RE HONG KONG PETROCHEMICAL COMPANY LTD AND ANOTHER

HCMP 886/2024

[2024] HKCFI 2601

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 886 OF 2024

________________

________________

________________________________

REASONS FOR DECISION

________________________________

Applications

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 the Creditors, and a permanent stay of the winding up ordered on 20 December 2023 in HCCW 454/2023.

Scheme of Arrangement

2.  In these reasons I adopt the abbreviations and terminology employed in the Explanatory Statement and the Scheme despatched to the Creditors per the Order made on the Originating Summons on 25 June 2024 (“Convening Order”).

3.  The resolution of the Scheme Meeting was carried unanimously by the Creditors present and voting, either in person or by proxy. The Scheme’s objective is to return the Company to a solvent going concern and to permanently stay its liquidation. If the Company’s liquidation continues, it is estimated that the Scheme creditors would recover nothing. However, under the Scheme, the estimated recovery rate for the creditors increases significantly to approximately 10.1% (based on the Proofs of Debt received by the Liquidators up to the Latest Practicable Date).

Background to the Scheme

4.  The Company was incorporated in Hong Kong on 26 August 1988 and is engaged in the manufacturing and trading of petrochemical products, as well as providing sub-processing services.

5.  On 20 December 2023:

(1)  Following a winding-up petition presented on 10 October 2023, the Court wound up the Company on insolvency grounds.

(2)  The Court made a regulating order appointing the Liquidators.

6.  As of 20 December 2023, the Company had estimated total assets of approximately HK$241 million and estimated liabilities of approximately HK$480 million. The Creditors’ recovery under the Scheme is estimated to be about 10.1% (based on the Proofs of Debt received by the Liquidators up to the Latest Practicable Date), compared to nil in the Company’s current liquidation.

7.  To maximise recovery for the Creditors, the Liquidators have pursued a restructuring proposal leading to the Scheme. The Liquidators believe that the most effective way to maximise recovery for the Creditors is to find an investor willing to put forward a rescue proposal. After an extensive market-testing exercise, the Liquidators received only one bid submitted by the Investor. On 2 April 2024, the Company, the Liquidators, the Investor, and the Acquiring Entity entered into a restructuring agreement, outlining the terms and conditions agreed upon to facilitate the implementation of the restructuring proposal (“Restructuring Proposal”). If successfully implemented, the Restructuring Proposal will, amongst other things, result in the following:

(1)  The Capital Restructuring;

(2)  The Investor injecting US$15,600,000 into the Company through the Share Subscription;

(3)  Discharging all the liabilities of the Company through the Scheme; and

(4)  A permanent stay of the Company’s winding-up.

8.  The Capital Restructuring involves the following steps:

(1)  The Capital Reduction whereby, subject to the Court’s sanction, the Company’s issued share capital would be reduced from HK$274,708,622 to HK$2,747.08 as follows:

(i)  ordinary A Shares being reduced from HK$4,493,313 divided into 4,493,313 ordinary A Shares of HK$1 each to HK$44.93 divided into 4,493,313 ordinary A Shares of HK$0.00001 each;

(ii)  ordinary B Shares being reduced from HK$85,372,955 divided into 85,372,955 ordinary B Shares of HK$1 each to HK$853.73 divided into 85,372,955 ordinary B Shares of HK$0.00001 each;

(iii)  non-voting Shares being reduced from HK$184,842,354 divided into 184,842,354 non-voting Shares of HK$1 each to HK$1,848.42 divided into 184,842,354 non-voting Shares of HK$0.00001 each.

(2)  Immediately upon the Capital Reduction taking effect, the share capital of the Company will be increased by HK$121,680,000 by the creation of 12,168,000,000,000 unissued New Shares of HK$0.00001 each (comprising 199,014,313,380 ordinary A Shares, 3,781,537,720,052 ordinary B Shares, and 8,187,447,966,568 non-voting Shares).

(3)  The New Shares will be issued to the Acquiring Entity (or the Designated Subsidiary) at HK$0.00001 each.

(4)  After the Capital Restructuring, the Company’s issued share capital will be HK$121,682,747.08.

Principal features of the Scheme

9.  The Scheme seeks to discharge the Company’s liabilities to all general unsecured creditors (Clause 3.4 of the Scheme). In return, the Creditors will be entitled to a pro rata distribution of the Scheme Funds (subject to prior payments of Preferential Claims and Scheme Costs) (Clause 5.1 of the Scheme).

10.  The Scheme Funds primarily consist of the Cash Amount, which is derived from the Share Subscription proceeds totalling US$15,600,000, less the Restructuring Costs. In addition to the Share Subscription proceeds, the Cash Amount may include proceeds from the Transferred Assets, which are the Company’s residual assets deemed non-essential by the Investor (Clause 7 of the Scheme):

(1)  Upon the Scheme becoming effective, the Company will transfer all the Transferred Assets to New Co, a company controlled by the Scheme Administrators.

(2)  New Co will hold the Transferred Assets on trust to realise them. The proceeds of such realisation will then be transferred to the Scheme Administrators as part of the Cash Amount.

11.  However, the value of the Transferred Assets is uncertain and has therefore been excluded from the Scheme recovery analysis.

The legal principles governing the sanction of a scheme and approval of reduction of capital

12.  In considering whether to sanction a scheme, the Court will apply some well-established principles which were recently restated 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 on whether or not to support it;

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

(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.

Legal principles governing a capital reduction principle

13.  When considering whether to confirm a technical reduction of capital, the Court applies well-established principles, recently restated in Re Mason Group Holdings Ltd[2]. These principles require the Court to assess the satisfaction of the following conditions:

(1)  All the shareholders must be treated equitably.

(2)  The reduction proposal had been properly explained to the shareholders so that they could form an informed judgment on it.

(3)  The creditors must be safeguarded.

(4)  The reduction is for a discernible purpose.

See also Fok Lai Lor Nora v Fok Ying Tung Ming Yuan Development Co Ltd[3].

Scheme Sanction Criteria

Permissible purpose

14.  As in Singyes, the Scheme represents a legitimate effort at debt restructuring for a company facing financial distress.

Class composition

15.  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. The court should be careful to avoid unnecessary proliferation of classes because by ordering separate meetings the court might give a veto to a minority group.

(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 CA Cultural Technology Group Ltd[4].

16.  As regards the identification of the appropriate comparator, the established practice is thus: The management of the scheme company, being advised by their professional advisers, are normally in the best position to identify what will happen if a scheme fails: Re CA Cultural Technology Group Ltd[5].

17.  In brief, in assessing the scheme creditors’ rights, the Court considers what are often referred to as “rights in” (i.e. the scheme creditors’ rights as against the scheme company absent the scheme) and “rights out” (i.e. any new rights conferred on the scheme creditors by the scheme):

“A consideration of the rights of the members of the proposed class involves an analysis of the rights as against the scheme company which are to be released or varied under the scheme, and of the new rights which the scheme gives by way of compromise or arrangement to those whose rights are to be released or varied… The focus is upon ‘rights’ not ‘commercial interests’. The consideration requires those rights to be analysed not as a matter of theory but in context, an exercise which generally requires an analysis of what those rights would be if the scheme did not proceed” (Re Praesidiad Ltd [2023] EWHC 2745 (Ch) at [14] (Sir Alastair Norris)).

See also Re CA Cultural Technology Group Ltd[6].

18.  In essence, the classification principles involve a two-stage test (Re EFW 21 Renewable Energy Ltd[7]):

(1)  At the first stage, the Court considers the rights in and rights out.

(2)  If there is no material difference between the legal rights of the relevant creditors (namely, in respect of both rights in and rights out), they will form a single class, and there is no need to proceed to the second stage of the test.

(3)  If there are material differences between the legal rights of the relevant creditors, at the second stage the Court needs to assess the relevance of those differences. In brief, a difference is only sufficient to mandate the creation of a separate class if it is sufficiently great to make consultation with a view to the class members’ common interest impossible. That is a value judgment involving, among other things, the materiality of the difference in rights. Differences can be material without leading to separate classes, and a robust approach must be taken: Re Syncreon Group BV[8].

19.  Applying the above principles, the Scheme justifiably categorises the Creditors into a single class for the following reasons:

(1)  The appropriate comparator is the Company’s liquidation because the Company is already in liquidation.

(2)  In the event of the Company’s liquidation, the Creditors have identical “rights in” because the Claims are the Company’s general unsecured debts.

(3)  The Creditors have the identical “rights out” because the Scheme treats them equally (i.e. the right to receive Dividend that is proportionate to their respective Claim).

Compliance with Convening Order

20.  The Convening Order has been complied with. This appears from the 3^rd Affirmation of Chow Wai Shing Daniel dated 16 July 2024, confirming the circulation and publication of the Notice of the Scheme Meeting, Explanatory Statement and Scheme to the Scheme Creditors at least 14 days before the Scheme Meeting.

21.  The English and Chinese advertisement of the Notice of the Scheme Meeting was duly placed in The Standard and Sing Tao Daily on 27 June 2024.

22.  In this connection, it is pertinent to note that due to urgent health and safety concerns affecting the local community, which in turn impacted the viability of the Scheme, the Convening Order permitted the notice period for the Scheme Meeting to be 14 days, rather than the standard 21 days, consistent with the principles stated in Re National Car Parks Ltd[9] and Re Vue International Bidco Plc[10]. The shortened notice period did not cause any prejudice to Creditors, as demonstrated by the following facts:

(1)  On 7 June 2024, the Company circulated the draft Scheme document to all Creditors, as filed with the Court on 28 May 2024.

(2)  No creditor requested more time for consideration.

(3)  The Scheme Meeting received the Creditors’ overwhelming approval.

Statutory majorities

23.  During the Scheme Meeting convened on 12 July 2024, the Creditors voted unanimously in favour of the Scheme, thereby satisfying the requirements under section 674(1)(b) of the Ordinance.

Information provided to Creditors

24.  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” (Re Century Sun International Ltd [2021] HKCFI 2928; [2021] HKCLC 1477 at [23] (Harris J) (footnotes omitted)).

See also Re CA Cultural Technology Group Ltd[11].

25.  The Explanatory Statement satisfies the requirements of section 671(3) because:

(1)  It presents the Scheme as an alternative to the current liquidation of the Company.

(2)  It provides detailed estimates of creditor recovery under both the Scheme and the current liquidation, thereby providing a basis for informed decision-making.

(3)  It explains the background to the Scheme and offers a detailed analysis of its feasibility.

Discretionary element: the “intelligent and honest man” test

26.  The established principles may be summarised thus:

(1)  In Re People’s Energy (Supply) Ltd[12], Hildyard J held:

“I must consider whether the Scheme is one that an intelligent and honest man, acting in respect of his interests, might reasonably approve. This, put in that way, rather puts the onus on the court to sit in judgment on the honesty and reasonableness of the Scheme, but ultimately, what is really before the court is an issue of fairness…”

(2)  It is not within the Court’s purview to assess whether the scheme is the only fair scheme or even the “best” scheme: Re AGPS Bondco Plc[13].

(3)  “[I]t is not for the Court to strain to find reasons why a Scheme of Arrangement should not be sanctioned”: Representation of Wentworth Resources[14].

(4)  The Court should be slow to differ from the majority’s views, as it 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[15].

27.  The primary objective of the Scheme is to discharge all Claims upon its effectiveness, providing the Creditors with the Dividend in return. This Dividend offers a substantially more favourable outcome than they would receive through the Company’s ongoing liquidation. The unanimous support for the Scheme attests to the Scheme’s value and demonstrates that a reasonable creditor would likely approve it.

28.  Hence, in respect of the 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.

No “blot” or roadblocks

29.  As a final cross-check, the Court will evaluate whether there is any blot or defect in the scheme which may hinder its operational effectiveness (Re China Bozza Development Holdings Ltd[16]).

30.  It is a recognised practice in debt restructurings that schemes sanctioned by the Court typically take effect following a series of post-sanction steps. The present Scheme is similar because the Effective Date is conditional on a series of post-sanction steps to implement the Scheme, namely completion of the Share Subscription. The Company is on course to satisfy the Conditions Precedent promptly after the Scheme’s sanction. Thus the Court would not be acting in vain in sanctioning the Scheme.

31.  Accordingly, there is no blot on the Scheme. The Scheme is thus a scheme that the Court can and should sanction in the exercise of its discretion.

Confirmation of Capital Reduction

32.  Paragraph 1 of the Scheme envisages the cancellation and extinguishment of the Scheme Shares. This reduction of capital was considered by the Court on 22 July 2024 when it made the Directions Order that the requirement to settle a list of the Company’s creditors under section 227 of the Ordinance could be dispensed with.

33.  The Directions Order was made on the basis that the Scheme and the reduction involved no diminution of any liability in respect of the unpaid share capital of the Company or payment to any shareholder of the Company of any of its paid-up share capital: Re Cheung Kong (Holdings) Ltd[17].

34.  In anticipation of the Scheme, the Capital Reduction has been approved by the sole voting shareholder of the Company. None of the Company’s creditors are adversely affected by the Capital Reduction which is a technical step in the Restructuring Proposal. The Court may thus properly confirm the reduction of capital under section 229 of the Ordinance.

Conclusion

35.  The Scheme is a legitimate debt restructuring scheme which has complied with all the statutory requirements and has received the requisite Creditors’ support after exercising their independent business judgment and, therefore, I sanctioned it.