RE HELENBERGH CHINA HOLDINGS LTD

HCMP 353/2024

[2024] HKCFI 2628

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 353 OF 2024

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REASONS FOR JUDGMENT

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1.  By petition presented on 29 July 2024 (“Petition”), Helenbergh China Holdings Limited (海倫堡中國控股有限公司) (“Company”) seeks sanction of a scheme of arrangement (“Scheme”) between the Company and the “Scheme Creditors” (as defined in §3 below) on the terms and subject to the conditions set out in the composite scheme document (“Scheme Document”). At the hearing, I sanctioned the Scheme. These are the reasons for my judgment.

2.  The Scheme Document comprises the Letter from the Board, the Explanatory Statement (“ES”), the Scheme, and the Appendices which include the Liquidation Analysis and Recovery Analysis prepared by Kroll (HK) Limited (“Kroll”), the financial advisor to the Company. 

3.  The Company is insolvent.  It puts forward the Scheme for the purpose of extending the maturity dates of the “Existing Notes” (as defined in §11 below) so as to restore its solvency. The Company believes that the Scheme will provide a better outcome for the “Scheme Creditors”, which comprise “Class A Creditors” and “Class B Creditors” (as defined in §15(1)-(2) below), than in a liquidation scenario. The Scheme Creditors are beneficial owners of the Existing Notes.

4.  The Scheme was approved at the court-convened meetings held on 19 July 2024 (“Scheme Meetings”) by Class A Creditors as to 87.5% in number and 99.26% in value, and by Class B Creditors as to 95.24% in number and 86.83% in value.  

5.  The Petition is opposed by Ease Sail Holdings Ltd (“ESH”),  which is one of the beneficial owners of the “March 2023 Notes” and “October 2023 A2 Notes” (as defined in §10 below) with total claims in excess of US$58 million.

6.  There are 8 Scheme Creditors who have filed notices to appear in and support the Petition (“Supporting Creditors”). They are:

(1)  YONXI Great China Fund SPC – Yonxi Prosperity Fund SP (“Yonxi”);

(2)  Right Time Global Investment SPC (“Right Time”);

(3)  Pentamount Capital SPC-Master SP and Pentamount Global SPC-SP5 (together “Pentamount”);

(4)  Orient Sun Rise Fund Series SPC-Orient Brimstone Global Stable Fund No. 4 Segregated Portfolio (“Orient”);

(5)  Oakwise Value Fund SPC- Enhanced Fixed Income SP and Oakwise Value Fund SPC – Greater China High Yield Income SP (together “Oakwise”); and

(6)  Everbright Dynamic Bond Fund (“Everbright”).

7.  The parties have filed 14 affirmations in these proceedings:

(1)  ESH filed affirmation of Wu Li on 26 July 2024 (“Wu 1^st”)[1], affirmation of Ren Tingting (“Ren”) on 1 August 2024 (“Ren 1^st”), second affirmation of Wu Li on 13 August 2024 (“Wu 2^nd”), and second affirmation of Ren on 10 September 2024 (“Ren 2^nd”) in opposition to the Petition.

(2)  The  Company filed affirmation of Huang Chiheng (“Huang”) on 1 March 2024 in support of its application for leave to convene the Scheme Meetings; third affirmation of Huang on 29 July 2024 (“Huang 3^rd”) in support of the Petition, and adduced 4^th affirmation of Huang in reply to Wu 1^st; and affirmation of Zhang Hong on 9 September 2024 in reply to Wu 2^nd, Ren 1^st and Ren 2^nd. 

(3)  The Supporting Creditors filed 5 affirmations in support of the Petition[2].

A.  FACTUAL BACKGROUND

A1.  Corporate background

8.  The Company was incorporated in the Cayman Islands and is a registered non-Hong Kong company under Part 16 of the Companies Ordinance (Cap. 622) (“CO”). The Company is a private company and is the ultimate holding company of a group of companies which engage in real estate property business including development of residential property, commercial property and creative tech parks in the Mainland all of which are held through subsidiaries incorporated in the Mainland, the BVI and Hong Kong (“Group”).

9.  Huang is the Chairman and the only director of the Company  and the Chief Executive Officer of the Group. He is the beneficial owner of 98.99% shares in the Company[3].

10.  The Group’s business has been financed by a combination of onshore debts incurred in the Mainland and offshore debts incurred outside of the Mainland. The Company is the Group’s offshore financing vehicle and the issuer of the “March 2023 Notes” [4] and “October 2023 A2 Notes”[5] with maturity dates of 24 March 2023 and 8 October 2023 respectively. A portion of these notes were previously exchanged pursuant to exchange offers and became “November 2024 Notes”[6] and “October 2023 A1 Notes”[7]. ESH did not accept either of the exchange offers.

11.  The 4 series of notes described in the preceding paragraph constitute 99.9% of the Company’s liabilities (collectively “Existing Notes”). For the purpose of the Scheme, they are classified as “Class A Notes” and “Class B Notes”, details as follows:

Existing Notes	Principal as at 1/3/2024 (US$)	Interest p.a.	Maturity Date
October 2023 A1 Notes	285,442,328	10.33%	8/10/2023
October 2023 A2 Notes	2,000,000	11.0%	8/10/2023
Total Class B Notes	287,442,328
November 2024 Notes	315,407,211	8.0%	7/11/2024
March 2023 Notes	54,600,000	11.0%	24/3/2023
Total Class A Notes	370,007,211
Total Existing Notes	657,449,539

12.  The payment obligations of the Company under the Existing Notes are guaranteed by the Subsidiary Guarantors[8].

13.  Since mid-2021, the Group has started to experience liquidity difficulty, followed by the Company’s default on the Existing Notes. With a view to restructure its liabilities under the Existing Notes, the Company entered into negotiations with an ad hoc group of creditors holding US$260 million in outstanding principal of Existing Notes (“AHG”). This led to the signing of the Restructuring Support Agreement on 1 December 2023 (“RSA”) with a term sheet setting out the commercial terms of the restructuring.

A2.  Scheme

14.  The Scheme seeks to compromise the Company’s liabilities under the Existing Notes by cancelling the Existing Notes in exchange for the “New Notes” (as defined in §15(3) below) to be issued by the Company in accordance with the terms of the Scheme[9].

15.  Under the Scheme:

(1)  “Class A Creditors” (beneficial holders of Class A Notes) will receive “New A Notes”[10] in the amount of their Claims[11].  The New A Notes will mature on 8 October 2026.

(2)  “Class B Creditors” (beneficial holders of Class B Notes) will receive “New B Notes”[12] in the amount of their Claims[13]. The New B Notes will mature on 7 November 2027.

(3)  The New A Notes and New B Notes (together “New Notes”) will be guaranteed by the Subsidiary Guarantors[14].

(4)  A Scheme Creditor who acceded to the RSA on or before 15 July 2024[15] will receive a Consent Fee at 0.1%[16] of the outstanding principal of the Existing Notes held by it.

16.  Under the Scheme, the Scheme Creditors will release the “Released Person(s)”[17] from any claims arising out, of, relating to or in respect of (1) the Existing Finance Documents, (2) the preparation, negotiation, sanction or implementation of the Scheme, the Restructuring Documents and/or the RSA; and (3) the execution of the Restructuring Documents and the carrying out of the steps and transactions contemplated in the Scheme in accordance with their terms[18].

A3.  Convening Hearing

17.  By originating summons filed on 29 February 2024, the Company applied for leave to convene 2 separate Scheme Meetings to be held for the purpose of considering and approving the Scheme. The Company filed Huang 1^st in support of the application on 1 March 2024.

18.  At the convening hearing on 8 March 2024, this Court raised the following issues arising from the draft Scheme Document, and indicated that the issues should be addressed or rectified in the Scheme Document or at the sanction hearing (if the Scheme is approved by the Scheme Creditors):

(1)  The RSA and the Consent Fee specifically, whether it has the effect of binding the Scheme Creditors to vote for the Scheme at the Scheme Meetings;

(2)  The conditions precedent to the Scheme becoming effective in particular, whether there are any conditions which the Company may not be able to comply with within a reasonable time or at all. This is to ensure that the period between (a) the “Scheme Effective Date”[19] (when the Scheme becomes effective and binding upon the Scheme Creditors) and (b) the “Restructuring Effective Date”[20] (when the Company is obliged to issue the New Notes to the Scheme Creditors), will be kept within a reasonably short period and the same cannot be extended without the consent of the majority of the Scheme Creditors or approval of the court;

(3)  Whether there is any proper basis to give AHG a right to agree to extend the Long Stop Date[21] for compliance with the conditions precedent when AHG is merely a reference to certain Scheme Creditors which were involved in negotiating with the Company on the RSA and did not represent all the Scheme Creditors;

(4)  The scope of the release and exemption of liability clauses, whether they have the effect of releasing any claims other than the Claims held by the Scheme Creditors and, if so, the justifications for such release and exemption clauses;

(5)  The return under the Scheme, whether the Scheme Creditors will in fact receive payment in full taking into account the fact that the Company had been in default of payment under the Existing Notes since 2023 such that the financial position of the Company would be different from the one portrayed in the 2022 AFS;

(6)  The mechanism to effect a release of the Subsidiary Guarantors and whether it will be effective; and

(7)  The mechanism to allow the beneficial owners (as opposed to the holders) of the Existing Notes to be notified of the Scheme, to vote at the Scheme Meetings and to be bound by the Scheme after it becomes effective.             

19.  Upon the Company’s indication that it would revise the draft Scheme Documents to address the above issues, an order was made (“Convening Order”) directing (1) the  Company to convene the Scheme Meetings, (2) to publish the notice of Scheme Meetings and the other documents at the transaction website (“Website”)[22], the website of the Company, (3) to dispatch the Scheme Document through the Euroclear Bank SA/NV and Clearing Banking S.A. (“Clearing Systems”) and (4) the sanction hearing to be heard on 6 August 2024.

20.  On 29 April 2024, the Company issued a notice to convene the Scheme Meetings to be held on 20 May 2024 and uploaded the Scheme Document at the Website pursuant to the Convening Order[23]. The Scheme Meetings were subsequently postponed at the request of certain Scheme Creditors who had to sort out certain logistical issues with their custodian bank before they can vote at the Scheme Meetings[24].

21.  On 27 June 2024, the Company issued another notice to convene the adjourned Scheme Meetings to be held on 19 July 2024[25]. A revised version of the Scheme Document, which is also the final version of the Scheme Document, was uploaded to the Website on 27 June 2024[26].  

22.  By letter dated 5 July 2024, Messrs. Ashurst Hong Kong (“Ashurst”) on behalf of ESH complained that the Scheme Creditors were not given sufficient information to decide on how to vote for the purposes of the Scheme and requested the Company to provide, inter alia, 15 categories of information and documents (“Ashurst Letter”) within the next 3 business days. 

23.  In response, the Company provided the documents filed in these proceedings to Ashurst on 9 July 2024. Further, the Company through Sidley’s letter of 12 July 2024 (“Sidley Letter”) explained why the Company considered that the Scheme Creditors had sufficient information for the purposes of the Scheme Meetings and answered each of the 15 requests raised by Ashurst.

A4.  Scheme Meetings

24.  On 13 July 2024, the Company uploaded the Ashurst Letter and Sidley Letter to the Website and issued a supplemental notice of adjourned Scheme Meetings (“Supplemental Notice”) to inform the Scheme Creditors that:

(1)  The Ashurst Letter and the Sidley Letter have been uploaded to the Website so that the Scheme Creditors could be fully appraised of the issues raised and discuss them at the Scheme Meetings before the Scheme is put to a vote.

(2)  There is no guarantee that the cashflow of the Company will improve, meaning that there is a material risk that the Company may default on the New Notes.

(3)  The Liquidation Analysis in the ES was prepared on the basis of the financial statements for the financial year ended 31 December 2022 (“2022 FS”).

(4)  The Scheme Creditors should consider the above risks when deciding how to exercise their vote at the Scheme Meetings.

25.  The Supplemental Notice was uploaded to the Website and sent to the Scheme Creditors by the Information Agent through email and the Clearing Systems. 

26.  On 19 July 2024, the Scheme Meetings were held and the Scheme was approved by the requisite majorities of Class A Creditors and Class B Creditors present and voting at the respective Scheme Meetings.[27]

A5.  Opposition by ESH & adjournment of Petition

27.  On 26 July 2024, Ashurst filed notice to appear in these proceedings, Wu 1^st and Skeleton Submissions in opposition to the application for sanction. This was the first time this Court was notified that the Petition would be contested.

28.  On 29 July 2024, the Petition was presented by the Company seeking sanction of the Scheme.

29.  After close of business on 30 July 2024, Ashurst emailed a copy of Ren 1^st to Sidley.

30.  On 1 August 2024, the Company lodged its Skeleton Submissions and list of authorities and indicated that originally it intended to seek an adjournment so as to respond to the allegations belatedly raised in Ren 1^st, but upon ESH’s confirmation by letter dated 31 July 2024 that it would not deploy Ren 1^st in legal argument or otherwise rely on it at the sanction hearing, the Company was content to argue the matter on 6 August 2024.

31.  This was unsatisfactory. The sanction hearing was fixed on the basis that this Court would consider the issues raised at the convening hearing, the results of the Scheme Meetings and the other matters which the Company needs to satisfy at the sanction stage. The hearing was not fixed to consider any arguments or allegations which had been raised by any Scheme Creditors as none had been identified or even foreshowed at the convening hearing.

32.  By letter dated 2 August 2024, the parties were informed that the Petition would be re-fixed before a Recorder on 23 August 2024. However, Ashurst objected to the matter being heard before the Recorder on the ground of conflicts whereupon the matter was re-fixed before this Court on 11 September 2024. 

B.  DISCUSSION

33.  In considering whether a scheme should be sanctioned, the court considers the following factors namely, whether[28]:

(1)  the scheme is for a permissible purpose;

(2)  the 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)  in convening the meeting, the court’s directions were complied with;

(4)  the creditors were given sufficient information about the scheme to enable them to make an informed decision;

(5)  the necessary statutory majorities have been obtained; 

(6)  the court is satisfied 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)  if the company which puts forward the scheme is a foreign company, there is sufficient connection between the scheme and Hong Kong[29], and the utility of the court sanctioning the scheme[30].

34.  In the present case, there is no dispute that the factors identified in §33(1)-(3), (5) and (7) are satisfied.

35.  As regards permissible purpose, the purpose of the Scheme is to compromise and discharge the liabilities of the Company and the Subsidiary Guarantors under the Existing Notes. This is a permissible purpose (Re Moody Technology Holdings Limited [2022] HKCFI 1992, §15).

36.  As for classification of Scheme Creditors, Mr Jose Maurellet SC (leading Mr Terence Tai), counsel for the Company, submits (and I agree) that applying Re UDL Holdings (2001) 4 HKCFAR 358, §27(2), there are clearly 2 classes of Scheme Creditors:

(1)  Whilst the rights of the Scheme Creditors are the same in insolvency (which is the likely alternative if the Scheme fails), the rights of the Class A and Class B Creditors are different under the Scheme since they are given different instruments with different maturity dates. The “rights out” to these Scheme Creditors are different and they should be placed in different classes (Re Sunac China Holdings Ltd [2023] 5 HKLRD 765 §§22-23).

(2)  Whilst Scheme Creditors who have signed the RSA are entitled to receive a Consent Fee, this should not fracture the class given that the Consent Fee is small and would not have a material impact on a Scheme Creditor’s decision and the Consent Fee was offered to all Scheme Creditors so long as they sign the RSA and comply with the terms of the same (E-House (China) Enterprise Holdings Ltd [2023] HKCFI 3117, §§50-52).

37.  There has been compliance with court’s directions in that the notices of the adjourned Scheme Meetings and the adjourned Scheme Meetings were uploaded to the Website, the Company’s website and provided by the Information Agent to the Scheme Creditors by email and through the Clearing Systems, and advertisements substantially in the form of the notice were placed in accordance with the Convening Order.

B1.  Releases

38.  Mr Maurellet submits that the releases contained in the Scheme are justified in the circumstances of this case:

(1)  These releases prevent contribution claims from arising. For instance, if a disgruntled creditor decides not to take action against the Company but sues its director and advisors instead.  The latter may file a contribution claim against the Company, which is a ricochet claim that may undermine the Scheme (Re Noble Group [2019] BCC 349 at §§ 25-26).

(2)  Such releases fall within the concept of a compromise and can be upheld as part of an arrangement between the Company and its Scheme Creditors (Re Virgin Active Holdings Ltd [2021] EWHC 814 (Ch) at §46). Ultimately, these are matters which the Scheme Creditors can approve, and are not objectionable if they are properly disclosed (Re Lecta Paper UK Ltd [2020] EWHC 382 (Ch) at §22).

(3)  The presence of these releases reduces the risk (and, therefore, the costs) associated with the restructuring. It is not difficult to see the importance of these releases in restructuring with multiple parties and entities and why these clauses have become a regular feature in schemes (Re E D & F Man Holdings Ltd [2022] EWHC 433 (Ch) at §57).

(4)  Whilst the releases in the Scheme are based on the provisions approved in Re Noble Group Ltd at §§20-30, the releases are narrower; the carve outs[31] are not limited to “fraud” but extends to wilful default, gross negligence or wilful misconduct and any “liability of any Advisor arising under a duty of care to its client”. These carve outs limit the releases to what is reasonably necessary to give efficacy to the Scheme.

39.  I agree with the submissions primarily because the Company is a Cayman company. However, this cannot be taken as an indication that similar release and exemption of liability clauses would necessarily be acceptable if the company concerned is a Hong Kong company. This is because s.468 of the CO provides that any provision “contained in a company’s articles, or in a contract entered into by a company, or otherwise” which purports to exempt a director from any liability or indemnify the director against any liability in connection with any negligence, default, breach of duty or breach of trust in relation to the company or indemnity against any such liability is void.  

40.  The Scheme was approved by the statutory majorities of Scheme Creditors at the Scheme Meetings (see §4 above).

41.  As regards international dimension and utility of the court exercising its jurisdiction to sanction the Scheme, there is sufficient connection between the Scheme and Hong Kong in that:

(1)  the Company is and has since 2018 been a registered non-Hong Kong Company and has carried on all its offshore fund raising activities including issuing the Existing Notes in Hong Kong;

(2)  a significant part of the negotiations between the Scheme Creditors (including the AHG) and the Company on the RSA as well as the terms and conditions of the Scheme took place in Hong Kong;

(3)  100% of Class A Creditors and 99.57% of Class B Creditors in value (including ESH) have voted at the Scheme Meetings. By voting at the Scheme Meetings, these Scheme Creditors have elected to submit to the jurisdiction and be bound by the Scheme upon it becoming effective. Thus, notwithstanding that the Existing Notes are governed by New York law and the Gibbs rule[32] applies in Hong Kong, the Scheme would achieve a substantial effect in allowing the Company to compromise almost all the Claims under the Existing Notes even if the remaining 0.43% Class B Creditors in value will not participate in the Scheme; and

(4)  the primary purpose of the Scheme is to protect the Company from being wound up in Hong Kong.

42.  The only remaining issues are sufficiency of information and whether the Scheme is one a member of the class might reasonably approve to which I now turn. 

B2.  ESH’s objections

43.  ESH raises 3 grounds in opposition to the Petition:

(1)  There is insufficient objective and specific financial information for Scheme Creditors to meaningfully evaluate for themselves the Company’s assertion in the ES that it “expects to honour the payment of the New Notes” (Ground 1).

(2)  There is no explanation of the inferior treatment and risks involved for Class B Creditors. The fact that the New B Notes mature a year after the New A Notes materially departs from the pari passu principle which would apply in a liquidation (pursuant to which payments would be made at the same time and rateably), and results in a greater risk of non-payment (Ground 2).

(3)  There is insufficient provision of details of other indebtedness of the Group and how they are proposed to be dealt with (Ground 3).

B3.  Ground 1

44.  This ground concerns the adequacy of disclosure given in the Scheme Document.

45.  The applicable principles are not in dispute. As submitted by Mr Chris Chain SC (leading Ms Jasmine Cheung), counsel for ESH:

(1)  The purpose of a scheme document is to assist scheme 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.  Legal representatives are expected to draw to the attention of the creditors and the court any terms that are novel, unusual or potentially objectionable (Re Sino Oil and Gas Holdings Ltd [2024] 2 HKLRD 1084, §§19-22).

(2)  An explanation of the effects of a scheme requires an explanation of how a scheme will affect a creditor commercially. A creditor needs to be given such up-to-date information as can reasonably be provided on what he can expect under the schemes. An explanatory statement must contain all the information necessary to enable creditors to form a reasonable judgment on whether the scheme is in their interests or not, and hence how to vote.  If the creditors have been provided with materially inaccurate, incomplete or otherwise inadequate information, the court will most likely not be able to place any reliance upon, or give effect to, an affirmative vote at the creditors’ meeting (In re Sunbird Business Services Ltd [2020] Bus LR 2371, §§57-58, per Snowden J (as he then was)).

(3)  Where up-to-date information has not been provided, an adequate explanation of why this has not been done should be provided (Re Century Sun International Ltd [2021] HKCFI 2928, 6^th October 2021, §23 per Harris J).

(4)  Where the company contends that the scheme provides a more advantageous outcome for creditors than a liquidation, details as to the possible alternatives to the scheme and the basis for the predicted outcomes should be provided. The provision of such information is likely to be essential if there is a challenge to the scheme (Re Van Gansewinkel Groep BV [2015] Bus LR 1046, §24 per Snowden J; Sunbird §59).

(5)  Unlike the board which has had plenty of time to prepare the circulars, the creditors/objectors who receive a notice of the meeting and circular is generally alone. The court ought to bear in mind these considerations when it has before it a case where the whole matter is really determined by the proxies that have been given before the meeting is held (In re Dorman, Long & Co [1934] Ch 635, 657-658 per Maugham J (as he then was)).

(6)  Material representations by the Company must not only be accurate when made but must remain the whole story when they come to be acted upon (Re Minster Assets plc (1985) 1 BCC 99299, 99300-99301 per Harman J).

46.  Mr Maurellet submits, and I agree, that the following principles are also relevant when the court considers whether the company has provided adequate information for the scheme creditors to decide whether or not to vote for the scheme:

(1)  The scheme creditors are assumed to be intelligent and can ordinarily be expected to read the explanatory statement as a whole. This is particularly so when the majority of the scheme creditors are sophisticated institutional investors (Re Winsway Enterprises Holdings Ltd [2017] 1 HKLRD 1, §21).

(2)  Where scheme creditors are sophisticated, provided that their attention is fairly drawn to the limitations in the financial information, those creditors may well be able to form their own view on whether what they have been given is adequate (Re Sunbird Business Service Ltd [2021] Bus LR 401 (“Re Sunbird (No. 2)”), §95).

(3)  Even if there is defect in the scheme, “provided that the defect does not go to the jurisdiction of the court to sanction the scheme, it is clear that the court has a discretion as to whether to sanction a scheme notwithstanding an inaccuracy or omission in the information provided to the scheme creditors. In exercising that discretion, the court will naturally have regard to the materiality of the inaccuracy or omission.  This will ordinarily involve asking whether the inaccuracy or omitted matter is likely to have affected the way in which a creditor would have voted on the scheme – e g whether an assenting creditor would have changed their view or an abstaining creditor would have voted against the scheme” (Re Sunbird (No.2), §44).

(4)  The court must be astute to see that the deficiencies are not deployed to frustrate the wishes of the majority. The court needs to be satisfied that the deficiency is such that it caused mistaken votes to be cast (Re William Hill Plc [2021] BCC 744, §43 per Sir Alastair Norris J).

47.  Mr Chain contends that the ES does not contain the information necessary to enable Scheme Creditors to form a reasonable, informed judgment on whether the Company could honour payment of the New Notes in 2-3 years’ time for the following reasons:

(1)  The ES contains only figures based on the 2022 FS which are unaudited and outdated. The deficiency in information was not explained in the ES. The lack of transparency is of particular concern as the Company is not a listed company and, therefore, is not subject to any regulatory or corporate governance oversight.

(2)  No “Scheme-specific financial information and analyses” such as cashflow forecasts, future business plan and forecast for the Group or any such information and analysis on a project by project basis has been provided in the ES, unlike the schemes in Re Kaisa Group Holdings Ltd [2017] 1 HKLRD 18, §§8, 29 and in Re Moody Technology Holdings Ltd [2022] HKCFI 1992, 29 June 2022, §20.

(3)  Lack of up-to-date and specific financial information means that other than the five vague factors listed in §6.16(e) of the ES (“Five Factors”), there is simply no basis for Scheme Creditors to objectively evaluate the Company’s assertion that “should the implementation of the Restructuring be successful, the Company expects to honour the payment of the New Notes” (“Expectation”).

(4)  Even in respect of the Five Factors, no information has been provided as to whether the Company’s financial status or sales has indeed started to improve.

(5)  In Sidley’s Letter, the Company stated that it believed that there was a “real possibility” for the Group to support its operations (§§23, 27).This calls into question whether the Expectation was supported by any reasonable basis, and whether Huang has properly discharged his duties in considering whether the Scheme is indeed viable or in the interests of the creditors (Re Carnival Group International Holdings Ltd [2022] HKCFI 2668, 29^th August 2022, §14.

(6)  The financial information has not been verified by an independent insolvency practitioner or other suitable professional. Even Kroll has not been provided with sufficient information to evaluate the Expectation, as can be seen from its qualification to the Liquidation Analysis (§§19, 38).

(7)  It is not sufficient for the Company to say that the risk of not being able to honour the New Notes has been disclosed as the “numerous assumptions and assessments” made by the Company have been kept from the Scheme Creditors.

48.  I do not think that the objection under Ground 1 is well founded.

49.  First, the Scheme is a straight-forward one and the only substantive change is to extend the maturity dates of the Existing Notes by 2-3 years. The outstanding principal owed and the interest rates payable to the Scheme Creditors remain the same, and the New Notes will be guaranteed by the Subsidiary Guarantors. The decision which the Scheme Creditors had to make was whether to accept the issue of the New Notes or to insist on their rights under the Existing Notes which would lead to the Company being wound up by the court. This was a decision which the Scheme Creditors would be able to make on the basis of the information provided in the Scheme Document, in particular those set out in the ES and the Liquidation Analysis.

50.  Second, the Scheme Creditors were informed in clear term that the Expectation was based on the Five Factors and there is a risk that the Company will not be able to perform the payment obligations under the New Notes. These include:

(1)  In the ES, it was highlighted the risk associated with the New Notes (§12.5). The Scheme Creditors were reminded that the ability to honour the New Notes depends on the Group’s ability to generate cash and the Company had not conducted a cash flow analysis to project their ongoing cash flow position. It was further stated that the Liquidation Analysis has not taken into account factors such as predicted future cash flow of the Group, and that the Group’s business might not generate sufficient cashflow to enable it to pay off its indebtedness (ES §4.7; §§12.5(h)-12.5(i)).

(2)  ESH’s complaints in Ashurst Letter, including the lack of a cashflow forecast and uncertainty over the Company’s ability to honour the New Notes, were expressly drawn to the attention of the Scheme Creditors through the Supplemental Notice.  Both Ashurst Letter and Sidley Letter were uploaded on the Website so that they could be fully appraised of the issues raised and discuss the same before the Scheme was put to a vote.

(3)  The Supplemental Notice stated that the there is no guarantee that the cashflow of the Company will improve. The fact that the Liquidation Analysis was prepared based on the 2022 FS was highlighted. The Scheme Creditors were also reminded of the Risk Factors stated in the ES and the problems highlighted in Sidley Letter.

(4)  At the Scheme Meetings, the Company’s representatives highlighted Ashurst Letter and Sidley Letter and emphasised that there is no guarantee that the Company could honour the New Notes and that the Company may default again. The fact that the Company did not provide any financial model or cash flow analysis to the Scheme Creditors was also highlighted[33].

51.  Third, the Scheme Creditors were also told, in no uncertain term, that the Liquidation Analysis was prepared based on the 2022 FS. Given the nature of the Group’s business, the returns to the Scheme Creditors in liquidation scenario would be even lower if more recent financial data were used by Kroll.

52.  Fourth, the Scheme Creditors could assess the information contained in the Scheme Document including the limitations thereof and decide whether it would be in their interests to accept the Scheme or to have the Company be wound up. This is particularly so when the Scheme Creditors are sophisticated financial institutions or investors, and their attention was fairly drawn to the limitations in the financial information such that they would be able to form their own view as to whether what they had been given was adequate (cf. Re Sunbird (No. 2), §95). In this regard:

(1)  The Supporting Creditors are professional investors comprising financial service institutions and funds managed by asset management companies and are independent of the Company;

(2)  The Supporting Creditors have filed evidence to confirm that they were aware of the uncertainties and the risks in the proposed restructuring including the Company’s ability to honour the New Notes even before acceding to the RSA; they  had considered ESH’s grounds of opposition and confirmed that they would not affect their decision to vote in favour of the Scheme;

(3)  Other Scheme Creditors which voted in favour of the Scheme include financial institutions such as HSBC, Guotai Junan Financial Products Limited, CMBCC Special Opportunities Fund Sp8 and Nomura International Plc (“Nomura”); and

(4)  Nomura and IFast Financial Pte Ltd have provided letters to confirm that they understood there is a high level of uncertainty in relation to the Company’s ability to honour the New Notes and they believe that the information in the ES and the other documents presented by the Company are sufficient for them to form a reasonable decision on whether or not to support the Scheme.

53.  Lastly, it is difficult to see why the Company should provide the specific financial information or analysis on individual project in the Scheme Document or why such information would be relevant to the Scheme Creditors’ assessment of the Scheme. All that the Scheme seeks to achieve is to extend the maturity dates for payments of the debts owed to the Scheme Creditors. The Scheme does not seek to compromise any debts owed to the Scheme Holders by issuing any new shares to them (in such scenario, one may say that it would be necessary for the Scheme Creditors to assess and evaluate the projected financial position of the Company and its performance so as to decide whether it would be in their interests to accept the shares in exchange for the debts owed to them).

B4.  Ground 2

54.  ESH contends that the Scheme Creditors have not been sufficiently informed or given any sufficient explanation as to the Scheme’s material departure from the pari passu principle, in that it enables holders of the New A Notes to be paid ahead of holders of the New B Notes, whereas in a liquidation, all unsecured creditors of the Company would be paid at the same time pro rata.

55.  Mr Chain relies heavily on In re AGPS Bondco plc [2024] Bus LR 745, where the terms of the scheme retained the existing staggered maturity dates of 5 series of notes ranging from 2024 to 2029. Holders of notes maturing in 2029 opposed the scheme on, inter alia, the ground this was a departure from the principle of pari passu distribution that would apply in a formal insolvency.[34]Although the case concerned an application under Part 26A of the Companies Act 2006, which provides a cross-claim cram down and requires the court to consider whether there was equal treatment between all shareholders, the principles of fairness as discussed in the case are relevant to the question whether sufficient information has been provided (albeit not raised as an independent ground of appeal in AGPS (§224)).

(1)  Snowden LJ first set out the rationale of pari passu distribution as follows (§186):

“The concept is one of a pari passu distribution of a pool of assets under which payments are made at the same time and rateably to all creditors who have established their claims. It is vital to appreciate that no creditor should be paid any amount from the common pool ahead of other creditors who rank equally with him if to do so creates a risk that the other creditors will not be able to be paid the same rateable proportion of their claims.”

(2)  On the facts, the company had already provided a report forecasting that the notes could be repaid in full, but it was still held that the margin was so small that for the company to pay off the holders of the 2029 notes in full can be described as ambitious (§191).

(3)  Snowden LJ thus concluded (§193) that:

“Given the existence of these material risks that the Group might fail to realise the sums forecast in the BCG Report, the payment of the different series of Notes sequentially under the Plan thus carried the risk that the Group would pay the earlier dated Notes in full, but would run out of money from realisations before being able to pay the 2029 Notes. As I have pointed out above, adherence to the principle of pari passu distribution of the Group’s assets would have eliminated that risk by proportionate distributions being made rateably to all Noteholders from time to time. Put shortly, sequential payments to creditors from a potentially inadequate common fund of money are not the same thing as a rateable distribution of that fund.”

56.  Mr Chain contends that the same, if not greater, risk applies here to in respect of Class B Notes, as New B Notes mature in 2027, after  New A Notes mature in 2026, and there is great uncertainty as to the Company’s ability to honour the payment of the New Notes.

57.  As regards the adequacy of the ES, Mr Chain submits that the inadequacies in the ES on a number of critical aspects identified in AGPS are also present in the ES. These include:

(1)  the failure to distinguish in any material respect between the treatment of New A Notes and New B Notes[35];

(2)  the ES did not draw attention to the fact that by preserving sequential payment dates for New A Notes and New B Notes, the Scheme departs in a material respect from the pari passu distribution of assets to the Class A and Class B Creditors[36]; and

(3)  in “Risk Factors” section in the ES, it was stated that there is difference in the new rights which Class A and Class B Creditors would be entitled to under the Scheme namely, the different maturity dates, this is hardly sufficient[37].

58.  I do not think that the ES is inadequate in drawing to the attention of the Scheme Creditors the difference in rights between the  New A Notes and New B Notes or the risk associated with such different maturity dates. 

59.  While one cannot rule out the risk that Class A Creditors will receive payment but not Class B Creditors owing to the difference in maturity date, this is a risk which the Scheme Creditors decided to take. It is not for the court to override their decision when the risk was sufficiently drawn to their attention and highlighted. 

60.  In any event, as submitted by Mr Maurellet, the risk that Class A Creditors will receive payment in full but Class B Creditors will not receive any payment is very remote given that if Class A Creditors receive payment in full, it means that the financial position of the Company has improved in line with the Expectation and in such scenario, Class B Creditors will also be paid in full. Conversely, if the Company’s financial performance does not improve and remains insolvent by the time New A Notes fall due, the director will be under a duty not to pay the amount due so as to preserve the assets for distribution to the creditors in liquidation. In either scenario, there will not be a departure from the pari passu principle.

B5.  Ground 3

61.  ESH complains that there is insufficient information on the details of other indebtedness of the Group and how they are proposed to be dealt with:

(1)  Although the Scheme and the ES contain definition for “Out-of-Scope Offshore Debts”, which means “all financial debt instruments of the Group other than the Existing Notes”[38], this defined term does not appear to have been used in the ES.

(2)  Such information should have been provided in the ES. As held in Sunbird, §60).

(3)  The Company’s response to ESH’s requests for further information in this regard is also deficient[39].

(4)  The Scheme releases not only the Scheme Creditors’ Claims against the Company, but also their claims against the Subsidiary Guarantors.  However, the Scheme Creditors have not been provided with sufficient information as to how the other debts of the Group would be dealt with to form an informed view as to whether the value has been appropriately allocated between different stakeholder groups.

(5)  Further, the treatment of other debts of the Group is also necessary for the overall assessment of Scheme Creditors as to whether the Company and the Group can eventually return to solvency and make payment of the New Notes.

62.  I do not think that the objection is well-founded. While it is correct that when the Scheme becomes effective, the liability of the Subsidiary Guarantors under the Existing Notes will be released, it does not mean that details of the Group’s other indebtedness is relevant or necessary for the Scheme Creditors’ consideration of whether to approve the Scheme. This is particularly so when the release does not affect the substantive right of the Scheme Creditors as their claims  under the New Notes will be guaranteed by the Subsidiary Guarantors.

B6.  Other arguments

63.  In his supplemental submissions, Mr Chain raises 2 further points in opposition to the Petition:

(1)  The Company cannot hide behind creditors’ support. Although the Supporting Creditors’ position is that they made their own commercial decisions, “none of them have put forward any actual independent commercial/financial analysis, and have merely parroted the Company’s broadbrush justifications” (Creditors’ Support Point); and

(2)  There is credible, weighty and partially corroborated evidence from an “independent whistleblower” which suggests that some (unspecified) part of the creditors’ support of the Scheme may be controlled or subject to the influence of the Company itself. This relates to the “Contribution Arrangements” which, according to Ren (an ex-employee of the Company), is a practice known in the financial industry and involves entities affiliated with the issuer of a bond to subscribe and pay for non-voting participating shares in a fund, and the fund to purchase bonds issued by that issuer. Ren confirms on oath that Yonxi engaged in the Contribution Arrangements such that the Company was able to influence how it voted on the Scheme. Ren further surmises that Right Time and Oakwise were also known to participate in such Arrangements although she is unable to verify if they did so with respect to the Existing Notes (Contribution Arrangements Point).

64.  As regards the Creditors’ Support Point:

(1)  As a matter of law, there is no obligation on the Supporting Creditors to explain why they decided to vote for the Scheme, let alone put forward any independent commercial/financial analysis to justify their decision.

(2)  In any event, the Supporting Creditors have in their affirmations confirmed that they had carried out their own risk-benefit analysis and analysis of the recovery prospects in each of the liquidation and restructuring scenario, and explained their commercial considerations for voting for the Scheme, details of which are set out in Wan 1^st. There is simply no basis for ESH to challenge their evidence or, indeed, the sufficiency of their commercial considerations. 

65.  As for the Contribution Arrangements Point, it is wholly without basis:

(1)  Yonxi has adduced evidence confirming that its notes were pledged to CCB International (“CCBI”) and the vote casted at the Scheme Meetings were based on CCBI’s instruction.

(2)  There is simply no evidence in support of Ren’s speculation with regard to Right Time and Oakwise. 

(3)  The Supporting Creditors have filed affirmation to confirm that it was independent of the Company and they voted in accordance with their own commercial interests.

(4)  At the hearing, Mr Chain confirms that ESH no longer pursues the Contribution Arrangements Point.

66.  For all the above reasons, this Court sanctioned the Scheme and directs the Company to deliver an office copy of the order to the Registrar of Companies within 7 days of the order as the Scheme will only become effective upon registration of the order.

67.  As for costs, I make a costs order nisi that:

(1)  There be no order as to costs as between the Company and ESH;

(2)  The Company do pay 50% of the costs of the Supporting Creditors, to be taxed if not agreed; and

(3)  ESH do pay 50% of the costs of the Supporting Creditors, to be taxed if not agreed.

68.  It seems to me that although ESH fails in its opposition to the Petition, except the Contribution Arrangements Ground, the grounds raised by ESH are legitimate grounds which ESH is entitled to raise at the sanction hearing, and the Company should pay the costs of and occasioned by ESH for such purpose. However, the same cannot be said of the Contribution Arrangements Ground which I consider to be wholly without basis. Much costs have been incurred by the Company in responding to the allegations raised by ESH in Wu 2^nd, Ren 1^st and Ren 2^nd. ESH should be required to pay the costs of and occasioned by the Contribution Arrangements Ground. As both sides have to pay costs incurred by the other, a fair order would be that there should be no order as to costs.

69.  As for the Supporting Creditors, they should be entitled to recover their costs for supporting the Petition, which shall be borne by the Company and ESH as to 50% each. This reflects the fact that a substantial part of the 5 affirmations filed by the Supporting Creditors are directed to dealing with the allegations in relation to the Contribution Arrangements Point, and ESH should be liable to pay 50% of the costs incurred by the Supporting Creditors in these proceedings.