NATIONAL ARTS ENTERTAINMENT AND CULTURE GROUP LTD (IN PROVISIONAL LIQUIDATION FOR RESTRUCTURING PURPOSES)

HCMP 1480/2019

[2020] HKCFI 275

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1480 OF 2019

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D E C I S I O N

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The Petition

1.  On 12 November 2019 National Arts Entertainment and Cultural Group Limited (“Company”) issued a petition seeking the  court’s sanction of a scheme of arrangement pursuant to section 673 of  the Companies Ordinance, Cap 622 (“Ordinance”) between it and  its unsecured creditors (“Scheme Creditors”).  A meeting of the  Scheme Creditors was ordered on 4 October 2019 and took place on 8 November 2019.  The necessary statutory majority was obtained: 89.86% in value and 88.38% in number of Scheme Creditors present and voting at the meeting [1].  Sanction of the Scheme has been opposed by a number of Scheme Creditors [2]. The Petition was heard on 19 November 2019.   As a consequence of some of the submissions that were made by Scheme Creditors, who attended and opposed the Scheme (one through counsel, one through a solicitor who I gave leave to address the court) and 15 others who mostly appeared in person, I made directions for further evidence and submissions to be filed.  Having read the additional evidence and submissions my Clerk wrote to the Parties on 6 January 2020 informing them that I would sanction the Scheme.  These are my reasons for so doing.

The Company

2.  The Company was incorporated in the Cayman Islands, but deregistered and continued in Bermuda on 14 October 2010.  It was listed on the Growth Enterprise Market of the Stock Exchange of Hong Kong since 17 October 2002.  It has been carrying on business in the film and television industry.

3.  The Company has an unusual debt profile currently totaling approximately $2.13 billion[3]. Its financing was through two principal sources: shareholder loans and bonds. In summary, this consists of:

(1) $1.28 billion owed to bond holders;

(2) $740 million owed to shareholders and directors

In addition, it has a relatively small amount of debt owed to independent third party non-bond holders: HK$120 million.

4.  The Company encountered financial difficulties which came to a head in early 2019 when it began to experience a severe liquidity crisis.  With a view to restructuring the Company’s debt it applied successfully to be put into soft-touch provisional liquidation in Bermuda on 14 June 2019. Osman Mohammed Arab of RSM and Roy Bailey of Ernst & Young were appointed as provisional liquidators.  On 15 August 2019 Wilson Chan J made an order recognizing the provisional liquidation and granted powers to the Provisional Liquidators, which allowed them to assist in the formulation of a restructuring plan and the introduction of a scheme of arrangement.  The Petition is presented by the Company, but in practice the restructuring has been managed by the Provisional Liquidators, who support it.

The Scheme

5.  The Scheme provides that each Scheme Creditor will receive convertible bonds with a face value equal to 60% of the admitted debt plus new shares allocated on the basis of one share for each HK$0.38 of each HK$1 of admitted debt.

6.  In broad terms the commercial justification for the Scheme is that without it the Company will go into liquidation and that what appears in its audited consolidated accounts as its most valuable assets, land in Guangdong, is likely to be lost because the terms on which it is held would allow it to be resumed in the event of a liquidation leaving creditors with a minimal return.  The Scheme is made possible because an American investor is prepared to recapitalize the Company, but not on terms which would allow a cash distribution to Scheme Creditors.

7.  As the result of the voting indicates, clearly a majority of Scheme Creditors have concluded that the terms of the Scheme are preferable to what I accept looks like the only possible alternative, namely, a liquidation and likely minimal return.

8.  All this is explained in the Scheme Document, which was amended to address in particular the terms on which the land is held at my direction at the time of the hearing of the application for an order convening a meeting of Scheme Creditors to vote on the Scheme.

9.  The function of the Court at the hearing of a petition to sanction a scheme is to consider:

(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.

See Re Mongolian Mining Corporation.[4]

10.  I am satisfied that criteria (1) to (5) have been satisfied (although I shall say something about the conduct of the meeting in [16]).  It is the final criteria, which requires some consideration given the fact that a number of Scheme Creditors attended the hearing and opposed the sanctioning of the Scheme apparently preferring liquidation.

11.  As I have already observed the Company has an unusual debt profile. Although the majority of the debt is described by the Company as taking the form of bonds this would appear to be misleading as it suggests one or more series of commercial paper issued in a conventional form.  This appears not to be the case.  At least a proportion of the “bonds” consist of individual loans made by individual creditors in unsatisfactory circumstances.  A number of the creditors appeared before me and objected to the Scheme, all but one was from the Mainland.  Their circumstances varied.  Some had bought “bonds”, because of an interest in the right they understood they would acquire to live in Hong Kong, because under a scheme operated by the Immigration Department which allows people who invest a certain amount of money in a Hong Kong business to acquire residency rights.  This was not a term of any of the bonds and, therefore, has no effect on classes composition.  Others told me that they were not interested in the residency rights and had invested the money purely for the interest and because they understood that the Company held valuable land, which meant that lending to it was a safe investment.  None of the creditors, who appeared produced the bonds or their terms.

12.  An example of the unsatisfactory nature of the way the Company has raised money is the case of Madam Liu Yu Hua, who as I understood what her friend Lu Mei Lin, who attended the hearing and made representations on her behalf, explained in Putonghua during the hearing,  in April of 2019, at a time when the Company was clearly in financial difficulties, bought through an agent (the capacity of the person involved was unclear) a bond for RMB3.5 million with a three-month tenor at an interest rate of 4% per annum to be repaid in Hong Kong in Hong Kong dollars.  This was a remarkably low rate of interest for unsecured lending to a Company, whose financial position could be seen from then publicly available information to be precarious.  It would appear that the attraction to Ms Liu was the repayment in Hong Kong. In other words it was a way of getting money out of the Mainland.  The implication is that many of the creditors were not motivated in making loans to the Company simply by the interest that was being paid.  None of the creditors suggested that they had bought bonds because the rate of return was very high.  The highest rate of interest mentioned to me was 8% per annum.  It seems likely that most of them were motivated by other considerations such as the potential right to reside in Hong Kong or being able to transfer money out of the Mainland.

13.  Ultimately the complaints of the opposing creditors boiled down to the same thing: a feeling that they had been cheated and that  the Scheme is unfair.  Although I understand the opposing creditors’ frustration and concerns it does not seem to me that of itself it has much bearing on a consideration of whether or not the Scheme is one that a reasonable creditor might approve.  The principal determinant of whether or not a scheme is one that a creditor might reasonably be expected to accept is the alternative.  I am satisfied that the alternative is highly likely to be liquidation and loss of the Company’s interest in the land, which it is hoped to develop into an entertainment orientated theme park.  It seems to me that a reasonable creditor might well take the view that what is on offer is better than the alternative: liquidation and a long wait for what might ultimately be a minimal, if any, distribution.

14.  The Court is slow to depart from the views of the majority  of creditors.  As Lewison J observed in Re McCarthy & Stone Plc [5], the test the court applies when it comes to the last criteria, which is a matter of discretion, in practice means that unless there is something “glaringly wrong with the scheme the principle of creditor democracy ought to be respected”. Although I understand the opposing creditors’ frustrations it does not seem to me that the matters of which they complain demonstrate that the majority who voted in favour of the Scheme appear to have     reached an irrational decision.  The Explanatory Document explained comprehensively what the alternatives are and why the Joint Provisional Liquidators have taken the view that the Scheme is in Scheme Creditors’ best interests.  I can see no reason to think that their professional judgment is unsound or, as some of the opposing creditors seemed to suggest, was not exercised fairly.

15.  For these reasons I have determined that the Scheme should be sanctioned.

16.  The final matter I will address is the conduct of the court ordered meeting of Scheme Creditors to consider and vote on the Scheme.  The additional evidence that was filed was primarily directed to addressing complaint from the opposing creditors about the conduct of the Scheme meeting.  I have read the evidence filed by the Provisional Liquidators and the transcript.  I have two comments on the conduct of the meeting.   It appears to have been the understanding of the Provisional Liquidators that the meeting was to vote on the Scheme rather than an opportunity for Scheme Creditors to ask questions and discuss the Scheme’s merits.  The Provisional Liquidators were wrong in this view: although as it transpired questions were asked and answered and I do not think that the Scheme Meeting was conducted in such a way as to render it ineffective.  The order convening the Scheme Meeting is in conventional terms and directs that it is convened “for the purpose of considering and, if thought fit, approving” the Scheme.  It is an opportunity for scheme creditors to ask questions and try and establish whether it is in their best interests to support a scheme or not.  The Chairman has considerable discretion as to how he conducts the meeting, but it must be conducted in a manner that gives creditors who attend an opportunity to ask questions, which the company (in the present case the Provisional Liquidators) make a reasonable attempt to answer.   If this were not the case it would be unnecessary to have a meeting: votes could be cast by post, email or online voting.

17.  The second matter is a minor one.  There is reference in the evidence and the transcript to an “MC”.  The identity of this person for some reason is not given.  The mystery person would appear to have played the role of “mastery of ceremonies”, for which MC is an abbreviation.    The order of 4 October 2019 expressly appointed one or other of the Provisional Liquidators to chair the meeting.  There was no need or proper role for a “mastery of ceremonies”.  The person appointed to chair the meeting should do exactly that.