RE DREAMEAST GROUP LTD (carrying on business in Hong Kong as DREAMEAST CULTURAL ENTERTAINMENT)

HCCW 487/2023 & HCMP 580/2025
(HEARD TOGETHER)

[2025] HKCFI 4800

HCCW 487/2023

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 487 OF 2023

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 580 OF 2025

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(HEARD TOGETHER)

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REASONS FOR DECISION

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Introduction

1.  There are two applications before the Court:

(1)  By a petition dated 18 August 2025 in HCMP 580/2025, the joint and several liquidators (“JLs”) of DreamEast Group Limited (“Company”) seek the Court’s sanction under section 673 of the Companies Ordinance (Cap. 622) of a scheme of arrangement (“Scheme”) between the Company and the Scheme Creditors[1].

(2)  By summons dated 18 August 2025 in HCCW 487/2023, the Company seeks a permanent stay of the winding-up proceedings upon the issuance of a written notice by the JLs to the Official Receiver that the Scheme between the Company and the Scheme Creditors has become effective.

2.  The Scheme was approved by 92.86% in number and 95.57% in value of the Scheme Creditors present and voting (in person or by proxy) at the Scheme Meeting held on 30 July 2025.

3.  At the hearing, I sanctioned the Scheme and granted a permanent stay of the winding-up proceedings. These are the reasons for my decision.

Background

4.  The Company was incorporated in Bermuda on 8 June 1993 as an exempted company with limited liability. It has been listed on the Main Board of the Stock Exchange of Hong Kong (“SEHK”) since 27 July 1993 (stock code: 593).

5.  The Company is an investment holding company. The Company and its subsidiaries (collectively “Group”) are principally engaged in property development and tourism park operations in the PRC.

6.  The financial position and business performance of the Company and the Group had been deteriorating since 2020 due to, inter alia, (1) the disruption caused by the COVID-19 pandemic to the cultural and tourism industry, which was a core sector for the Group, and (2) the post-pandemic property market downturn in the PRC which exacerbated liquidity pressures.

7.  By the end of 2022, the Company incurred a loss of HK$903.66 million and the Group had net liabilities of approximately HK$837.09 million. The Company had net current liabilities of HK$841.1 million and has been cash flow insolvent. This led to the Company’s default in debt obligations and the presentation of a winding-up petition by Forever Union Holdings Limited (i.e. the Petitioner) against the Company on 1 November 2023.

8.  On 11 March 2024, the Company was wound up and the trading of its shares on SEHK has been suspended ever since.

9.  On 14 August 2024, the JLs were appointed to the Company.

10.  Should the liquidation continue, the estimated realisations from the Company’s assets in a liquidation scenario are expected to be far lower than their book values. Based on the Company and the Group’s unaudited management accounts as at 30 September 2024:

(1)  Even though the Company itself appeared to have net assets of HK$1.43 billion, a majority of its assets (HK$2.27 billion) are either amounts due from its insolvent subsidiaries (HK$1.40 billion) or investments in its insolvent subsidiaries (HK$0.87 billion), which are non-current in nature and are not readily realisable.

(2)  Instead, the Company had net current liabilities of HK$841.3 million and was severely cash flow insolvent, leading to its default in debt obligations and winding-up.

(3)  The Group itself also had net liabilities of HK$2.19 billion.

(4)  As a result, the Scheme Creditors are only expected to recover 0.10% to 2.06% of their claims in a liquidation scenario[2].

Principal Features of the Scheme

Funding

11.  The debt restructuring of the Company is funded by Honor Magic International Limited (“Investor”) which entered into a Funding Agreement with the Company and the JLs on 11 April 2025 and agreed to grant an interest-free credit facility of HK$12,000,000 to the Company to pay, inter alia, the costs for the preparation and execution of the Proposed Restructuring and the Resumption Proposal. To date, HK$3,000,000 has been drawn down.

Capital Reorganisation

12.  The Company currently has an authorised share capital of HK$300,000,000, comprising 3,000,000,000 ordinary shares of HK$0.10 each, of which 545,796,038 Shares have been issued and fully paid (representing share capital in the amount of HK$54,579,603.80)[3].

13.  As part of the Proposed Restructuring, the Company’s existing share capital will undergo the Capital Reorganisation, which comprises the following major steps[4]:

(1)  Share Consolidation: every 10 issued and unissued Existing Shares of HK$0.1 each will be consolidated into 1 Consolidated Share of HK$1.0 each;

(2)  Capital Reduction: immediately upon the Share Consolidation becoming effective:

(a)  Any fraction in the issued share capital of the Company arising from the Share Consolidation will be cancelled;

(b)  The par value of every issued Consolidated Share will be reduced from HK$1.0 to HK$0.1, cancelling the paid-up share capital of the Company to the extent of HK$0.90 on each of the then issued Consolidated Shares;

(c)  The credit arising from the Capital Reduction in the amount of approximately HK$49,121,643.5 on the basis of 54,579,603.8 Consolidated Shares will be transferred to the contributed surplus account of the Company and the Directors be authorised to use the amount to eliminate any accumulated losses of the Company, pay dividend or to make any other distribution from time to time without further authorisation from the Shareholders; and

(3)  Share Subdivision: immediately following the Capital Reduction becoming effective, each of the authorised but unissued Consolidated Shares of HK$1.0 each will be subdivided into 10 unissued New Shares of HK$0.1 each. The New Shares will rank pari passu in all respects with each other and the Capital Reorganisation will not result in any change in the relative rights of the Shareholders (save for any fractional shares which may arise).

14.  The implementation of the Capital Reorganisation is conditional upon the fulfilment of several conditions, such as compliance with the requirements of section 46(2) of the Companies Act 1981 of Bermuda and the Company obtaining all necessary approvals from the regulatory authorities[5].

The Subscription, Whitewash Waiver and Share Placing

15.  The Cash Consideration to be distributed under the Scheme is derived from the following Subscription. In gist[6]:

(1)  On 13 June 2025, the Investor (as subscriber), the Company (as issuer) and the JLs have entered into a Subscription Agreement, pursuant to which the Investor shall subscribe for a total of 491,216,427 Subscription Shares, representing 90% of the issued share capital of the Company as enlarged by the allotment and issue of the Subscription Shares and after the adjustment for the effect of the Capital Reorganisation, at the total subscription price of HK$80,000,000 (i.e. at approximately HK$0.16 per Subscription Share).

(2)  The subscription price shall be satisfied partly by way of set-off against the outstanding amounts under the Funding Agreement of HK$12,000,000 in whole on a dollar-for-dollar basis, and the remaining amount shall be satisfied by way of cash payable to the Company.

(3)  The Subscription Price represents a discount of approximately 91.88% to the theoretical closing price of HK$1.97 per New Share as adjusted for the effect of the Capital Reorganisation (in particular the Share Consolidation), based on the closing price of HK$0.197 per Share as quoted on the SEHK on the last full trading day (i.e. 8 March 2024) prior to the suspension of trading in the Shares.

(4)  The Company will apply to the SEHK for the listing of and permission to deal in the Subscription Shares.

(5)  As the public float of the Company will fall below 25% upon completion of the Subscription, the Investor has undertaken to dispose of such number of Subscription Shares through a placing agent to ensure that the public float requirement under the Listing Rules can be complied with by the Company as soon as practicable.

(6)  The Investor has also made an application to the Executive for a Whitewash Waiver of the Investor’s obligation to make a mandatory general offer for all the issued Shares of the Company.

(7)  A special general meeting will be convened for independent shareholders to approve (a) the Capital Reorganisation; (b) the special mandate under which the Subscription Shares will be allotted; and (c) the Whitewash Waiver.

(8)  The completion of the Subscription is conditional upon the fulfilment of various conditions precedent, such as the Capital Reorganisation becoming effective and the sanction of the Scheme.

Scheme Claims

16.  Based on the latest information available to the JLs, it is estimated that the Scheme Claims amount to HK$883,550,638.40 and are mainly comprised of bondholders’ claims, as well as directors’ remunerations, loans and other professional fees[7]. The Excluded Claims[8]are envisaged to be settled in full outside the Scheme, primarily using the remainder of the net proceeds from the Subscription (i.e. about HK$20,000,000)[9].

Distribution of Entitlement to Scheme Creditors

17.  All Scheme Creditors with Admitted Scheme Claims will be entitled to receive (1) Cash Consideration of HK$60,000,000, being part of the net proceeds to be received from the Subscription, on a pro rata basis; and (2) the proceeds, if any, from the realisation of the Excluded Companies[10] and the Transferred Claims[11].

18.  In respect of the latter, the JLs do not expect any realisation proceeds therefrom given the severe insolvency of or lack of control over the Excluded Companies, and the lack of any specific Transferred Claims identified at the moment. Rather, the exclusion of the Excluded Companies is intended to streamline the operation, improve the financial position of the Retained Group and consolidate resources for more focused development of the businesses of the Retained Group, whilst the claims or cause of action against the Excluded Companies could be carved out and handled under the Scheme Company by the Scheme Administrators[12].

19.  In other words, it is likely that the Cash Consideration will be the only Scheme consideration received by the Scheme Creditors, and the returns comparison was also conducted on this basis.

20.  As soon as reasonably practicable after the Scheme Effective Date[13], the Scheme Administrators will:

(1)  Establish a Scheme Company and will open a Scheme Trust Account in the name of the Scheme Company and/or the Scheme Administrators for the purpose of implementing the Scheme[14];

(2)  Deposit the Cash Consideration into the Scheme Trust Account[15];

(3)  Proceed with the determination and adjudication of the Scheme Claims of the Scheme Creditors[16].

21.  The Group will also transfer its shareholding in the Excluded Companies and the Company will transfer the Transferred Claims (essentially all its choses in action) to the Scheme Company at a nominal value[17].

Scheme Costs

22.  All Restructuring Costs (including the Scheme Costs), which are currently estimated at HK$10.5 million, will be borne by the Company outside the Scheme and paid in full under the Funding Agreement[18].

Legal Principles

23.  In considering whether to sanction the Scheme, the Court applies some well-established principles which have recently been restated in my decision in Re CIFI Holdings (Group) Co Ltd[19] at [28]:

(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 such 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 the necessary statutory majorities have been obtained;

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

(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; and

(7)  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.

Permissible Purpose

24.  It is well-established that debt restructuring is a permissible purpose of a scheme of arrangement: Re CIFI Holdings[20] at [30].

Class Composition

25.  In considering the issue of class composition, the test is whether creditors who are called on to vote as a single class have sufficiently similar legal rights that they could consult together with a view to their common interest at a single meeting. Essentially:

(1)  The overarching question is whether the pre and post-scheme rights of those proposed to be included in a single class are so dissimilar as to make it impossible for them to consult with a view to their common interest. If that is the case, separate meetings must be summoned.

(2)  It is the rights of creditors, not their separate commercial or other interests, which determine whether they form a single class or separate classes. Conflicting interests will normally only ever arise at the sanction stage as a question for consideration.

(3)  The court should take a broad approach to the composition of classes, so as to avoid giving unjustified veto rights to a minority group of creditors, such that the test for classes becomes an instrument of oppression by a minority. The court should be careful to avoid unnecessary proliferation of classes because by ordering separate meetings the court might give a veto to a minority group.

(4)  The court has to consider, on the one hand, the rights of the creditors in the absence of the scheme (i.e. rights in) and, on the other hand, any new rights to which the creditors become entitled under the scheme (i.e. rights out). If, having carried out that exercise, there is a material difference between the rights of the different groups of creditors, they may, but not necessarily will, constitute different classes. Whether they do so depends on a judgment as to whether such a difference makes it impossible for the different groups to consult together with a view to their common interest.

(5)  In terms of “rights in”, it is only the rights compromised by the scheme or granted by it that are relevant to the question of class composition. Other rights or interests will be relevant at the discretionary stage.

(6)  The starting point is to identify the appropriate comparator, that is, what the alternative would be if the scheme does not proceed.

See: Re CIFI Holdings[21] at [33]-[34].

26.  In the present case, I am satisfied that all Scheme Creditors, except Mr Li Mengchao (“Mr Li”), constitute the same class. Their “rights in” are materially identical as they hold unsecured claims against the Company in a liquidation. They also have identical “rights out” as the Scheme treats them equally. They are entitled to receive the Scheme Consideration that is proportionate to their Scheme Claims.

27.  However, Mr Li stands in a different position. As the legal and beneficial owner of the Investor, he will become the 90% shareholder of the Company pursuant to the Proposed Restructuring and the Scheme. Given the different treatment that Mr Li receives under the Scheme, it would plainly not be possible for Mr Li to have a discussion with the other Scheme Creditors as to their common interest.

28.  Mr Li had undertaken not to vote at the Scheme Meeting and to abide by the terms of the Scheme. Although it is possible to convene a class meeting of one creditor where that is the sum total of members of the class, it is more normal for the creditor concerned if supportive of the scheme (as is Mr Li) simply to undertake to the court to be bound by the terms of the scheme: Re Noble Group Ltd[22] at [94] (Snowden J) (as he then was).

29.  As regards the Preferential Creditors or Secured Creditors, they may participate in the Scheme only to the extent of the unsecured, non-preferential portion of their claims (Re Century Sun International Ltd[23] at [9]). In any event, the JLs have not received any Preferential Claims or Secured Claims so far.

Compliance with the Court’s Directions

30.  There has been compliance with the Convening Order. This appears from the 3^rd Affirmation of Osman Mohammed Arab dated 18 August 2025 confirming the circulation and publication of the Notice of the Scheme Meeting, the Explanatory Statement and Scheme to the Scheme Creditors at least 21 days before the Scheme Meeting. The English and Chinese advertisement of the Notice of Scheme Meeting was also duly placed in The Standard and Hong Kong Commercial Daily on 7 July 2025.

31.  For Scheme Creditors having their last known addresses in the Mainland, the Convening Order requires the composite scheme document to be delivered by prepaid courier express service to such addresses[24]. Due to an inadvertent error, the documents were delivered by prepaid surface mail instead. Nevertheless, all 6 Scheme Creditors having their last known addresses in the Mainland have provided valid email addresses to the Company and the documents were also circulated to them by email. All of them ultimately attended the Scheme Meeting or, in the case of Mr Li, gave an undertaking to abide by the Scheme.

Statutory Majorities

32.  The Scheme was approved by the statutory majorities of Scheme Creditors at the Scheme Meeting: see [2] above.

Information provided to Scheme Creditors

33.  An explanatory statement should be sufficient to enable creditors to form a reasonable judgment on whether the Scheme is in their best interests and to reach a sensible decision as to its benefits. The information should be up to date. Creditors are assumed to be intelligent and can be expected to read the explanatory statement as a whole: Re CIFI Holdings[25] at [51].

34.  The Explanatory Statement satisfies the above requirements. It contains, inter alia, the reasons for the Scheme[26], a summary of the key terms of the Scheme[27], the implementation and effect of the Scheme[28], the estimated returns to the Scheme Creditors under the Scheme and in a liquidation[29], the conditions precedent[30], and the risk factors[31].

Intelligent and Honest Man Test

35.  I am satisfied that the Scheme is one which an intelligent and honest man might approve. The Scheme would give the Scheme Creditors a higher recovery rate (6.79%) than that in the liquidation (0.10% to 2.06%)[32]. An overwhelming majority of Scheme Creditors also voted in favour of the Scheme. The Court is normally slow to differ from the majority of creditors’ views in these circumstances as it acts on the basis that businessmen are much better judges of what is in their commercial interest than the Court: Re CIFI Holdings[33] at [55].

International Dimension

36.  The Company was incorporated in Bermuda. To justify the Court exercising its jurisdiction to sanction a scheme in respect of a foreign company, the Court has to consider (1) whether there is sufficient connection between the scheme and Hong Kong for the Court to exercise its jurisdiction over a scheme promoted by a foreign company, and (2) whether the scheme is effective in other foreign jurisdictions of practical importance: Re CIFI Holdings at [57].

37.  I am satisfied that the Scheme has sufficient connection with Hong Kong. First, the Company’s shares are listed on SEHK. Second, it has been registered as a non-Hong Kong company since 1993. Third, the Company maintains a principal place of business in Hong Kong. Fourth, to the best of the JL’s knowledge, the vast majority of the Scheme Creditors are located in Hong Kong.

38.  As regards the utility issue, the Scheme will achieve a substantial effect because based on the proofs of debts received thus far, all liabilities are due in Hong Kong or governed by Hong Kong law.

Application for Permanent Stay

39.  The principles which govern the Court’s power to grant a permanent stay of winding-up proceedings under section 209 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) are set out in Re Hong Kong Petrochemical Co Ltd[34]at [5]:

(1)  The Court has regard to the interests and views of members, creditors and the liquidator;

(2)  The Court also considers whether the stay is conducive to commercial morality and the interests of the public at large; and

(3)  If a stay is granted, whether all creditors and potential outstanding liabilities of the company are provided for.

40.  Normally, where unsecured debts have been compromised pursuant to a scheme of arrangement, these conditions are readily satisfied: Re Hong Kong Petrochemical[35] at [6].

41.  Granting a permanent stay in conjunction with sanctioning a scheme of arrangement, conditional upon the scheme’s effectiveness, is an established practice: Re Hong Kong Petrochemical[36] at [2].

42.  In my view, a permanent stay should be granted:

(1)  Upon the Scheme becoming effective, all of the Company’s indebtedness will either be provided for or discharged, thereby rendering the Company solvent. All liquidation expenses will also be provided for;

(2)  The JLs have not identified any potential misconduct in the Company which requires further investigation;

(3)  Allowing the Scheme to take effect will serve the best interests of the creditors as illustrated by the Returns Comparison[37] (see also [35] above); and

(4)  The proposed mechanics for confirming satisfaction of the permanent stay condition follow the similar technique approved in Re Hong Kong Petrochemical[38] at [8], following Re Seapower Resources International Ltd[39](Kwan J) i.e. the proceedings be stayed and the JLs be released and discharged upon their issuance of a written notice to the Official Receiver that the Scheme has become effective.

Conclusion

43.  For the above reasons, I granted orders in terms of the drafts produced to this Court subject to the amendments discussed with counsel at the hearing.