RE HIDILI INDUSTRY INTERNATIONAL DEVELOPMENT LTD

HCMP 170/2022

[2022] HKCFI 1833

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 170 OF 2022

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REASONS FOR DECISION

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Introduction

1.  Upon the Company’s application dated 31 January 2022, I ordered on 9 February 2022 that the Company have leave to convene a meeting of its Scheme Creditors (“Scheme Meeting”)  to consider and, if thought fit, to approve a proposed scheme of arrangement (“Scheme”).

2.  The Company has complied with the directions and convened the Scheme Meeting on 24 May 2022.  The Scheme was duly passed by around 99.68% in value and 99.20% in number of the Scheme Creditors present and voting at the Scheme Meeting.  By its Petition dated 30 May 2022, the Company seeks an order that the Scheme be sanctioned.

3.  The Company was incorporated in the Cayman Islands on 1 September 2006 and was registered in Hong Kong as a non-Hong Kong Company on 18 June 2007.  The Company has been listed on the Main Board of the Stock Exchange of Hong Kong (“HKEX”)  since 21 September 2007.  The Company is an investment holding company whose direct or indirect subsidiaries (together with the Company, “Group”)  are principally engaged in coal mining and the manufacture and sale of clean coal and coke and coal-related business in the Mainland.  The Group’s major investments include coal mines, coal washing plants and goods yards in Yunnan, Guizhou and Sichuan provinces.

4.  The Company and the Group are cash-flow insolvent:

(1)  As of 31 December 2021, the book value of the Company’s total assets and total liabilities were approximately RMB2,236.6 million and RMB1,342.2 million respectively.  The book value of the Company’s current assets and current liabilities were approximately RMB8 million and RMB1,342.2 million respectively.

(2)  As of 31 December 2021, the book value of the Group’s total assets and total liabilities were approximately RMB12,129.3 million and RMB11,206.5 million respectively.  The book value of the Group’s current assets and current liabilities were approximately RMB1,560.2 million and RMB10,869.1 million respectively.

5.  US$400 million 8.625% senior notes due 2015 form a major part of the Company’s liabilities (“Notes”). The Company defaulted on the Notes on 4 November 2015.

6.  The bulk of the Group’s indebtedness arises from the Notes, borrowings from onshore banks, and trading and business-related debts.  As at 31 December 2021, the indebtedness of the Group under the Notes, onshore borrowings, and trade and business-related debts were RMB1,252.74 million (11.18%), RMB7,707.04 million (68.77%), and RMB1,304.78 million (11.65%)  respectively.

7.  Since late 2015, the Company has engaged in extensive negotiations with its stakeholders in an attempt to restructure its indebtedness.  The Company negotiated with the banks in the hope of restructuring its onshore debts.  In this regard, the onshore lending banks have set up an Onshore Creditors Committee to facilitate negotiations.  The Company also engaged in extensive negotiations with the holders of the Notes including the Steering Committee in an attempt to restructure the Company’s indebtedness under the Notes.  The Steering Committee are institutional creditors holding 20% in value of the Notes.

8.  The negotiations with the Onshore Creditors Committee culminated in:

(1)  An agreement where Onshore Converted Shares will be issued to the onshore lending banks in return for the discharge of the conversion interest of about RMB1,050 million.

(2)  An agreement where the outstanding principal of about RMB5,867 million together with outstanding interest of about RMB616.99 million (after discharge of the conversion interest)  owed to the onshore lending banks will be extended to 4 February 2025.

9.  Separately, the negotiations with the Steering Committee culminated in a number of term sheets which set out the basis upon which the Company’s liabilities under the Notes are to be compromised.  These term sheets contain the key terms which form the basis of the Scheme, the key features I explain below.

10.  The Scheme seeks to compromise the Company’s offshore liabilities under the Notes.  In this regard:

(1)  A Scheme Creditor is defined as “a person with a beneficial interest as principal in the Notes held in global form or global restricted form through the Depositary at the Voting Instruction Deadline and which has a right, upon satisfaction of certain conditions, to be issued definitive notes in accordance with the terms of the Notes”.

(2)  A Scheme Claim is defined as “any Claim of a Scheme Creditor in respect of a Liability of the Company or any Subsidiary Guarantor arising directly or indirectly pursuant to, under or in connection with the Note Documents, excluding for the avoidance of doubt, any Excluded Liability”.

11.  Broadly speaking, the Scheme will compromise and release the Scheme Creditors’ Scheme Claims against the Company and the Subsidiary Guarantors.  In return, the Scheme Creditors will become eligible to receive the Scheme Consideration.  There are two options open to the Scheme Creditors in terms of how they receive the Scheme Consideration.

12.  Option 1: A participating Scheme Creditor can receive the following:

(1)  A Pro Rata share of the Scheme Shares, which in aggregate represents approximately 46.1% of the total issued Shares in the Company on a fully diluted basis on the Restructuring Effective Date.

(2)  A Pro Rata share of Zero-Coupon Bonds, which will have a face value equal to the 13/16 of the Total Accrued Interest Amount.

(3)  A Pro Rata Share of a Cash Payment, which represents cash equal to 3/16 of the Total Accrued Interest Amount.

13.  Option 2: Participating Scheme Creditors may elect to participate in the Share Placement Programme (“SPP”):

(1)  Those who elect to participate in the SPP will receivetheir Pro Rata share of the Zero-coupon Bonds, and their Pro Rata share of the Cash Payment.  The Scheme Shares to which such Participating Scheme Creditors would have been entitled to will be issued directly in the form of SPP Shares to the Creditor SPV and not directly to the Participating Scheme Creditor.

(2)  The Company will use its best efforts to sell or procure the sale of the SPP Shares and will distribute the sale proceeds to the SPP Participants within the 36-months period following the Restructuring Effective Date.

14.  Insofar as the returns comparison is concerned:

(1)  If the Scheme becomes effective, the expected recovery rate of the Scheme Creditors under the Scheme (excluding any claims against third parties)  is approximately 120%.

(2)  If the Scheme is not approved, the restructuring will not be able to proceed further and it is likely that the Group (including the Company)  would be placed into insolvent liquidation. The expected recovery rate of the Scheme Creditors in a liquidation scenario is 0.223% to 0.241%.

Legal Principles

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

(1)  Whether the scheme is for a permissible purpose;

(2)  Whether creditors who were called on to vote as a single class had sufficiently similar legal rights that they could consult together with a view to their common interest at a single meeting;

(3)  Whether the meeting was duly convened in accordance with the court’s directions;

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

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

(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.

See my decision in Re Da Sen Holdings Group Ltd[1].

16.  It is well-established that debt restructuring is a permissible purpose of a scheme of arrangement: see Re Mongolian Mining Corp[2].

17.  In considering the issue of class, 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.  As explained in [14] of Da Sen:

(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 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.

18.  In my view Scheme Creditors properly voted in 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.

19.  Scheme Creditors who have executed the Restructuring Support Agreement will be given a Consent Fee and/or the RSA Fee, equal to a creditor’s Pro Rata share of 0.25% and 1% of the Claim Amount on the Default Date respectively.  Each of the three Consenting Scheme Creditors which constitute the Steering Committee will receive the Work Fee equal to such Consenting Creditor’s Pro Rata share of the Work Fee, which is equal to 0.25% of the Claim Amount on the Default Date.  In view of the size of the fees, I accept that the fees are unlikely to have had a material impact on the way the Scheme Creditors vote and is not material to the assessment of whether or not the class was properly formed: see [16]of Da Sen; Re Noble Group Ltd[3].

20.  The Company has complied with the Order dated 9 February 2022 relating to the convening of the Scheme Meeting.

(1)  The Notice of Scheme Meeting was duly advertised on “The Standard” and “Sing Tao Daily”.

(2)  The Notice of Scheme Meeting and the Composite Document was duly circulated to the Scheme Creditors by pre-paid post or courier.

(3)  The Notice of Scheme Meeting was also circulated by notice on the Scheme Website, by announcement on the respective websites of HKEX and SGX-ST, and my electronic mail.

(4)  The Scheme Meeting was duly convened on 24 May 2022 at 24/F, Admiralty Centre I, 18 Harcourt Road, Admiralty, Hong Kong.

21.  The principles that govern the sufficiency of the explanatory statements are well established.  The statement should be sufficient to enable the Scheme Creditors to exercise a reasonable judgment as to whether the Scheme is in their interests, and to reach a sensible decision as to its benefits; Scheme Creditors are assumed to be intelligent and can be expected to read the explanatory statement as a whole.  This is particularly so where many of the Scheme Creditors of the Company are sophisticated institutional investors: see Re Winsway Enterprises Holding Ltd[4].  Scheme Creditors were provided with sufficient information for them to make a decision whether or not to support the Scheme.  The statutory majorities were conformably obtained.  The Scheme is clearly one which an intelligent and honest man might approve.

Transnational Considerations

22.  The Company is an offshore company.  To justify the Court exercising its jurisdiction to sanction a scheme in respect of a foreign company, it is necessary to demonstrate sufficient connection between the Scheme and Hong Kong.  This requirement is plainly met in this case as the Company is listed in Hong Kong and one of the principal purposes of the Scheme is to protect the Company from winding up proceedings in Hong Kong, which might jeopardise its listing.

23.  In a transnational case, the Hong Kong 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: [23] Da Sen; Re China Oil Gangran Energy Group Holdings Ltd[5].

24.  In the present case, the Notes are governed by New York Law.  In order to protect the Company from enforcement proceedings by creditors in the United States the Company intends to apply to the United States Bankruptcy Court for the Southern District of New York for recognition and assistance under Chapter 15 of the United States Bankruptcy Code.  This is consistent with previous similar cases such as Re Winsway Enterprises Holdings Ltd[6] and Re Kaisa Group Holdings Ltd[7], which provide a template for restructuring the US$ debt of Mainland businesses listed in Hong Kong.

25.  The Company has filed helpful opinion evidence from Mr Shmuel Vasser, a partner in the Financial Restructuring Group of Dechert LLP’s New York office, which explains the recognition process in some detail.  Give the concerns I express in my decision in Re Rare Earth Magnesium Technology Group Holdings Limited[8] concerning recent developments in the methods used to restructure US$ debt of Hong Kong listed companies, Mr Vasser’s detailed explanation of the recognition process is instructive.  It is well-established that a scheme of arrangement is a collective insolvency process capable of being recognised under Chapter 15. In order to obtain recognition a company must demonstrate that the proceedings are either “foreign main proceedings” or “foreign non-main proceedings”.  The distinction between the two types of foreign proceedings itself does not make any material difference to recognition.  It is relevant to the basis on which recognition is sought, namely, whether or not the proceedings are in the Company’s centre of main interests (“COMI”)  or a jurisdiction in which it has an “establishment” as defined in Chapter 15, which is substantially in the form of the UNCITRAL Model Law on cross-border insolvency.  In the present case the Company’s legal advisers have taken the view that its COMI is in the People’s Republic of China and for the purposes of Chapter 11 the COMI is in Hong Kong.  Mr Vasser explains his reasoning in [49] of his affidavit:

“In the Second Circuit, COMI would be measured as of the date on which the Recognition Petition is filed, not when the underlying insolvency proceeding began, 18 and that courts may properly consider restructuring activities at the time of the filing as relevant to a COMI finding.19 The Company is a holding company that has been seeking to restructure its obligations over the past several months, and the negotiations regarding such restructuring have mainly occurred in Hong Kong and will be effectuated in Hong Kong in accordance with Hong Kong law. Further, I understand from KYC that, although Hong Kong is a Special Administrative Region with a high degree of autonomy from Mainland China, it is still considered an ‘inalienable’ part of Mainland China and its people are Chinese citizens. Accordingly, it is my opinion that the Company’s presence and activities in Mainland China support a finding of COMI in Hong Kong.”

26.  Nothing ultimately turns on this, however, as the evidence supports the alternative view the Company has an “establishment” in Hong Kong, which is defined as place of operations where a company carries on non-transitory economic activity with human means and goods or services.  This would support an application for recognition made on the basis that the Scheme in Hong Kong is “foreign non-main proceedings”.

27.  In [46]–[47] of his affidavit Mr Vasser explains:

“46. Section 1502(4)  defines a foreign main proceeding as a ‘foreign proceeding pending in the country where the debtor has its center of main interests, or ‘COMI.’ While the Bankruptcy Code does not define COMI, Section 1516 creates a presumption that a debtor’s COMI is the jurisdiction of the debtor’s registered office (place of incorporation). However, if the facts do not support the presumption, the presumption may be rebutted by contrary evidence[9].

47.  As the Company’s registered office is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111, Cayman Islands, its COMI is presumed to be in the Cayman Islands. However, the Company conducts no business in the Cayman Islands, and conducts substantial business activity outside of the Cayman Islands. Accordingly, in my opinion, the presumption that the Company’s COMI is in the Cayman Islands is rebutted by contrary evidence.”

This is consistent with what I say in Rare Earth[10].

28.  Mr Vasser’s view is that the criteria for recognition and assistance that I have described and others such as it having been demonstrated that the Company has assets in the United States and that a “foreign representative” as defined in section 101(2) of the Bankruptcy Code has been appointed, will be satisfied in the present case and recognition and assistance granted if the Scheme is sanctioned.  Mr Vasser has helpfully provided the form of order that he anticipates would be granted. This shows the form of the assistance that will be granted.  The order provides that creditors (“Entities” as defined in section 101(15) of the Bankruptcy Code)  are enjoined from taking enforcement action.  However, the form of order expressly states “that such injunctions shall be effective solely within the territorial limits of the United States”.  It also contains a paragraph that provides as one would expect: “Nothing herein shall enjoin, impair, or otherwise supplement or modify in any manner the rights granted under the Scheme to any person, and nothing herein shall modify the exclusive rights of the Courts of Hong Kong to hear and determine any suit, action, or proceeding and to settle any dispute which may arise out of the Explanatory Statement or any provision of the Scheme or Sanction Order, or out of any action to be taken or omitted to be taken under the Scheme or Sanction Order or in connexion with the administration of the Scheme or Sanction Order”.  The order does not purport to prevent a creditor taking action in Hong Kong to enforce a debt or to compromise the debt.  Whether or not a creditor is able to take proceedings against the Company in Hong Kong is a matter to be determined by the Hong Kong court in accordance with Hong Kong law.  As a matter of Hong Kong law the question is did the Scheme compromise the debt.  An order for recognition and assistance under Chapter 11 in the terms that I have been given does not purport to compromise the debt or prevent its enforcement in Hong Kong; it prevents enforcement of a debt within the United States.

29.  The Company does not consider it necessary for a scheme to be introduced in the Cayman Islands given the minimal value of debt held by creditors, who did not participate in the Scheme approval process.  The Scheme will, therefore, be effective in all other relevant foreign jurisdictions and the Scheme will serve a practical purpose.

Amendments to the Scheme Document

30.  Three minor amendments were made to the draft Scheme Document which was presented to the Court at the hearing for an order convening a meeting, and the Scheme Document as amended was circulated and voted on by the Scheme Creditors at the Scheme Meeting.  The first change relates to the Zero-Coupon Bonds to be issued under the Scheme:

(1)  It was originally envisaged that the Zero-Coupon Bonds will be cleared via The Depository Trust Company (“DTC”)  and freely transferrable, and that the Bank of New York Mellon will act as the Zero-Coupon Bonds trustee.

(2)  Under the Scheme (as amended), the Zero-Coupon Bonds will be issued in the form of private bonds and will not be cleared in any clearing systems and will not be freely transferable.  RSM will act as the Zero-Coupon Bonds registrar and principal paying agent.

31.  The second change relates to the inclusion of additional security for the Holder of the New US$ Senior Notes (i.e. the Creditor SPV)  under the terms of the Scheme and explains that four additional share charges will be executed and four subsidiaries of the Company will be offered as security.

32.  The third change relates to the involvement of the DTC:

(1)  Shortly before the launch of the Scheme, the Company was informed by the DTC that it would (i)  not process ATOP instructions to block the Notes; and (ii)  the cash payment, consent fee and RSA will not be distributed via the DTC and will be credited directly to the bank account of the participating creditors specified in their Account Holder Letter.

(2)  Given the DTC’s stance, the Account Holder Letter was revised so that each Noteholder electing to participate in the SPP has to undertake that it will not transfer or otherwise dispose of or assign, directly or indirectly, any of the Scheme Claims from the date of the Account Holder Letter until the date of the distribution of the Scheme Shares.

(3)  If a Note Holder breaches this undertaking, any transferee of the Scheme Claims shall be deemed to have elected not to participate in the SPP and any transferee of the Scheme Claims from the relevant Scheme Creditor shall be deemed to have acknowledged and agreed that it has elected not to participate in the SPP.

33.  It is well-established that there is nothing objectionable for a Scheme document to be amended after its circulation, as long as those who would be called upon to vote on it are giving adequate notice of the changes: see Re The Hong Kong Building and Loan Agency Ltd[11].

Conclusion

34.  I will make an order sanctioning the Scheme.