RE DA YU FINANCIAL HOLDINGS LTD (formerly known as CHINA AGROTECH HOLDINGS LTD) (in liquidation)

HCMP 2196/2018 and
HCCW 325/2014
(Heard Together)

[2019] HKCFI 2531

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2196 OF 2018

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COMPANIES (WINDING UP) PROCEEDINGS NO 325 OF 2014

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REASONS FOR DECISION

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1.  On 22 July 2019, I sanctioned a scheme of arrangement (the “Scheme”) to be entered into between Da Yu Financial Holdings Limited (formerly known as China Agrotech Holdings Limited) (in liquidation) (the “Company”) and its general unsecured creditors (the “Scheme Creditors”) with an undertaking from the Company that all its restructuring and liquidation costs and expenses are subject to taxation. I also granted a permanent stay of the winding-up of the Company. I now give my reasons.

Procedural history

2.  On 11 June 2019, under section 670 of the Companies Ordinance, Cap 622 (the “Ordinance”), Mr Justice Harris gave leave for the Company to convene a meeting (the “Scheme Meeting”) of the Scheme Creditors in order that they could consider and vote on the Scheme.

3.  On 5 July 2019, the Scheme Meeting took place and an overwhelming majority of the Scheme Creditors present at the Scheme Meeting voted in favour of the Scheme.

4.  On 8 July 2019, the Company issued a petition seeking the Court’s sanction of the Scheme (the “Petition”).

5.  On 9 July 2019, Mr Justice Harris adjourned the Petition to be heard by me because the Petition was opposed and Mr Justice Harris decided to recuse himself.  Mr Justice Harris’ judgment dated 9 July 2019 explained the circumstances leading to his Lordship’s decision to recuse.

Background to the Scheme

6.  The Company is:

  (a)  a company incorporated in the Cayman Islands;

  (b)  registered in Hong Kong as an overseas company since 4 November 1999, with its principal place of business in Hong Kong;

  (c)  listed on the Hong Kong Stock Exchange since 14 January 2002, though its shares have been suspended from trading since 18 September 2014;

  (d)  an investment holding company with operating subsidiaries in the Mainland carrying on the business of, inter alia, trading in fertilizers, pesticides, and other agricultural and non-agricultural resources products;

  (e)  balance-sheet insolvent; and

  (f)  in liquidation in Hong Kong since 9 February 2015.

7.  The Company’s financial indebtedness includes:

  (a)  a bank loan of approximately HK$61.9 million;

  (b)  convertible bonds of approximately HK$540 million;

  (c)  corporate bonds of approximately HK$57.3 million;

  (d)  liabilities arising from a financial guarantee provided to some Mainland subsidiaries of approximately HK$198.2 million; and

  (e)  liabilities arising from a financial guarantee provided to a guarantor of Mainland subsidiaries of approximately HK$812.3 million.

8.  It appears that the Company’s only substantial asset is its listing status.  As a matter of Hong Kong law, a company’s listing status which carries with it a bundle of contractual rights and obligations under the listing rules and is analogous to a club membership, is a recognised form of asset: Re China Solar Energy Holdings Ltd (No 2) [2018] 2 HKLRD 338 at §39 per Harris J.

9.  With a view to realising the Company’s listing status for the benefit of the creditors, the Company’s liquidators have found an investor to pursue a restructuring and resumption of trading of the Company’s shares.  The key features of the proposed restructuring include the following:

  (a)  The Company will acquire the shares in Yu Ming Investment Management Limited (“Yu Ming”) for HK$400,000,000 which the Company will settle in cash on completion of the acquisition.

  (b)  The Company’s share capital will be reorganised involving a reduction of capital such that new shares will be issued to investors (the “Capital Reorganisation”).

  (c)  The proceeds of the share subscription will be used to pay for the acquisition of Yu Ming, the Company’s restructuring expenses, and the partial discharge of the Company’s existing indebtedness.  The amount of subscription proceeds available for distribution to creditors is HK$80,000,000, and thus the rate of recovery for creditors is about 4.28%.

  (d)  The partial discharge of the Company’s existing indebtedness will be achieved through parallel schemes of arrangement in Hong Kong and the Cayman Islands.

10.  On 16 July 2019, the Cayman court sanctioned the Cayman scheme of arrangement and the reasons were released later: Re China Agrotech Holdings Ltd (Grand Court of the Cayman Islands, 22 July 2019)(the “Cayman Scheme Judgment”).

Opposition to the Scheme

11.  A shareholder of the Company, Perfect Gate Holdings Limited (“Perfect Gate”), initially objected to the Petition, but withdrew its objection in the course of the hearing before me.  The background to Perfect Gate’s objection is as follows:

  (a)  On 22 May 2019, in order to effect the Capital Reorganisation,the Company held an extraordinary general meeting (the “EGM”).

  (b)  Perfect Gate voted against the relevant resolution at the EGM.

  (c)  However, the chairman of the EGM exercised his power to exclude and disallow Perfect Gate’s votes.  If Perfect Gate’s votes were counted, the shareholders’ resolution and Capital Reorganisation would have failed.

12.  On 12 June 2019, the Company issued a summons in the Cayman Islands (the “Cayman Application”) seeking a declaration that the shareholders’ resolution passed at the EGM was validly passed.

13.  On 26 June 2019, Perfect Gate issued a summons in Hong Kong seeking a declaration that the EGM chairman’s decision to exclude its votes was unlawful and the purported special resolution was unlawful.

14.  Although Perfect Gate did not appear by counsel in the Cayman court, it participated in the Cayman proceedings to oppose the Cayman Application by filing written submissions and evidence.

15.  On 9 July 2019, the Cayman court granted the Cayman Application and the reasons were released later: Re China Agrotech Holdings Ltd (Grand Court of the Cayman Islands, 16 July 2019) (the “Cayman EGM Judgment”).

16.  Nevertheless, Perfect Gate appeared by counsel in Hong Kong to oppose the Petition.  The Company, however, argued that Perfect Gate had been estopped from arguing against the validity of the resolution passed at the EGM and that, being a shareholder of an insolvent company, Perfect Gate had no economic interest and thus could not object to the Petition.

17.  During the hearing, I drew the parties’ attention to a number of authorities and expressed my preliminary views on Perfect Gate’s objection thus:

  (a)  Perfect Gate’s status as a shareholder would not preclude its standing to oppose the Petition even if the Scheme did not compromise Perfect Gate’s rights as a shareholder as such.  Perfect Gate has sufficient interest to oppose the Petition because the Scheme is part and parcel of a wider restructuring exercise that would significantly dilute Perfect Gate’s shareholding.  An analogous authority is Re Bluebrook Ltd [2010] 1 BCLC 338 where Mann J at §26 said:

“The schemes do not involve the mezzanine lenders in the sense of engaging them as parties. They will not bind them, and their legal rights are unaffected. The mezzanine lenders therefore cannot, and do not, complain as persons whose legal rights are being altered by the schemes in some unfair way. However, they are still entitled to object as creditors on grounds of unfairness if the schemes unfairly affect them in ways other than altering their strict rights. The court is exercising a discretion, and as a matter of principle can consider unfairness in that sense, if it is made out. That is the essence of the case of the mezzanine lenders.”

  (b)  However, the Hong Kong court would recognise and give effect to the Cayman EGM Judgment because Perfect Gate’s participation in the Cayman proceedings to oppose the Cayman Application suggests that it had submitted to the Cayman court’s jurisdiction.  The position is neatly summarised in Swiss Life v Kraus [2015] EWHC 2133 (QB). Green J at §61 said:

“ Case law provides illustrations of the sorts of acts of participation in foreign proceedings which amount to submission. These include: pursuing acts as a plaintiff; pleading to the merits of a claim qua defendant without contesting jurisdiction; contesting jurisdiction but nonetheless proceeding further to plead to the merits; agreeing to a consent order dismissing the claims and cross claims; failing to appear in proceedings at first instance but appealing on the merits; taking no part in proceedings and allowing judgment to go against him in default of appearance but later applying to set aside the default judgment on non-jurisdictional grounds.”

 (emphasis added)

18.  Perfect Gate took time to reconsider its position and then rightly decided to withdraw its opposition to the Petition.  In the circumstances, there is no need for this Court to rule on the objections raised by Perfect Gate including the issue that the EGM chairman’s decision to exclude its votes was unlawful and the purported special resolution was thus null and void.

The legal principles governing the Court’s discretion to sanction a scheme

19.  The Court has an unfettered discretion as to whether or not to sanction a scheme.  Case-law has developed principles which guide the Court in considering whether to sanction a scheme.  What is clear is that the Court does not act as a rubber stamp and must reach its own independent view.  But in doing so, if the scheme sanction principles are satisfied, the Court would be slow to differ from the views of the majority scheme creditors on matters such as what an intelligent, honest person might reasonably think. The Court regards the scheme creditors as the best judges of their own commercial interests.

20.  The Court will take into account the following matters in considering whether to sanction a scheme of arrangement:

  (a)  whether the scheme is for a permissible purpose;

  (b)  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:

“ the focus is upon ‘rights’; upon existing ‘rights’ as they stand and the ‘rights’ as they will be under the proposed compromise or arrangement; upon identifying material dissimilarities in such ‘rights’ of the members to be called to the meeting; and in relation to those material dissimilarities asking the question whether they are so great as to make it impossible for the holders of those differing ‘rights’ to confer together because there is no community of interest.”

 (See Re Realm Therapeutics Plc [2019] EWHC 2080 (Ch) at §32 per Norris J.)

  (c)  whether the meeting was duly convened in accordance with the Court’s directions;

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

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

  (f)  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

  (g)  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 because it would not be a proper exercise of the discretion to sanction a scheme that serves no purpose.

(See: Re Winsway Enterprises Holdings Ltd [2017] 1 HKLRD 1 at §§15 – 16 per Harris J; Re Mongolian Mining Corp [2018] 5 HKLRD 48 at §§11 and 13 per Harris J; Re Hong Kong Building and Loan Agency Ltd [2019] HKCFI 2088 (HCMP 2268/2018, unreported, 20 August 2019),per Harris J; Re Union Asia Enterprise Holdings Ltd [2019] HKCFI 2349 (HCMP 1093/2018, unreported, 19 September 2019), per G Lam J.)

21.  I also note that English case-law has summarised the scheme sanction principles by reference to the following five stages:

  (a)  The first stage—compliance with statute:  The court must consider whether the provisions of the statute have been complied with.  This will include questions of class composition,whether the statutory majorities were obtained, and whether an adequate explanatory statement was distributed to creditors.

  (b)  The second stage—proper class representation:  The court must consider whether the class was fairly represented by the meeting, and whether the majority were coercing the minority in order to promote interests adverse to the class whom they purported to represent.

  (c)  The third stage—fairness:  The court must consider whether the scheme is a fair scheme which a creditor could reasonably approve.  The court is not concerned to decide whether the scheme is the only fair scheme or even the best scheme.  The fairness requirement concerns whether the scheme is an arrangement that an intelligent and honest man,a member of the class concerned and acting in respect of his interest, might reasonably approve.

  (d)  The fourth stage—blot on the scheme:  The court must consider whether there is any ‘blot’ or technical or legal defect in the scheme that would, for example, make it unlawful or in any other way inoperable according to its own terms.

  (e)  The fifth stage—international effectiveness: In an international case, the court must also be satisfied that it is appropriate, in its discretion, to exercise its scheme jurisdiction on the basis that there is a sufficient connection between the scheme and England, and there is a reasonable prospect of the scheme having real effectiveness, having regard, in particular, to its prospects for recognition in other relevant or key jurisdictions.

(See: Re Noble Group Ltd [2019] BCC 349 at §§17 and 18 per Snowden J; Re Syncreon Group BV [2019] EWHC 2412 (Ch) at §12 per Falk J; Re NN2 Newco Ltd [2019] EWHC 2532 (Ch) at §10 per Norris J.)

Analysis

22.  Subject to the conditions relating to the Company’s restructuring and other costs and expenses discussed in the next section, I am satisfied that it is appropriate, in my discretion, to sanction the Scheme.

23.  First, it is well-established that debt restructuring is a permissible purpose of a scheme of arrangement.

24.  Secondly, it is appropriate that the Scheme Creditors vote in a single class because:

  (a)  the Scheme Creditors are the Company’s general unsecured creditors; and

  (b)  the Scheme Creditors are given the same Scheme consideration.

25.  Thirdly, the requirements in the Order relating to the convening of the Scheme Meeting have been complied with.

26.  Fourthly, subject to what I have to discuss below, the Scheme Creditors were given sufficient information in the explanatory statement to exercise their informed judgment on how to vote at the Scheme Meeting.

27.  Fifthly, the resolution approving the Scheme was passed by 90.9% in number of the Scheme Creditors present and voting (representing 93.62% of the Scheme claims held by the Scheme Creditors present and voting).  Thus the requisite statutory majorities of the Scheme Creditors have voted in favour of the Scheme at the Scheme Meeting.

28.  Sixthly, I am satisfied that an intelligent and honest creditor of the Company could reasonably consider the Scheme to be in his best interests.

29.  Seventhly, in relation to the international dimension:

  (a)  sufficient connection between the Scheme and Hong Kong exists for these non-exhaustive reasons:

  (i)  the Company is registered as an overseas company in Hong Kong;

  (ii)  the Company’s principal place of business is in Hong Kong

  (iii)  the Company is listed in Hong Kong;

  (iv)  the Company’s debts are governed by Hong Kong law; and

  (v)  the vast majority of the Scheme Creditors are in Hong Kong;

  (b)  as a result of the Cayman Scheme Judgment, the Scheme is practically effective in the Company’s country of incorporation. 

30.  Finally, I am not aware of any ‘blot’ on the Scheme.

Permissible purpose, and restructuring and related expenses

31.  There is one serious concern of the Court which I raised with Mr Hui (acting for the Company) at the beginning of the hearing which is the level or quantum of the liquidators’ restructuring and liquidation costs as compared to the rate of return to the Scheme Creditors.  I asked Mr Hui this question: Assuming the Company’s listing status could realise $100 million, if the return to the Scheme Creditors were in the absolute sum of HK$1 million and the totality of the liquidators’ restructuring and liquidation costs were HK$99 million, could be it sensibly submitted that the purpose of the Scheme was for the benefit of the Scheme Creditors and thus fell within the permissible purpose of propounding a scheme of arrangement under the Ordinance?

32.  Mr Hui very fairly answered in the negative.  The Court is very concerned that the statutory scheme should not be misused for any purpose other than advancing the interests of the Scheme Creditors and not for any other non-permissible purposes.

33.  Mr Hui in reply raised a very good question, namely, where does the Court draw the line?  For instance, is a 50:50 split of the value of the listing status between the Scheme Creditors’ recovery and restructuring and liquidation expenses permissible?  If not, what is the relevant percentage which will trigger the Court’s intervention? 

34.  In my view, there can be no hard and fast rules and it will not be appropriate for the Court to lay down a specific percentage as a guideline. Every case must depend on its own facts.  Depending on the complexity of the relevant schemes, there are cases where the amount of the restructuring and liquidation expenses is obviously reasonable albeit that they constitute a fairly large percentage vis-à-vis the rate of return to scheme creditors. Again, there will be cases where the amount of the restructuring and liquidation expenses will be unreasonably high irrespective of the rate of return to scheme creditors.  In every case, the question to be asked by the Court is, taking into account all the circumstances of the case, including the rate of return to scheme creditors and the amount of the restructuring and liquidation expenses, whether the relevant scheme is propounded for a permissible purpose for the general benefit of the scheme creditors.

35.  In the present case:

  (1)  HK$80 million is allocated for distribution to the Scheme Creditors — making a recovery rate of 4.28%;

  (2)  Restructuring expenses in the sum of approximately HK$49 million have been incurred and;

  (3)  Scheme costs in the sum of HK$5.87 million are expected to be incurred.

36.  Given the fact that the Scheme is not hugely complicated, the Court and indeed the Scheme Creditors are not informed of the rationales which can legitimately justify such significant amount of professional expenses.

37.  Mr Hui for the Company submitted that the amount of the restructuring expenses is a matter of contractual arrangement between the investor and the relevant professionals and normally such expenses are not subject to the supervision and taxation of the Court.  I agree.  However, it does not mean that the Court has no jurisdiction to impose conditions in exercising its function to sanction schemes of arrangement.

38.  Indeed, as set out above, one of the key concerns in sanctioning a scheme of arrangement is whether sufficient information and explanations about the scheme have been given to scheme creditors such that they can properly make an informed decision on whether to support a certain scheme of arrangement or not.

Sufficient information about restructuring and related expenses 

39.  As a matter of law, an explanatory statement must contain all the information necessary to enable the creditors to form a reasonable judgment on whether the scheme is in their best interest 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.  (See Re Ophir Energy Plc [2019] EWHC 1278 (Ch) at §22 per Snowden J.)

40.  In the present case, the provision of sufficient and meaningful disclosure on the restructuring costs and other expenses is crucial.  The adequacy of disclosure in the explanatory statement is a matter for the sanction hearing.  (See Re Noble Group Ltd(supra) at §130 per Snowden J.)

41.  I note from the Scheme’s explanatory statement that there is only a one liner for the restructuring costs of the liquidators, namely,HK$13,526,000 with no breakdown at all. The same applies to costs of legal advisers to the Company in the sum of HK$4,809,000 and costs of legal advisers to the sponsor in the sum of HK$3,376,000.  There is no further information for the Court and Scheme Creditors to assess the reasonableness of such costs.

42.  I do not find the disclosure in the explanatory statement about the restructuring and other expenses to be entirely satisfactory.  As I said, the so-called itemized list of expenses does not provide much information. In future, I expect that there will be a more detailed breakdown of such incurred costs so that both the Scheme Creditors and the Court can meaningfully assess the reasonableness of such costs.  A statement of costs which will allow the Court to make a gross sum assessment is a useful guide for the purpose of disclosure of restructuring and other expenses.

43.  The Court is being put in a difficult position in view of the lack of sufficient disclosure of restructuring and other expenses.  It would not seem right and just to withhold sanction of the Scheme as the failure of the Scheme would leave the Scheme Creditors with nil recovery.

44.  Accordingly, I am only prepared to sanction the Scheme on the condition that all of the restructuring and other expenses will be subject to taxation.  Any cost savings resulting from the taxation process should be distributed to the Scheme Creditors.  (See Re Rhine Holdings Ltd[2000] 3 HKC 543; Re Yaohan Hong Kong Corp Ltd [2001] 1 HKLRD 363; nTan Corporate Advisory v TT International [2018] 2 SLR 1237.)

Stay of winding-up

45.  As a corollary of the sanction of the Scheme, it would be proper to grant a permanent stay of the winding-up of the Company in order to allow the Company’s shares to resume trading.  (See Re Hong Kong Mercantile Exchange Ltd [2018] HKCFI 1986 (HCCW 10/2014, unreported, 24 August 2018), per Harris J.)

Cross-border coordination

46.  Finally, I like to say a few words about cross-border coordination.  In the Cayman Scheme Judgment, Mr Justice Segal made some apt and important remarks about the need for cross-border coordination (at §37):

“ Throughout this case I have reminded the liquidators (and Perfect Gate) of the need to consider the coordination of the applications made in this Court and the Hong Kong court (and the possible benefit of and need for common directions regarding the filing of evidence and submissions in both courts and even of court to court communication and simultaneous hearings). For reasons of which I am not aware this has not proved to be possible in this case. I do not intend to be critical. There may be good reasons why these steps were considered to be inappropriate or unavailable in this case (and I would note with gratitude that Mr.Justice Harris in the Hong Kong court very helpfully sent me a copy of his Decision of 9 July). But I would remind parties for the future to keep the need for such coordination firmly in mind.”

47.  I would respectfully echo Mr Justice Segal’s remarks and would like to add the following observations on the current state of cross-border cooperation which seems to call for significant improvement.

48.  It seems to have become an established practice that Hong Kong-listed companies incorporated offshore need to use parallel schemes of arrangement to restructure their debts.  Although the company maintains no more than a letterbox presence in its country of incorporation, a scheme in the country of incorporation is nevertheless necessary, just like the present case.  As Mr Justice Segal explains in the Cayman Scheme Judgment (at §33(d)(i)), “the main purpose of there being a scheme in Cayman was to ensure that scheme creditors cannot disrupt the smooth operation of the scheme by taking hostile action against the Company in its place of incorporation”, even though “Hong Kong [is] where the preponderance of the Company’s debts are located (most of the Company’s liabilities are governed by Hong Kong law)”.

49.  I am of the view that the idea that parallel schemes are needed in such circumstances appears to be an outmoded way of conducting cross-border restructuring.  Requiring foreign office-holders to commence parallel proceedings is the very antithesis of cross-border insolvency cooperation.  A crucial feature of cross-border insolvency cooperation is the recognition of foreign proceedings.  In Look Chan Ho, Cross-Border Insolvency: Principles and Practice (Sweet & Maxwell, 2016), the learned author at p 61 said:

“ Recognition of international bankruptcy orders and judgments is particularly needed because the equitable and orderly distribution of a debtor’s property requires assembling all claims against the limited assets in a single proceeding.”

50.  The raison d’être for recognising foreign proceedings is the avoidance of parallel proceedings.  As pointed out by Lord Hoffmann in Cambridge Gas Transportation Corpn v Official Committee of Unsecured Creditors of Navigator Holdings plc [2007]1 AC 508 at §22, “[t]he purpose of recognition is to enable the foreign office holder or the creditors to avoid having to start parallel insolvency proceedings and to give them the remedies to which they would have been entitled if the equivalent proceedings had taken place in the domestic forum”.

51.  Indeed, where Hong Kong and English schemes of arrangement need practical effectiveness in the United States, the standard procedure is to obtain recognition of the schemes in the United States (as opposed to commencing plenary US Chapter 11 proceedings to create a parallel Chapter 11 reorganisation plan).

52.  Therefore, in my view, it would be beneficial, in the spirit of cross-border cooperation that all jurisdictions do take to heart this question (mutatis mutandis) posed by Lord Hoffmann in Cambridge Gas (at §25):“Why…should the [offshore] court not provide assistance by giving effect to the [Hong Kong scheme of arrangement] without requiring the [Hong Kong office-holders] to go to the trouble of parallel insolvency proceedings in the [offshore jurisdiction]?”

53.  A substantive recognition in the offshore jurisdictions of foreign schemes of arrangement would seem to tie in well with the advanced procedural coordination that Mr Justice Segal was aptly advocating. Progress in cross-border procedural coordination should march in lockstep with progress in cross-border substantive recognition.

54.  Finally, it remains for me to thank Mr Hui for Company and Mr Ko and Mr Tai for Perfect Gate for their helpful assistance to this Court.