Re Keen Yield Investment Ltd.

HCMP436/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.436 OF 1999

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J U D G M E N T

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INTRODUCTION

1. Before the court are 25 separate petitions. UDL Holdings Limited ("the Company") and 24 of its subsidiaries ("the Subsidiaries") seek the court's sanction for Schemes of Arrangement ("the Schemes") to compromise debts owed by the Company and the Subsidiaries to their creditors.

2. The Schemes are in identical terms and form part of a global scheme. A single composite document ("the Scheme Document") was circulated to creditors which set out the reasons for, effect of and recommendation in favour of the Schemes.

BACKGROUND FACTS

3. In brief, the Company and the Subsidiaries were greatly affected by the Asian financial crisis. The principal activities of the Company and the Subsidiaries were in the business of building services, marine engineering, contracting and structural steel. Certain clients of large scale projects completed by the Subsidiaries delayed payment. Other customers and clients of the Subsidiaries even refused payment outright. The difficulties were exacerbated by the unexpected calling in of loans from major financial creditors of the Subsidiaries which triggered off a chain reaction leading to the refusal of credit arrangements by trade creditors and default in payment by the Subsidiaries. As the Company had provided corporate guarantees to financial creditors, default of its subsidiaries resulted in liabilities of its own.

4. The losses sustained ending 31 March 1999 were mainly attributable to exceptional loss including provision for contract work in progress, losses in connection with contracts terminated, bad and doubtful debts and decline in the recoverable amount of floating craft and vessels and leasehold land and buildings, etc. This was due largely to the fundamental uncertainty relating to the possible outcome of the contract work in progress, the impact of termination of engineering contracts and the outcome of various claims and litigation against the Subsidiaries.

5. The Company and its Subsidiaries form part of the UDL Group which consists of over 100 group companies. The global scheme involves the Company and such of its subsidiaries as are in financial difficulties.

THE SCHEME

6. In broad terms, each of the Schemes (which are identical) proposed as follows :

* The unencumbered assets of each of the companies whose creditors vote (by the required majority) in favour of the relevant Scheme of Arrangement and in respect of which the sanction of the court is obtained be pooled to form a fund for the payment of all "external claims" of those companies other than debts covered by security held by secured creditors.

* "External claims" are claims of creditors other than the Company and any of the Subsidiaries whose Schemes of Arrangement are sanctioned by the Court. Accordingly, the pool of unencumbered assets will not be applied to satisfy the claims of the Company and any Participating Subsidiary.

* The preferential creditors of those companies be paid the full amount of their preferential claims.

* The balance of the claims of the preferential creditors fall to be treated in line with the general unsecured creditors for any balance of their claims.

* Unsecured creditors of those companies receive dividends comprising a mixture of cash and new shares in the Company.

* Pending completion of realizations and distributions, there be a moratorium on enforcement by creditors of claims against those companies whose Schemes of Arrangement have been sanctioned by the court although pending arbitrations would be permitted to continue for the purpose of quantifying creditors' claims and establishing entitlement to dividends under the Schemes.

* Secured creditors of companies whose Schemes of Arrangement are sanctioned will be required to realize their securities within two years form the date when the relevant Scheme of Arrangement becomes effective and will be entitled to claim any shortfall after realization pari passu with general unsecured creditors (i.e. they will receive dividends in the form of cash and new shares in respect of any shortfall).

* If a secured creditor has not realized his security within the two year period, then his security will be valued and the difference between that valuation and the amount of his claim will be treated as the amount of his shortfall and entitle him to dividends as above. A secured creditor may, however, if he wishes, give notice to the Scheme Administrator that he requires his security to be valued earlier than the expiry of the two year period and in that case the matter will proceed in exactly the same way as if the valuation had taken place after the two years had elapsed.

* These terms will be in full discharge of creditors' claims against those companies whose Schemes of Arrangement are sanctioned by the Court.

7. If all the Schemes are sanctioned, the estimated recovery for the unsecured creditors is estimated at $0.1141 plus 0.17 new shares per dollar of scheme debt.

COURT MEETINGS

8. Pursuant to the Order dated 3 February 2000, court meetings for each of the Company and the Subsidiaries were duly held on 14 March 2000. So far as the Company is concerned, the result are set out in the table below :

On these figures, creditors voting in favour of the Scheme amounted to 80.36% of the debts and the number of creditors voting for the resolution exceeded those voting against.

9. Several days after the presentation of the petition, the Company received advice that certain votes may have been incorrectly included in the voting results of the court meeting. They were in respect of debts arising in relation to a claim by American Home Assurance Company ("AHAC") to be a creditor of the Company for the sum of $146,361,463.55. AHAC executed a number of bonds to guarantee the performance of relevant members of the UCL Group under engineering contracts. On 12 January 1995, the Company and five other companies, namely Chui Hing Construction Co. Ltd, Tonic Engineering and Construction Co. Ltd, UDL Argos Engineering and Heavy Industries Co. Ltd., UDL Kenworth Engineering Ltd and Universal Dockyard Ltd (collectively "the Indemnitors") executed a general agreement of indemnity in favour of AHAC in respect of those bonds. AHAC's claim comprised all outstanding premium, unreturned bonds, paid bonds and associated costs. AHAC had also made a similar demand against each of the Indemnitors. In the Scheme Document, the estimated amount of debt of AHAC was shown as $41,415,000 as it was understood that AHAC was intending to claim against other companies for liabilities arising out of other bonds issued and any additional claims by AHAC would be covered by the general provision item of $209,018,000 shown in Appendix 8 of the Scheme Document. As a result, the five Indemnitors were allowed to vote. It is accepted that an adjustment is required to the aggregate voting debts of the Company and the Indemnitors to eliminate the excess voting debt over the claim of AHAC as follows :

As so adjusted, the percentage of votes of the creditors of the Company in favour of the Scheme becomes 75.87%, just sufficient to meet the statutory threshold.

10. As regards each of the Subsidiaries, the necessary statutory majority of creditors required by section 166(2) of Cap.32 also voted in favour of the relevant Scheme.

11. It should be mentioned that in relation to all the Schemes, Stock Exchange approval which is a condition precedent has not yet been obtained. It is envisaged that this should be obtained before 30 April 2000 and the sanction that is sought is conditional, subject to the fulfillment of the condition precedent by 30 April 2000 or such later date as the court might allow.

12. Certain irregularities were brought to the court's attention :

(1) In relation to Econo Plant Hire Co. Ltd (HCMP411/2000) one vote cast against the Scheme was mistakenly counted as a vote in favour. But the error does not affect the necessary majorities required by section 166(2).

(2) In relation to S.K. Luk Construction Co. Ltd (HCMP426/2000) the meeting was chaired not by the persons specified by the court in that Chan Kim Leung was indisposed and had to leave prior to the meeting and the other person Mr Leung Yat Tung was held up in another meeting. It was therefore chaired by a person who had not been nominated by the court.

13. The irregularities concerning Econo Plant Hire and S.K. Luk Construction are purely technical in nature. The court has jurisdiction to waive irregularities. See In re Anglo-Tartar Refineries Limited [1924] WN 222 and In re Kansa General International Insurance Co. Ltd [1999] 2 HKLRD 429 at 437G. Given the nature of these irregularities, it is entirely appropriate for the court to exercise its discretion to waive them.

THE ISSUES

14. The petitions were opposed by some of the preferential creditors of UDL Argos Engineering and Heavy Industries Company Limited (HCMP437/1999), UDL Ship Management Limited (HCMP414/2000), UDL Marine Operation Limited (HCMP416/2000), UDL Civil Contractors Limited (HCMP418/2000), UDL Employment Services Limited (HCMP419/2000), UDL Steel Fabricators & Shipbuilders Company Limited (HCMP421/2000) and UDL Management Limited (HCMP422/2000) as well as Nishimatsu Construction Company Limited, a disputed creditor. HSBC who had presented the winding-up petition against the Company and had unsuccessfully sought a winding-up order at the hearing on 28 April 1999 did not appear at this hearing to oppose the petitions.

Jurisdiction : the classification issue

Internal creditors

15. The preferential creditors and the disputed creditor submitted that the court lacked jurisdiction to sanction the Schemes because only one meeting of all creditors was held in respect of each of the Company and the Subsidiaries and all the creditors voted as a single class. In other words, the objection was that the classes of creditors had not been properly constituted. Specifically, the objection was to internal creditors being allowed to vote in the same class as the other unsecured creditors. In this connection, there are two possible scenarios : one is that internal creditors should mean the Company and all its subsidiaries and not only those in respect of which a Scheme has been presented. The other is that it should be confined to the Company and the Subsidiaries whose Schemes are before the court (collectively "the Scheme Companies"). But the objection, if sustained, is fatal on either scenario because the requisite statutory majority would not be reached if the votes of the internal creditors were disregarded.

16. Since the hearing, the Company has submitted revised calculations (to which the preferential creditors had no comment) taking into account the excess voting debt over the AHAC claim and making appropriate adjustments concerning the internal creditors. Two sets of calculations are before the court :

(A) Votes of internal creditors excluded on the basis that internal creditors are defined to include all subsidiaries of the Company :

	Amount represented by the total votes given at the Court Meeting (HK$)	Amount represented by votes given for the Scheme (HK$)	Amount represented by votes given against the Scheme (HK$)
________________________________________________________
	1,757,027,619.80	1,411,956,678.72	345,070,941.08
Less : net adjustment	597,874,812.92	597,874,812.92	0.00
Adjusted amount	1,159,152,806.08	814,081,865.80	345,070,941.08
	============	===========	===========

On these figures the approval percentage is 70.23%.

(B) Votes of internal creditors excluded on the basis that internal creditors are defined to include only Scheme Companies :

	Amount represented by the total votes given at the Court Meeting (HK$)	Amount represented by votes given for the Scheme (HK$)	Amount represented by votes given against the Scheme (HK$)
______________________________________________________
	1,757,027,619.80	1,411,956,678.72	345,070,941.08
Less : net adjustment	476,536,016.73	476,536,016.73	0.00
Adjusted amount	1,280,491,603.07	935,420,661.99	345,070,941.08
	============	===========	===========

On these figures the approval percentage is 73.05%

As noted earlier, on either basis, if the votes of internal creditors are excluded, the requisite 75% threshold will not be met.

17. For the Company, it was submitted that the appropriate test is that laid down by Bowen LJ in Sovereign Life Assurance Co. v. Dodd [1892] 2 QB 573 at 583 where he held :

"The word 'class' is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the Court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term 'class' as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. If that be so, in considering the deed of arrangement made with the company which took over the business of the Sovereign, we must so construe it as not to include in one class those whose policies had already ripened into debts, and those whose policies might not ripen into debts for years to come..." (emphasis added)

The principle as formulated by Bowen LJ is regarded as authoritative and has been followed in numerous cases. A number of these were reviewed by Nazareth J (as he then was) in In re Industrial Equity (Pacific) Ltd [1991] 2 HKLR 614 who drew the following conclusion (at 620I) :

"...conflicting contentions as to whether all the shareholders constituted one class, resolved itself ultimately in the question of whether classes were to be determined by reference to the rights of shareholders ... on the one hand, or to their interests on the other."

He continued (at 624H-625A) as follows :

"... the meaning of a class of members in s.166 is that given by Bowen, L.J. in the Sovereign case at page 583, i.e. such 'as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest'; that is to say, it is to be determined by dissimilarity of rights not dissimilarity of interests.

Applying that meaning of class to the shareholders in question, I can see no reason why it was not possible for all the shareholders to consult together, not only the minority IEP shareholders without BIL shares, but also those shareholders whose BIL shareholdings exceeded their IEP shareholdings, and the major institutional investors whose inclusion was opposed by the objector. All of them had the same rights in IEP. If the interests of the minority were overborne by a majority with extraneous interests, that on the authorities would be a matter for the Court in addressing the petition for sanction."

Nazareth J also indicated the serious difficulties that determination of class by reference to interests would have encountered (at 625C-D) :

" Common shareholders' holdings of BIL shares could conceivably range in value from a minute, totally insignificant fraction of their IEP shares, to a totally overwhelming quantity, many times the latter. At which point would a conflicting or different interest to that of an IEP shareholder without BIL shares arise? Is every different interest to constitute a different class? Clearly not, but where then is the line to be drawn? The difficulties in identifying shareholders with such interests, as in the present case, could raise in terms of practicality virtually insuperable difficulties. It is determination by reference to rights of shareholders that meets such difficulties, while leaving any conflict of interest which may result in a minority being overborne or coerced to be dealt with by the courts when their sanction is sought. As an aside, I would add that the difficulties Templeman, J. considered manageable in Hellenic, appear to have been concerned with shares in subsidiary companies and to have presented difficulties of a wholly different and minor order."

18. To sum up, the approach taken in Industrial Equity is that classes are to be determined by reference to the rights of shareholders. That is not to say that their interests are irrelevant : interests would be addressed at the subsequent sanctioning stage but not in the constitution of classes. That was how Nazareth J interpreted the judgment of the Court of Appeal (of which Bowen LJ was a member) in Re Alabama, New Orleans, Texas and Pacific Junction Railway Co. [1891] 1 Ch 213 which he followed. In his judgment at 621G, he stated as follows :

" It is in my view clear from the foregoing, a fortiori in the general context of his judgment that he accepted that all the creditors constituted one class notwithstanding their diverging interests, and that after the voting it was the Court that would ultimately see to what was fair and just as regards the interest of the whole class."

19. In re BTR plc. [1999] 2 BCLC 675, Jonathan Parker J adopted the analysis and conclusions reached in Industrial Equity and held (at 682i-683b) as follows :

"...Shareholders with the same rights in respect of the shares which they hold may be subject to an infinite number of different interests and may therefore, assessing their own personal interests (as they are perfectly entitled to do), vote their shares in the light of those interests. But that in itself, in my judgment, is simply a fact of life: it does not lead to the conclusion that shareholders who propose to vote differently are in some way a separate class of shareholders entitled to a separate class meeting. Indeed a journey down that road would in my judgment lead to impracticability and unworkability. In the course of his submissions Mr Northcote accepted that in the instant case it may well be that (if he is right) a very large number of separate class meetings would be required in order properly to reflect the differing interests of shareholders. The question then arises how the company could possibly reach an informed decision as to the division of shareholders into separate classes without first requiring a considerable amount of personal information from individual shareholders; a wholly unworkable, and highly undesirable, situation."

The matter then went before the Court of Appeal in an application for leave to appeal on 19 February 1999 (unreported). The point argued by the appellant who had objected to the scheme was summarized by Chadwick LJ in the following terms :

"...the holders of shares of the same class, having the same legal rights both as against the company in respect of the shares and under the terms of the scheme, may nevertheless have quite different interests; in the sense that they will be motivated by different considerations in deciding whether or not to vote in favour of the scheme. Mr Northcote's point is that shareholders having different motivations in that sense - or different interests, as they are sometimes described - ought to be classed separately so that they can attend and vote at separate meetings."

Chadwick LJ held that :

"...Parliament clearly intended that s 425 should be available as a means of effecting a binding compromise between a company and its members and that it should be available as an alternate to the route under ss 428 and 429...

The way in which Parliament's intention is given effect - as it seems to me and as it has seemed to judges over the century or so since Bowen LJ considered the matter in 1892 - is that the court is not bound by the decision of the meeting. A favourable resolution at the meeting represents a threshold which must be surmounted before the sanction of the court can be sought. But if the court is satisfied that the meeting is unrepresentative, or that those voting in favour at the meeting have done so with a special interest to promote which differs from the interest of the ordinary independent and objective shareholder, then the vote in favour of the resolution is not to be given effect by the sanction of the court. That, as it seems to me, is the check or balance which Parliament has envisaged. Further, that as it seems to me, is the only practical check that can be imposed in circumstances where, as Jonathan Parker J pointed out, it is a fact of life that shareholders having shares which confer the same rights under the company's constitution and under the scheme may, nonetheless, be motivated to vote in different ways. Mr Northcote suggested to us that, in the present case, his approach could lead to about 40 separate meetings.... The list is almost endless. It is quite impossible, in my view, to accommodate an approach of that nature within the structure of s 425. Parliament has recognised that it is for the court exercising the function described by Jonathan Parker J to hold the ring between different interests; and to decline to sanction a scheme if satisfied that members having one interest has sought to take advantage over those having another. In my view the judge was plainly correct to reject the objection that there should have been more than one meeting in this case. I can see no reasonable prospect of the Court of Appeal being persuaded to interfere with that approach, or with the decision which the judge reached on that point."

It will be seen that the English Court of Appeal endorsed the approach of Nazareth J in adopting the so-called "rights" test, relegating the interest issue to the sanction stage.

20. Whilst I am not bound by either the decision in Industrial Equity or the English decisions, they are persuasive.

21. But the decision in Industrial Equity has been criticized in the context of minority shareholder protection. See Ho on Public Companies and their Equity Securities at 15.7.3 where a number of cases were considered with the emphasis on interests rather than rights.

22. In Re Hellenic & General Trust Ltd [1976] 1 WLR 123, 53% of the company which was the subject of the scheme (being a takeover by H) were already held by M, a wholly-owned subsidiary of H, the intending purchaser. A meeting of all ordinary shareholders, including M was convened and M voted in favour of the arrangement. The question was whether M formed part of the same class as the other ordinary shareholders. Templeman J answered this in the negative because if M were included it would find itself in the position of vendor as well as purchaser which was plainly unacceptable. In Re BTR (at 682 e-f) Jonathan Parker J considered that the ratio of Templeman J's decision on the question of separate classes was limited to treating the scheme as one for the acquisition of the outside shares and therefore discounted the views of M. He further opined that it did not involve any analysis of interests and rights. With the greatest respect, I do not agree that Templeman J's decision can be satisfactorily distinguished on that basis since the question posed by Templeman J (at 125H) was whether M should have formed part of the same class. It appears to me that to discount M's votes is another way of saying that it should not have formed part of the class.

23. Another case cited in Ho's Public Companies (to which counsel did not refer) is Re National Dairy Association of New Zealand Ltd [1987] 2 NZLR 607. The National Dairy Association ("NDA") issued "quota" shares as well as "non-quota" shares. Certain taxation advantages had been negotiated with the IRD and in order for that to continue, a scheme was put forward to cancel the non-quota ordinary shares on payment of 10￠ per share. Two meetings were convened, one for those who held quota shares and the other for those who held non-quota shares. However, it would appear that NDA members held both quota and non-quota shares but in different proportions. The scheme was beneficial so far as quota members were concerned, but to the prejudice of those (amounting to 19.2% of the non-quota shareholders) who held more non-quota shares than quota shares. The judge found (at 620, ll.37-40) that :

"Shareholders in this latter group clearly would be prejudiced by the significant drop in the percentage of the overall shareholding they would continue to hold and by the fact that the payment of 10 cents per share, as I shall explain in due course, is inadequate compensation for them."

He sought to apply the principle stated by Bowen LJ in Sovereign Life, namely, that :

"'class' ... must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest." (emphasis added)

But in his judgment (at 620, ll.20 and 28), the word 'interests' was used instead of 'rights'. It is not entirely clear whether this change from rights to interests was intentional. On closer analysis, given the dual shareholdings of the members, it could be said that their 'rights' under the scheme hinged upon the proportion of quota and non-quota shares rather than solely qua shareholder of a particular class of shares such that the rights of the non-quota shareholders inter se became dissimilar. The nub of the case appears to be that the scheme was fundamentally unfair, thus bringing into play the notion of confiscation and injustice referred to by Bowen LJ.

24. Although cases such as Industrial Equity and BTR appear to juxtapose "rights" and "interests", treating them as alternative and mutually exclusive tests for the determination of classes, I question whether that should necessarily be so. When one examines the oft-cited passage from Bowen LJ's judgment in Sovereign Life, it is apparent that he did not regard the "rights" test alone as determinative : it was also necessary to construe 'class' in a manner as would -

"prevent the section being so worked as to result in confiscation and injustice..."

25. In my judgment, I would agree that in general the "rights" test is the correct test. As Owen J stated in Re Bond Corporation Holdings Limited [1991] 5 ACSR 304 at 316 ll.39-43 :

"It is not appropriate to focus on considerations of motive and personal interests as they might affect individual creditors, or which might predispose individual creditors to vote one way or the other. Those considerations should not be used as the basis of classification."

See also Chadwick LJ in Re BTR in the passage cited earlier. But there may be exceptions, particularly when minority shareholder protection issues arise. The Hellenic case is just such an example. As noted above, I am not persuaded that conceptually the Hellenic case fits into the rights test or could be distinguished in a satisfactory manner whereas it fits neatly into Bowen LJ's formulation of principle.

26. Turning to the Schemes under consideration, if one were to apply the "rights" test, no objection can be taken to the internal creditors voting as part of the same class, nor for that matter the preferential and secured creditors (considered below) since the Scheme in essence only affected the non-secured portion of their debts. The fact that some of the internal creditors (viz. Scheme Companies) have different rights under the Schemes in that they do not participate in the dividend distribution makes no difference since it does not work to the prejudice of the other unsecured creditors : rather, it benefits them by augmenting the pool of assets available for distribution. It would be different if those who stand to be prejudiced object which is not the case here.

27. Would confiscation and injustice result by allowing internal creditors to vote as part of the same class? This is now considered from the viewpoints of the preferential creditors and disputed creditors respectively.

Preferential creditors

28. Turning to the Schemes under consideration, the rights of the preferential and secured creditors are preserved : the Schemes therefore really affect only the unsecured portion of those debts. That being so, in relation to the unsecured part of the debts, the preferential and secured creditors have the same rights as the unsecured creditors. As such, prima facie, there is no reason why a single class meeting was inappropriate.

29. It is to be noted that it is not the case that all preferential creditors opposed the Schemes. In fact only preferential creditors of seven of the subsidiaries (identified above) opposed them and even then, opposition was from only some rather than all of them, namely those represented by the Director of Legal Aid.

30. The opposing preferential creditors submitted that the focus of the test is on rights and not on the impact of the Scheme. On that premise, I am unable to see that there should be a separate meeting for preferential creditors given that their preferential rights are preserved and as to the unsecured portion of their debts, they take pari passu with the other unsecured creditors.

31. The opposing preferential creditors then sought to identify the "prejudice" that would result from the Scheme vis-à-vis preferential creditors. It was submitted that under the Scheme they have to wait for the condition precedent (namely, Stock Exchange approval) to be satisfied, they would have to consider the position of 25 different companies rather than a single company and finally that they would have to wait for realization. The suggestion there is that there is bound to be an inevitable delay before payment is received under the Scheme compared to a liquidation. In that connection, reference was made to In re Neath and Brecon Railway Co. [1892] 1 Ch 349 where it was held (at 358) that :

"... if there is any right which is prejudicially affected, although the balance of advantage may be in favour of the class, sect.15 does not apply."

The Neath case does not assist since it turned on the wording of section 15 of the Railway Companies Act 1867 which specifically required that the scheme must not prejudicially affect "any right or interest" of this class. Section 166 is differently worded. In any event, the likely prejudice appears to be wholly speculative. There is no evidence of the nature of the assets held by each of the seven subsidiaries affected to warrant any inference or conclusion that a preferential creditor would in all probability receive payment earlier in a liquidation of the relevant subsidiary than under the Scheme which envisages a pooling of assets but which specifically provides that after costs of $8 million are set aside, preferential claims are to be paid.

32. Counsel for the opposing preferential creditors also identified eight respects in which a scheme of arrangement differs from a liquidation, for example, under a liquidation, control is in the hands of the Official Receiver or the liquidator whereas under the scheme, control is vested in the Scheme Administrator. But such differences do not impinge upon the rights of the preferential creditor whose preferential rights are preserved.

33. The opposing preferential creditors who are ex-employees constitute a small minority of the creditors. As explained in a letter from the Director of Legal Aid, the Protection of Wages on Insolvency Fund Board is not prepared to make ex-gratia payments to ex-employees unless there is a winding-up order. Pausing there, it is to be noted that under section 16(1)(b) of the Protection of Wages on Insolvency Ordinance, Cap.380, the discretion is triggered by the presentation of a winding-up petition and not a winding-up order. Be that as it may, it is salutary to bear in mind the observations of Owen J in Re Bond Corporation Holdings Limited (supra) at 317 ll.26-37 :

"... In determining classes of creditors, the court must balance the danger of a compromise being forced on dissenting creditors by a majority, against the danger of a minority of creditors having the power to veto the scheme. The court must be satisfied that the result of a meeting is likely to reflect properly the views of the creditors concerned. In approaching its task, the court must identify the legal character of the rights and obligations of the creditors against the company and must assess the way in which those rights and obligations will be affected in the implementation of the scheme. Creditors whose legal rights and obligations (so understood) are so dissimilar to those of other creditors that it would be impossible for them to consult together with a view to their common interest must be treated as a separate class."

34. For the reasons stated, I can discern no dissimilarity in rights and further conclude that as regards preferential creditors, the classification of creditors under the Schemes did not give rise to or result in any confiscation and injustice Accordingly, I reject the submission that there should have been a separate meeting of the preferential creditors.

Disputed creditors

35. Nishimatsu is a disputed creditor. It claims to be a creditor of the Company under parent company guarantees issued in respect of a contract entered into between Nishimatsu and its subsidiaries in UDL Kenworth Engineering Ltd ("Kenworth") and UDL Argos Heavy Engineering Ltd ("Argos"). As appears from the judgment in Re UDL Holdings Ltd (No.1) [1999] 3 HKC 211 at 213F-G, Nishimatsu's claim is in respect of subcontract works in relation to the airport development. Kenworth disputed its liability and asserted a claim against Nishimatsu. Nishimatsu's primary contention appeared to be that it is entitled to recover the costs of work which had to be done under the subcontract from the Airport Authority direct and on the basis of its contract with the Airport Authority, the liquidation of Kenworth and the Company would strengthen its position vis-à-vis the Airport Authority. A similar situation arises between Nishimatsu and Argos. Nishimatsu accepted that it is not in a position to present a winding-up petition because its debts are disputed but maintained that it is nevertheless a creditor for the purposes of section 166.

36. Appendix 8 of the Scheme document set out contingent and disputed claims. As noted above, Nishimatsu's claims against the Company stemmed from parent company guarantee obligations in respect of the Company's subsidiaries Kenworth and Argos. Each of these claims have been assigned an estimated net value of HK$0. The notes to these claims are in the following terms :

"(3) The Claim by Nishimatsu Construction Co Limited is rejected by reference to contractual reasons and also the amount has not allowed for non-disputed entitlement of UDL Kenworth Engineering Limited. A counterclaim of approximately $195,823,000 has been made by UDL Kenworth Engineering Limited

........

(6) The Claim by Nishimatsu Construction Co Ltd is rejected by reference to contractual reasons and also the amount has not allowed for non-disputed entitlement of UDL Argos Engineering & Heavy Industries Co Limited. A counterclaim of approximately $68,994,000 has been made by UDL Argos Engineering & Heavy Industries Co Limited"

Because its claims were valued at $0, Nishimatsu was not allowed to attend the meeting of creditors or to vote.

37. Under the Scheme, "creditors" is defined as those whose claims arose out of or had their origin in any matter occurring before the effective date and whether present, future or contingent, whether sounding in equity, contract, tort or under statute and whether liquidated or yet to be ascertained.

38. It is plainly contemplated that the Scheme, if sanctioned, should bind all "creditors". Having regard to the definition set out above, the term must extend to Nishimatsu : the bar to proceedings contained in Part I of the Scheme would make no sense should that not be the case. Under Part III of the Scheme (if sanctioned), it would be open to Nishimatsu to submit a notice of claim prior to the cut-off date. Where such a notice of claim comprises a claim subject to arbitration proceedings which have commenced, the Scheme Administrator has to await the decision of the arbitrator or of the appellate body should an appeal be made from such decision. The award made by the arbitrator or appellate body becomes the amount of the claim.

39. Counsel for Nishimatsu submitted that the Scheme is objectionable if it seeks to bind his client in that it would constitute expropriation without representation, contrary to the basic principles of corporate restructuring. He relied on the decision of Harman J in Re a Debtor (No.222 of 1990) Ex p Bank of Ireland [1990] 2 BCLC 137. But that was a decision on the English insolvency legislation, specifically, rule 5.17(6) of the Insolvency Act 1986 relating to individual voluntary arrangements. Whilst a corresponding provision for company voluntary arrangements under the 1986 Act exists, the decision of Harman J plainly turned on the particular statutory provision which post-dated Cap.32 and introduced a new insolvency regime. It renders no assistance on the proper construction of "creditors" for the purposes of section 166 nor on the question as to how the claims of disputed creditors are to be valued.

40. Nishimatsu's claims against the Company amount to over $343 million in the aggregate which it may or may not succeed in establishing. Their claims were rejected in whole for voting purposes. The evidence showed that specialist review and assessment of Nishimatsu's claims were taken before the claims were rejected by the chairman of the meeting. There is no evidence before the court to suggest mala fides on the part of the Company. In those circumstances, prima facie, it would not appear to be intrinsically unfair for a disputed creditor whose claims were valued at HK$0 not to be allowed to vote.

41. Counsel for Nishimatsu accepted that Nishimatsu, being a disputed creditor, was not in a position to present a winding-up petition. What then is the justification for the disputed claim to be allowed in full for voting purposes? The Schemes are meant to stave off compulsory liquidation. If sanctioned, the winding-up petitions will proceed no further and fall to be dismissed. Assume the following scenario. A scheme has the support of the creditors of the Company whose debts are undisputed. There is a disputed claim, the value of which is sufficiently large to block the scheme. The disputed claim is valued at $0, an estimate made in good faith. If such disputed creditor has the right to vote for the full amount of his debt, he would be in a position to bring about the liquidation of the Company when, under the Companies legislation, he does not even have locus to present a winding-up petition. That cannot be right.

42. The Scheme does not preclude disputed creditors to the extent that they succeed in establishing their entitlement to participate in the Scheme and receive a dividend distribution in the same way as the other unsecured creditors. They are treated no differently. I do not see that any unfairness, confiscation or expropriation is involved in this arrangement.

43. In my judgment, the objection raised as to the inclusion of internal creditors is not well-founded and falls to be rejected.

Discretion

44. I now turn to the matters which may have a bearing on how the court's discretion ought to be exercised.

Inadequate disclosure

45. Nishimatsu submitted that the disclosure made in relation to the claims of Nishimatsu was wholly inadequate. The gravamen of the complaint is that it failed to state the dollar value of its claim. In view of the size of the claim, it was submitted that it might have affected the way in which a creditor would have voted because it could have a material impact on the estimated recovery.

46. It is not at all apparent that the disclosure of the size of Nishimatsu's claim would have had the effect submitted. Unless the estimated value ascribed to Nishimatsu's claim can be shown not to have been arrived at in good faith, the statement of the dollar value of Nishimatsu's claim will not take matters further. Moreover, there is a general provision of approximately $209 million in respect of contingent and disputed claims. Whilst it has now emerged that roughly half of this amount may be absorbed by the AHAC claims, there is still a significant amount left.

47. In all the circumstances, I cannot accept that there is a reasonable likelihood that the omission of the statement of the dollar value of Nishimatsu's claim could have had any material impact on the way the creditors voted.

Votes of internal creditors

48. So far as the Company is concerned, the impact of the votes of internal creditors is summarized below :

Looking at these percentages, whether the correct approach is to exclude the votes of all internal creditors or only those of the Scheme Companies, it is indisputable that the Scheme enjoyed considerable support from a significant majority of creditors not connected with the Company whose votes are therefore both independent and objective. The impact of the votes of the internal creditors was minimal. Having regard to the substantial support from independent and objective creditors, I see no reason to withhold sanction.

49. As regards the seven subsidiaries in which the opposing preferential creditors are interested, the impact of the votes of internal creditors is set out below :

As is the case with the Company, independent creditors of four of the seven subsidiaries in question (i.e. Argos, Ship Management, Marine Operation and Civil Contractors) have voted for the Scheme by a large majority. So even if the votes of all internal creditors were to be disregarded, there remains significant support for the Schemes by independent and objective creditors.

50. But what of the remaining three (i.e. Employment Services, Steel Fabricators and Management)? Prima facie, if all internal votes were discounted, support is only in the 50% region.

51. Whilst Scheme Companies have an interest in the Schemes going through and could be said to have, in the words of Chadwick LJ in Re BTR, "a special interest to promote which differs from the ordinary independent and objective [creditors]", the position of the non-Scheme subsidiaries is different. What is the rationale for disregarding the votes of non-Scheme subsidiaries?

52. In deciding how their votes should be cast, their respective boards must consider what would be in their best interest as creditors. Unless I am to assume that the directors of the non-Scheme subsidiaries were all acting in breach of their fiduciary duties and voted in a manner that was not in the best interest of the relevant non-Scheme subsidiary as creditors, their votes should not be discounted. There is no evidence before the court to warrant such an inference, much less conclusion. Therefore I see no basis for making the assumption that I am implicitly invited to make. It must follow that no valid reason exists for disregarding the votes of non-Scheme subsidiaries.

53. As can be seen from the Table above, the votes of Scheme Companies had very little impact on the voting results : in fact, support for the Schemes was overwhelming.

Conclusion

54. The classic statement of the function of the court is as stated in Buckley on the Companies Act (14th edn 1978) Vol.1 at pp 473-474. I am satisfied that the statutory provisions have been complied with. Further, I can discern no reason (such as the meeting being unrepresentative or that members having one interest sought to take advantage over those having another) as would cause the court to withhold its sanction to the Schemes. Finally, I am also satisfied that the arrangements are such as an intelligent and honest person, a member of the class concerned and acting in respect of his interest, might reasonably approve.

55. I therefore sanction the 25 Schemes before the court. I will reserve the question of costs.