the payment of the CB Subscription Consideration of an expected amount totalling HK$139.3 million, to be paid by the Investors to SchemeCo through the Company, which will then be paid to the Scheme Creditors as Cash Dividends under the Scheme. In addition, the Company will allot 696,500,000 Scheme Shares, representing approximately 5% of the enlarged issued share capital of the Company immediately upon Completion and Placing (as defined below), to the Scheme Creditors.

The Board believes that the Scheme is the most efficient and effective method for the Company to achieve the above aims in the shortest practicable time, and that the Scheme will maximise returns to Creditors compared to the returns in the Liquidation Scenario (as defined below).” (underlined added)

30.  The distinct impression which the Letter seeks to create is that, like any company which implements a restructuring, all the debts will be compromised and discharged under the Scheme, and the Creditors will receive cash dividends and shares in the Company, which they can continue to hold and benefit qua shareholders of a “debt-free” company.

31.  In his Skeleton, Mr Hui sheds more light on the key commercial terms of the Restructuring and highlights the fact that, contrary to the picture portrayed in the Letter, not all the Claims will be discharged and not all the Cash CB will be converted into shares. Mr Hui describes the Restructuring as having the following 3 parts and append a diagram as illustration[20]:

(1)  The partial acquisition of the CS Bonds and the steps envisaged thereunder, which will “resolve the Company’s liabilities under the secured portion of the CS Bonds”.

(2)  The Scheme, which seeks to compromise all the unsecured debts (including the unsecured portion of the CS Bonds and the Corporate Bonds).

(3)  Exercise and Conversion of the Cash CB[21] – the Investors having subscribed for the Cash CB to fund the Scheme, will convert a portion of the Cash CB into shares of the Company.

32.  This is followed by more detailed descriptions on (1) the partial subscription of the CS Bonds, (2) the Scheme, (3) the exercise and conversion of a part of the Cash CB by the Investors, and (4) the key features of the Scheme in §§16-24 of Mr Hui’s Skeleton.

33.  The picture painted in Mr Hui’s Skeleton is that there is nothing remarkable or unusual about the commercial terms of the Restructuring, which involves:

(1)  The Investors investing new funds into the Company by subscribing for the Cash CB, most of which will be converted into shares with the result that the Investors will become substantial shareholders of the Company.

(2)  The Company will be restored to solvency as (a) the Secured Portion will be resolved; and (b) the Unsecured Portion, the Corporate Bonds and the Other Debts will be compromised and discharged; and

(3)  The Creditors will receive 15% return under the Scheme – 10% in the form of Cash Dividends and 5% in the form of Scheme Shares, which is much higher than the 0.01% return under liquidation scenario.

34.  The submissions, the diagram and the notes appended thereto, only deal with the mechanics of the various parts of the Restructuring and the figures pertaining to those parts. They do not draw to the attention of the court, let alone in a clear and coherent manner, all the matters relevant to the court’s consideration as to whether the Scheme is one which will in fact offer the return stated in the Scheme Document. In particular, the financial position and equity structure of the Company before and after implementation of the Restructuring is not mentioned. This is a cause for concern as 5% of the return under the Scheme is in the form of Scheme Shares, the value of which depends on how many new shares will be issued by the Company under the Restructuring, and whether the Company will remain subject to substantial debts. It therefore falls on this Court to go through the entire Scheme Document to ascertain the actual position.

C3.  Unusual or questionable features of Restructuring

35.  Upon reading the Scheme Document, it becomes clear that the Restructuring has a number of unusual or questionable features which are plainly relevant to the estimated return to the Creditors but have not been taken into account in the Restructuring Scenario. Worse still, except the first 2 features, Mr Hui has not drawn to the attention of the court sufficiently or at all those features in his Skeleton.

36.  First, the Secured Portion of the CS Bonds will not be resolved. Instead, only 1/3 of the amount due (HK$397.3 million) will be converted into shares to be issued by the Company to CS, and 2/3 of them (HK$616.7 million) will be acquired by the JV Company (i.e. Acquired CS Bonds) and will remain a liability of the Company and be secured by the Security.

37.  Second, the value of the Security has been agreed at HK$1,014 million. However, the market value of OEI (which holds the CBM project) alone as at 30 June 2022 was already HK$1,296 million. There is no explanation in the Scheme Document as to why no value is attributed to the remaining assets which form part of the Security. Nor is there any valid justification for attributing a lower value of HK$1,014 million as the value of OEI.

38.  Third, the Investors will receive a very substantial windfall in that they will pay HK$139.3 million to subscribe for the Cash CB (“Subscription Proceeds”), but will receive:

(1)  6,800 million shares in the Company (equivalent to 45.74% in the enlarged issued capital of the Company). In the Recovery Analysis, the Company adopts HK$0.1/share as the value of the Scheme Share to be issued by the Company[22]. If the same value is applied to the 6,800 million shares, the Investors will obtain shares which have a value of HK$680 million;

(2)  the right to receive HK$540.7 million (together with interest accrued thereon) from the Company, being the balance of the Cash CB which will not be converted into shares; and

(3)  the benefit of having the Cash CB and the Acquired CS Bonds be secured by the “guarantee arrangement”[23].

39.  Fourth, the Recovery Analysis and the estimated returns under the “Restructuring Scenario”[24] are incomplete, if not misleading in that:

(1)  the Subscription Proceeds (HK$139.3 million) will not be paid to the Creditors as Cash Dividends. Instead, the amount will be applied to pay (a) the Preferential Claims[25], (b) the Adjudicators’ costs in the event that the Adjudicator varies his decision following review by a Creditor[26], and (c) any liability under the Indemnity Clauses, which are without any limit as to amount or time period (see §44 below); and

(2)  the value attributed to the Scheme Shares (i.e. HK$0.1 per share) has not taken into account the dilutive effect of the new shares (11,869.5 million shares in total[27]) to be issued by the Company under the Restructuring, which represent 3.54 times of the shares presently issued by the Company. Nor has it taken into account the fact that after the Restructuring, the Company will remain liable to pay the principal amount of the Acquired CS Bonds and Cash CB together with interest accrued thereon (as described in §41 below).

40.  Fifth, the accuracy of the estimated return of 0.01% under the Liquidation Scenario[28] is highly questionable:

(1)  The Company states that upon liquidation, the Company will only have estimated recovery of HK$100,000 or 0.01%[29]. It is inconceivable that the Company with a substantial portfolio of assets will upon its liquidation recover a mere HK$100,000.

(2)  The “intercompany receivables” and “investment in subsidiaries” which have book values of HK$956.7 million and HK$2,448.8 million respectively are estimated to produce only HK$1.64 million, which represent 0.048% of their book values. The amount is barely sufficient to pay the estimated liquidation costs of HK$1.5 million. However, other than the assertions (in notes 5-6) that the receivables and investments are based on “the debtor subsidiaries recovery analysis” and the “subsidiary level recovery analysis”, no explanation has been provided by the Company as to why these valuable assets will become almost worthless bearing in mind that the subsidiaries are primarily funded by the Company which, in turn, obtained its funds from the issue of the CS Bonds, the Corporate Bonds and new shares.

(3)  The Liquidation Scenario has not taken into account (a) the HK$10.7 million professional fees incurred or to be incurred in connection with the Restructuring and the Scheme; (b) the other professional fees incurred or to be incurred before the Effective Date; and (c) the Petitioner’s costs, all of which shall “be paid in full by the Company from its cash reserves outside the Scheme”[30]. Nor has it taken into account the Scheme Costs in the amount of HK$1.3-1.8 million which will be paid by the Company[31].

(4)  Unless there is any basis to suggest that the professional fees and costs paid or to be paid have already been validated by the court under s.182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (none has been suggested), it is difficult to see why these “cash reserves” in excess of HK$10.7 million and the HK$1.3-1.8 million are not treated as realisable assets in the Liquidation Scenario.

41.  Sixth, when the Restructuring becomes effective, the Company will owe very substantial amount of HK$1,157.4 million to the Investors given that:

(1)  only the liabilities under the Corporate Bonds, the Other Debts and the Unsecured Portion of the CS Bonds will be discharged;

(2)  the Company will remain liable under the Acquired CS Bonds in the principal amount of HK$616.7 million together with interest accrued thereon; and

(3)  the Company will be subject to a new liability under the Cash CB in the principal amount of HK$540.7 million together with interest accrued thereon.

42.  Seventh, the directors, representatives and advisers of the Company and the Administrators will effectively be excluded from any liability in connection with the Scheme save for wilful default, fraud, dishonesty or wilful breach of duty or trust[32] (“Exclusion Clauses”). The Exclusion Clauses are in these terms:

“16.1 None of the Board, the Company and their representatives, staff, agents and advisers (including legal advisers) shall have or incur any liability for actions taken or omitted to be taken in good faith under, or in connection with the negotiation and preparation of, the Scheme or otherwise.

16.2 None of the Administrators or any of their representatives, partners, staff, agents and advisers (including legal advisers) shall incur any personal liability under the terms of the Scheme or otherwise.

16.3 None of the Scheme Creditors or the Company shall be entitled to challenge the validity of any act done or omitted to be done in good faith by the Administrators or any member of the Scheme Creditors’ Committee or its nominated representative in accordance with and to implement the provisions of the Scheme or the exercise by any such Person in good faith of any power conferred upon it or him for the purpose of the Scheme and no such Person shall be liable for any loss of any kind whatsoever unless such loss is attributable to its or his own willful default, fraud, dishonesty or willful breach of duty or trust.”

43.  I do not see any proper basis for the Company to insert the Exclusion Clauses in the Scheme:

(1)  No explanation or justification has been provided, whether in the Scheme Document or elsewhere, as to why the directors, staff, representatives and advisers should be protected from liability in this way.

(2)  If the directors, staff, representatives or advisers have acted in breach of their duty of care or fiduciary duties owed to the Company or the Creditors, there is no reason why their liability should be restricted by the Exclusion Clauses.

(3)  This is particularly so in the case of the professional advisers who have or will receive very substantial fees and remuneration in excess of HK$12.5 million[33].

(4)  The directors, representatives and advisers are not parties to the Scheme. It has not been explained why they should be allowed to benefit from the Scheme.

44.  Eighth, the Administrators are entitled to be indemnified out of the Scheme Funds for all their expenses, disbursements costs, claims, losses, damages and liabilities which may be incurred or suffered by them in the performance of their role in good faith, and the indemnity is unlimited[34] (“Indemnity Clauses”). This indemnity is in addition to the remuneration to be paid to the Administrators and their staff[35]. Again, no justification whatsoever has been provided by the Company as to why the Administrators should be given such right, let alone at the expense of the Creditors.

D.  DISCUSSION

45.  As stated in Re North Mining Shares Company Ltd [2023] HKCFI 2439 (§16), in considering whether to sanction a scheme of arrangement, the court will consider the following factors:

(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;

(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.

46.  For the reasons set out in §§28- 44 above, I do not think that the Creditors have been given sufficient information about the Scheme to enable them to make an informed decision at the Scheme Meeting. The deficiency is not a matter which can be rectified by the Company providing further evidence as it is impossible to ascertain whether the Creditors would have voted differently at the Scheme Meeting, had it been provided with sufficient information about the Restructuring and the Scheme in particular the unusual features of the Restructuring.

47.  I also consider that the Company has failed to comply with the requirement of s.671(3)(b) of the Companies Ordinance (Cap 622). In the ES under “Interests of Directors”, the only matters disclosed are the fact that Dr Dai (through Investor 2) will be interested in 5,408.5 million shares representing 35.55% of the enlarged issued share capital of the Company and will become the largest shareholder of the Company. There is no disclosure of the fact that Dr Dai (through Investor 2) will become a creditor in respect of a portion of the HK$540.7 million Cash CB alongside with Investor 1 or the benefit under the “guarantee arrangement” (as described in §38(2)-(3) above).

48.  For these reasons, I do not think that the Scheme is one which the court should sanction.

49.  Ms Jasmine Cheung, counsel for the OCs, opposes the Petition on 3 main grounds:

(1)  The Scheme Meeting was not properly constituted as CS’s rights are so different from the other Creditors and should have been placed in a separate class (“Constitution Issue”).

(2)  Alternatively, CS has special interest in the Restructuring and hence its votes are not representative of the class and should be disregarded (“Special Interest Issue”).

(3)  Insufficient information has been provided to the Creditors in the ES.

50.  As regards the Constitution Issue, Ms Cheung submits that in considering whether CS’s security rights are affect, the court needs to consider the Proposed Restructuring as a whole. Her arguments run like this:

(1)  Where, as here, the contractual arrangements under the restructuring are conditional upon the scheme taking effect, in considering the class question, the court is not confined to looking at the scheme document but will refer to all the arrangements taken as a whole (Re Baltic Exchange Ltd [2016] EWHC 3391, §§15-18; Re Stemcor Trade Finance Ltd [2016] BCC 194, §18; Re Sunbird Business Services Ltd [2020] EWHC 2860 (Ch), §§23-24).

(2)  The Scheme was not originally intended to cover CS’s claim and was projected to bring 35% to 60% recovery to the holders of the Corporate Bonds. However, after CS had agreed in principle to the terms of the acquisition of CS Bonds, it suddenly changed its stance and demanded a higher rate of recovery and participation in the Scheme[36].

(3)  Following this, CS’s claim was bifurcated into Secured Portion and Unsecured Portion, with the ascribed value of the security negotiated and agreed as part of the Proposed Restructuring at HK$1,014 million even though the market value of OEI alone was HK$1,296 million.

(4)  The ascribed value of the Unsecured Portion has a substantial impact on whether the Scheme can be passed, as the current ascribed value of HK$833.9 million results in CS holding 59.6% in value of the “unsecured” claims.

(5)  The overall effect of the Proposed Restructuring is that CS will receive (a) Cash payments totalling HK$616.7 million over 5 years; (b) HK$397.3 million worth of shares in the Company; and (c) Scheme Shares and Cash Dividends with an estimated value of HK$124,540[37]. Whereas other Creditors will only receive the Scheme Shares and Cash Dividends.

(6)  If CS’s votes are excluded the Scheme would only have received support from 42.32% in value[38] of the Creditors.

51.  As the Restructuring is conditional upon the Scheme taking effect, I agree that it is necessary to consider the Restructuring as a whole. This is particularly so when 1/3 of the return to the Creditors under the Scheme is in the form of Scheme Shares, the value of which depends on the number of new shares to be issued under the Restructuring and the liabilities of the Company after implementation of the Restructuring.

52.  As for the Special Interest Issue, Ms Cheung submits that the starting point is that secured creditor should be placed in a different class from unsecured creditors, without any bifurcation of its claim, for the following reasons:

(1)  Where the comparator of an insolvent liquidation is used, secured creditors generally form a different class from unsecured creditors because of their different rights against the company in a liquidation (Schemes of Arrangement: Theory, Structure and Operation, 2^nd ed, pp.64-65; Re KB (Asia) Ltd, HCMP 307/2013, 30 June 2014, §§17-18).

(2)  The position in Re Noble Group Ltd (No 1) [2019] 2 BCLC 505, albeit not concerning secured claims, is illustrative.

(a)  Deutsche Bank was a senior creditor of the company. Its claims against the company were divided into (§92) (i) “DB Excluded Claim”, which would be released for certain senior notes (New Tranche A2 Asset Co Bonds) issued to Deutsche Bank alone; and (ii) “DB Surplus Claim” for the balance of Deutsche Bank’s claims, which would be treated in the same manner as all other common scheme claims. Deutsche Bank was placed in a separate class in respect of both the “DB Excluded Claim” and the “DB Surplus Claim”.

(b)  In agreeing with the company’s constitution of classes, Snowden J (as he then was) held (§93):

“Given the favourable and different rights conferred upon Deutsche Bank under the Scheme in respect of part of its claim against the Company (the DB Excluded Claim), it is obvious that there are two linked arrangements under the Scheme: one between the Company and Deutsche Bank, and the other between the Company and the remainder of the Scheme Creditors. It would plainly not be possible for Deutsche Bank to have a discussion as to their common interest with the remaining Scheme Creditors about the proposal from the Company that they should receive the senior New Tranche A2 Asset Co Bonds for part of their claims, because no such senior notes will be issued to anyone apart from Deutsche Bank.”

(3)  Similarly, here, CS should form a class of its own, with a separate (but linked) arrangement with the Company compared to the arrangement between the unsecured creditors and the Company:

(a)  CS has different rights against the Company whether in liquidation or under the Restructuring.

(b)  Given the substantially different nature of rights and different recovery rates whether in liquidation or in the Restructuring[39], it is impossible for CS and the other Creditors to consult together.

53.  Mr Hui submits that the Special Interest Issue does not arise for the following reasons:

(1)  It is the rights of creditors, not their separate commercial or other interests, which determine whether they form a single class or separate classes. The court should take a broad approach to the composition of classes to avoid giving unjustified veto rights to a minority group of creditors (UDL Argos Engineering & Heavy Industries Co. Ltd v Li Oi Lin (2001) 4 HKCFAR 358, §27, per Lord Millett NPJ).

(2)  The Scheme only seeks to compromise the Company’s unsecured debts held by the Creditors; the new rights given to those Creditors are the same under the Scheme.

(3)  Whilst CS holds security, the Scheme will only compromise the Unsecured Portion and will not affect its secured claims. This is unobjectionable and is an “established practice in Hong Kong” (Re Hong Kong Airlines Ltd [2022] HKCFI 3792, §15, per Harris J).

(4)  Specifically, it is well established that secured creditors can agree with the Company on the value of their security interest and vote on the unsecured portion part of their claims (Re Dickson Group Holdings Ltd, HCMP 357/2008, 30 May 2008, §17).

54.  Ms Cheung submits that the “established practice” only applies where the security rights are not affected. This is the position in Re Hong Kong Airlines Ltd [2023] BCC 477, §§28-29; Re Dickson Group Holdings Ltd, HCMP 357/2008, 30 May 2008; Re I-China Holdings Ltd, HCMP 580/2004, 26 April 2004 and Re Century Sun International Ltd [2021] HKCFI 2928.

55.  As a matter of principle, I do not think that a creditor holding security in respect of the debts owed should without more be placed in a different class. The position is that where a creditor holds a valid security, it is entitled to realise the security and applies the proceeds to pay off the debt even if the company is put into liquidation. For this reason, a secured creditor should not be allowed to participate in the scheme unless it gives up the security or only seeks to vote in respect of the unsecured portion of the debt. To the extent that the value of the security is not sufficient to repay the debt owed to the secured creditor, the creditor is an unsecured creditor in respect of the unsecured portion, and is entitled to participate in the scheme to the extent of the such unsecured portion of its claim.

56.  The question whether by virtue of the other arrangements under the Restructuring CS should be regarded as having a special interest in supporting the Scheme such that its view cannot be said to be fairly representative of the class in question (UDL, §27(6)) is not an issue I need to decide, in view of my decision not to sanction the Scheme for the other reasons stated above.

E.  DISPOSITION

57.  The Petition is dismissed.

58.  As for costs, I make a costs order nisi that the costs of the OCs in respect of the Petition, including all costs reserved, are to be paid by the Company, to be taxed if not agreed.