RE DA SEN HOLDINGS GROUP LTD

HCMP 1615/2021

[2022] HKCFI 185

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1615 OF 2021

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D E C I S I O N

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1.  The Company seeks the Court’s sanction under section 673 of the Companies Ordinance (Cap 622) (“Ordinance”) of a scheme of arrangement between the Company and its Scheme Creditors.

2.  The Scheme Meeting was duly convened on 9 December 2021 pursuant to the order made by me on 28 October 2021.  The resolution of the Scheme Meeting was carried by a majority in number of the Scheme Creditors present and voting, in person or by proxy, holding 78.9% of the Claims voted.

3.  The Scheme seeks to restructure the Company’s indebtedness in order to return the Company to a solvent going concern.  A successful restructuring would give the Scheme Creditors a much higher recovery (estimated to be 50%–60%).  Absent restructuring, the Company would be liquidated and the Scheme Creditors’ estimated recovery would be no more than 32%.

4.  The Company is a Cayman-incorporated entity listed in Hong Kong since 19 December 2016.  The Company is an investment holding company whose operating subsidiaries are in the Mainland (together, “Group”). The Group is principally engaged in the manufacturing and sale of wood products and leasing activities in the Mainland.  The Group’s principal customers are purchasers of wood products which are mainly end users, such as furniture manufacturers, equipment manufacturers, decoration or renovation companies, and packing material producers.  Most of the customers are located in the Eastern China and Southern China regions.

5.  Partly due to the Sino-US trade friction war, the Group’s business performed badly in 2019.  The onset of the pandemic in 2020 has caused a further deterioration of the Group’s business, leading to the Company’s and the Group’s financial difficulties.

6.  The Company’s financial difficulties also caused the Company to default on its Bonds.  As a result, a number of Bondholders have taken enforcement action against the Company.

7.  In order to avoid a liquidation and to return the Company to a solvent going concern, the Company has been pursuing a debt restructuring leading to the Scheme.  The Scheme will be funded by a cash injection of approximately HK$23.2 million by the existing shareholders participating in an open offer.

8.  The Scheme Creditors’ recovery under the Scheme is estimated to be about 50%–60%, whereas in a liquidation the Scheme Creditors’ recovery is estimated to be no more than 32%.

9.  The Scheme seeks to discharge the Company’s liabilities under the Bonds which are the Company’s general unsecured debts.  In return, the Scheme Creditors will be entitled to a combination of cash and shares in the Company:

(1)  a pro rata distribution of part of the Open Offer Proceeds in the sum of HK$15.2 million;

(2)  a pro rata distribution of 49,194,476 new shares in the Company to be allotted and issued at a price per share which has been determined and is defined as the Ascribed Value under the Scheme (Clauses 3.1–3.3 of the Scheme).

10.  In addition, the Scheme Creditors who have executed the Restructuring Support Agreement will be given additional shares in the Company to be issued at the Ascribed Value by way of a consent fee (“Consent Fee Shares”) up to a maximum of 5% of the Scheme Claims as at 31 December 2020 (Clause 3.3 of the Scheme).  The maximum amount of Consent Fee Shares to be issued is 16,398,159.

11.  The Bonds are governed by Hong Kong law.  The Company does not need any parallel scheme of arrangement in any other jurisdiction.

12.  In considering whether to sanction a scheme, the Court applies some well-established principles which were recently restated by me in Re China Singyes Solar Technologies Holdings Ltd[1] such that the Court would consider in particular the following:

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

(5)  whether the necessary statutory majorities have been obtained;

(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.

I deal with each of these criteria in turn.

13.  As in Singyes, the Scheme is a genuine debt restructuring of a distressed company.

14.  In considering whether creditors are properly classified, 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.  The relevant principles may be summarised thus:

(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)  The second principle is that 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 third principle is that 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.

(4)  The fourth principle is that the court has to consider, on the one hand, the rights of the creditors in the absence of the scheme and, on the other hand, any new rights to which the creditors become entitled under the scheme. 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 applying the above test, the starting point is to identify the appropriate comparator: that is, what would be the alternative if the scheme does not proceed.

See Re China Oil Gangran Energy Group Holdings Ltd[2].

15.  The Scheme Creditors clearly properly voted as a single class.  The appropriate comparator here is an insolvent liquidation because, absent the Scheme, an insolvent liquidation of the Company would be an unavoidable outcome.  The Scheme Claims are the Company’s general unsecured debts. All Scheme Creditors are given the same options for distribution under the Scheme.

16.  As I have mentioned above the Scheme Creditors were offered the opportunity to sign the Restructuring Support Agreement in return for which they would receive the Consent Fee.  The approach to assessing the impact of consent fees on the formulation of classes has most recently been considered by by Trower J in Re National Car Parks Ltd[3].  Trower J explains it as follows in [72]–[73]:

“72. As I mentioned a little earlier when describing the nature of the arrangements proposed for the various categories of landlord creditor, there is a lock-up agreement in place which is available for signature by any landlord and that gives rise to the next question in relation to class constitution. A fee equivalent to 2 per cent of the rent arrears due to any landlord creditor signing up to the lock-up agreement was payable if the landlord accepted the terms prior to an acceptance deadline. I think initially this was 13 April but it was then extended to 11 May and has been further extended to 15 June. The present position is that some 73 per cent of the class A landlord creditors have signed the lock-up agreement but not, as I understand it, the creditor that was in the A2 group. The question which arises is whether the existence of the agreement fractures the class between those who sign the lock-up agreement and those who do not.

73. The law in this area has recently been reviewed by Snowden in Re Port Finance Investment [2021] EWHC 378 (Ch) at paras 83ff.  I agree with the submission made by the Company that the principles explained in Port Finance support a conclusion that a fee of this character is unlikely to be class creating, providing two requirements are met.  The first is that the fee is made available to all creditors within the relevant class and that they have a realistic opportunity to qualify.  The second is that no amount of the fee should be so large that it might have a material influence on the decision of a reasonable creditor as to whether or not to support the proposed plan.”

This is consistent with the approach taken by me in Re Mongolian Mining Corp[4]. The payment of a consent fee will not fracture the class if it is available to all creditors within the class and there is no reason to think that offering the fee distorted the outcome of the voting by the class.  In the present case it seems to me that as the consent fee was available to all Scheme Creditors and was not unusually large (5% of Scheme claims) it is not material to an assessment of whether or not the class was properly formed, which in my view it was.

17.  The Scheme Meeting duly voted in favour of the Scheme.  The requirements under section 674(1)(b) of the Ordinance that the Scheme be approved by a majority in number representing at least 75% in value of the Scheme Creditors present and voting in person or by proxy have been satisfied.

18.  In order to satisfy the requirements of section 671(3) of the Ordinance, an explanatory statement must be sufficiently informative:

“A company is under a duty to include in the explanatory statement all the information necessary to enable the creditors to form a reasonable judgement on whether the scheme is in their best interests or not, and hence how to vote. The extent of the information required to be provided will, of course, depend on the facts of the particular case. Necessarily, the duty extends to the company providing up to date information, or an adequate explanation of why it has not done so, that will allow a creditor to contrast what is to be anticipated if the scheme is approved, and the outcome if it is not. A company is required to provide specific financial information to support its predicted outcomes, and I would normally expect it to have its views independently verified by an insolvency practitioner or other suitable professionals”[5].

19.  The Explanatory Statement satisfies the requirements of section 671(3).

20.  The Court should be slow to differ from the majority view, as the Court normally acts on the principle that businessmen are much better judges of what is to their commercial advantage than the court could be: Re Allied Properties (HK) Ltd[6].

21.  The primary object of the Scheme is that, upon the Scheme becoming effective, the Scheme Creditors’ Scheme Claims will be discharged and in return they will be entitled to be given cash distribution and shares in the Company in accordance with the terms of the Scheme.  The cash distribution and shares in the Company gives the Scheme Creditors a better return than in an insolvent liquidation of the Company.

22.  Therefore, in respect of the Scheme Creditors, the Scheme is one that an intelligent and honest person acting in accordance with his interests as a member of the class within which he voted might reasonably approve.

23.  In an international case, the Court would consider whether the scheme is effective in other foreign jurisdictions of practical importance because it would not be a proper exercise of the discretion to sanction a scheme that serves no purpose.  In practice whether or not a jurisdiction is of practical importance to the efficacy of a scheme sanctioned in Hong Kong will commonly be determined by the following considerations:

(1)  Is a material amount of debt to be compromised by the scheme governed by the law of a jurisdiction other than Hong Kong?

(2)  Even if there is some doubt as to whether or not a scheme will compromise a proportion of the debt, is there any reason to think that the creditors will take action in a jurisdiction which will not recognise a scheme as compromising the debt?

(3)  The amount of the debt involved. If, for example, the amount of debt that is not governed by Hong Kong law is less than the cost of introducing a parallel scheme it makes more sense to exclude that debt from the scheme and settle it separately if it is ever pursued.

See China Oil at [21]–[23].

24.  The Scheme is expected to be internationally effective because all the Scheme Claims to be discharged under the Scheme are governed by Hong Kong law.  Thus any dissenting creditors’ opposition should not hamper the effectiveness of the Scheme.

25.  For the above reasons I shall make an order sanctioning the Scheme.