RE UNITY GROUP HOLDINGS INTERNATIONAL LTD (formerly known as SYNERGY GROUP HOLDINGS INTERNATIONAL LTD)

HCMP 869/2022

[2022] HKCFI 3419

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 869 OF 2022

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D E C I S I O N

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Introduction

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 Creditors.

2.  Pursuant to the Order made on the Company’s Originating Summons on 15 July 2022 (“Convening Order”), the Scheme Meeting was convened on 26 August 2022. The resolution of the Scheme Meeting was carried by a majority in number of the Creditors present and voting, in person or by proxy, holding 99.44% of the Claims voted. Specifically, eight out of the nine Creditors voted for the Scheme.

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, the Company says, give the Scheme Creditors a much higher recovery (estimated to be 100% of the Principal under a Cash Option explained in [8]). Absent restructuring, the Company would be liquidated and the Creditors’ estimated recovery would be approximately 51%.

The Company

4.  The Company is a Cayman-incorporated entity listed in Hong Kong since 26 October 2016. It is an investment holding company. The Company’s subsidiaries are principally located in Hong Kong, Mainland China, Malaysia, and the British Virgin Islands. The Group’s key businesses consist of the provision of leasing services of energy saving systems, consultancy service, and trading of energy saving products.

The Company’s financial difficulties

5.  The Company’s audited accounts for the year ended 31 March 2022 show the Group having net assets of approximately HK$145,641,000. The Company, however, is at least cash-flow insolvent. The Company’s main indebtedness, governed by Hong Kong law, arises from:

(1) loans taken out by the Company; and

(2) guarantees granted by the Company for loans obtained by affiliated entities.

6.  The Company’s present total indebtedness amounts to approximately HK$223.7 million. The Company is very likely to go into liquidation, unless its current indebtedness can be restructured.

7.  In January 2022, the Company raised HK$110,000,000 by issuing 1,100,000,000 Subscription Shares to an investor. The Company intends to use HK$28.2 million from the subscription proceeds to fund the restructuring of the Company’s indebtedness through the Scheme. The Scheme covers all of the Company’s creditors, with some exceptions to be dealt with bilaterally. The Scheme seeks to discharge the Company’s unsecured indebtedness, which would also entail releasing the following third parties and rights:

(1) the Guarantors; and

(2) the Company’s joint obligors; and

(3) the Third-Party Security (Clauses 2.6–2.7 of the Scheme).

In return, the Scheme Creditors will be given a choice to choose either a Cash Option or an Equity Option (Clause 2.8 of the Scheme).

8.  Under the Cash Option, the Scheme Creditors will receive:

(1) the Initial Cash Payment of 5% of the Principal;

(2) up to 95% of the Principal over the course of 30 months; and

(3) interest on the outstanding Principal at the rate of 2.5% p.a. from the Effective Date (Clause 2.11 of the Scheme).

9.  Under the Equity Option, the Scheme Creditors will receive New Shares issued at a premium of 25% over the average closing price of the Shares for the last five consecutive trading days prior to the Effective Date (Clause 2.12 of the Scheme).

10.  The Scheme Creditors’ recovery under the Scheme is estimated to be 100% of the Principal under the Cash Option, whereas in a liquidation the Scheme Creditors’ recovery is estimated to be approximately 51%. The Company does not need any parallel scheme of arrangement in any other jurisdiction.

The legal principles governing the sanction of a scheme

11.  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 on 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.

Permissible purpose

12.  As in Singyes, the Scheme is a genuine debt restructuring of a distressed company. As part of a debt restructuring, a number of authorities in Hong Kong and England establish that it is a permissible purpose for a scheme to release obligations of third parties connected with a company’s debts or owed by a company to third parties. For example:

(1) A scheme may release the scheme company’s guarantors and joint obligors (Re Century Sun International Ltd[2]; Re Swissport Fuelling Ltd[3]).

(2) A scheme may release third-party security for the scheme company’s debts (Re Far East Capital Ltd SA[4]).

(3) Where the scheme company is a guarantor, the scheme may release the principal obligors (Re Swissport Fuelling Ltd[5]; Re Swissport Fuelling Ltd[6]; Re Swissport Fuelling Ltd[7]; Re Swissport Fuelling Limited[8]).

13.  In the present case, where the Company is only a guarantor, the Scheme seeks to discharge debts owed by principal obligors who are members of the Group of which the Company is the holding company. This is the first Scheme in Hong Kong, which has sought to do so. This is an issue of practical importance as the viability of a business group may depend on a form of restructuring that involves the release of the debt of subsidiaries which is guaranteed by the ultimate parent company. I understand from Mr Ho that there are a number of other business groups considering introducing schemes, which in order to be viable will require the holding company to be released from its liability for the debts of its subsidiaries. Following the English approach, in order to permit the Scheme to discharge debts owed by the principal obligors the Company has executed a deed of assumption of obligations to make it a joint obligor with the original principal obligors.

14.  The use of a deed of assumption to permit a guarantor’s scheme to discharge debts owed by the principal obligors is a well-established technique in England. Re E D & F Man Holdings Ltd[9] is an example. Michael Green J explains the technique in his decision granting the company leave to convene a meeting of creditors:

“On 3 February 2022, the company executed a Deed of Contribution in favour of MTM and Volcafe Vietnam, who are the borrowers under each of the financing arrangements to be compromised under the plan. The company is merely a guarantor under these financing arrangements and that is why the deed was required. The Deed of Contribution creates a right of contribution in favour of MTM and Volcafe Vietnam against the company, something that they would not otherwise have.

The basic effect of the Deed of Contribution is that in the event that either MTM or Volcafe Vietnam makes a payment in respect of the BBF, the RCF, the Secured Term Loan facility or the Secured Term Notes, then it will be entitled to recover a contribution from the company. The purpose of the Deed of Contribution, as explained to me by Mr Allison, is to enable the company, as a guarantor of the financial debt, to propose the restructuring plan so as to compromise its own liabilities and the liabilities of all other group obligors, including MTM and Volcafe Vietnam as borrowers. Similar deeds of contribution have been executed in a number of previous schemes and restructuring plans. It provides for what is called a ricochet claim and this has been held in previous cases to be entirely appropriate…

[T]he restructuring plan is not only a compromise or arrangement of the plan creditors’ rights against the company, it is also a compromise or arrangement of the plan creditors’ rights against the other group entities, which are obligors in respect of the debt, including MTM and Volcafe Vietnam as borrowers. This falls within the scope of a compromise or arrangement between the company and its plan creditors, since, absent a compromise of the plan creditors’ rights against the other obligors, the plan creditors could continue to enforce their existing rights against the other obligors and the other obligors would then have a ricochet claim for a contribution against the company which would defeat the purpose of the restructuring plan. This was considered in In re Noble Group Limited [2019] BCC 349 by Mr Justice Snowden, as he then was, and by Mr Justice Zacaroli in In re Gategroup Guarantee Limited [2021] EWHC 304 at paragraph [163]. This was the reason why it was necessary to have the Deed of Contribution, which I have already described, as being entirely appropriate to have entered into.”

15.  The application for an order sanctioning the scheme was heard by Trower J who also took the view that the release of the principal obligors was permissible[10].

“[T]here are two further matters which require consideration. The first is whether there is any difficulty arising out of the fact that the company is only a guarantor of the finance debt; a fact which caused those responsible for designing the plan to execute a deed of contribution to provide for a ricochet claim thereby rendering the company a co-obligor with MTM, as principal debtor under the existing finance agreements.

In my judgment, there is no objection to the use of such a structural device so long as it is done with a view to achieving the best possible outcome for creditors as a whole. In Re Swissport Fuelling Limited [2020] EWHC 3413 (Ch), paragraph 62-73, I explained why I consider that this is the correct approach.”

16.  The Singapore court has taken a different approach although reaching the same conclusion, namely, that a principal obligor’s obligations may be released, by permitting a guarantor’s scheme to discharge debts owed by the principal obligors, without the guarantor resorting to a deed of assumption to trigger a ricochet claim. In Pathfinder Strategic Credit LP v Empire Capital Resources[11], the Singapore Court of Appeal held (at [20(b)], [77], [79]–[82]):

“What are the limits of the court’s jurisdiction under s 210(1) of the CA where the proposed scheme purports to release liabilities between the company’s creditors and third parties (‘Issue 2’)? This issue arises because the Proposed Scheme is put forward by Empire Capital as a guarantor and it contemplates the compromise and release of the liabilities of the primary obligors, BCR and BCE, under the 2015 and the 2017 Notes…

In relation to the substantive test of jurisdiction, it seems to us that the proper inquiry is … whether there is a sufficient nexus or connection between the release of the third party liability and the relationship between the company and the scheme creditors…

Further, there also does not appear to be good reasons for drawing a distinction between a ‘primary’ and a ‘secondary’ obligation in the context of a guarantee for the purpose of determining jurisdiction under s 210(1) of the CA.

On this basis, the Proposed Scheme would appear to fall within the scope of s 210(1) of the CA since the release of the debt owed by other members of the Berau Group to the 2015 and the 2017 Noteholders is evidently closely related to the creditor-debtor relationship between these noteholders and Empire Capital. The debts all arise out of the same note issues and indeed, from the creditors’ view, are effectively the same liability since the discharge of one extinguishes the right to pursue the other. On this basis, it is not relevant to the court’s jurisdiction under s 210(1) of the CA whether the scheme applicant is the issuer of the notes (BCR and BCE) or a guarantor of the same (Empire Capital).

Even if the test of necessity were to be adopted, as the Minority Creditors propose, we would have been inclined to find that it would be satisfied on the present facts. In our judgment, having regard to the legislative context of s 210(1), any jurisdictional test would have to be applied in a commercially sensible manner particularly where a group restructuring is concerned. In this context, even if it was the guarantor and not the primary obligor who was the scheme applicant, a release of the third party debt owed by the primary obligor to the scheme creditors would still be regarded as necessary, since otherwise liability and enforcement risks would merely be shifted between members of the corporate group and the overall restructuring objective would be entirely unmet. Indeed, without a release of the primary obligor’s liability, it seems to us unrealistic to even expect a guarantor within the same corporate group to settle or compromise its contingent liability through a scheme of arrangement. In that context, the third party releases must be viewed as necessary to give effect to the Proposed Scheme.

For these reasons, we would have affirmed our jurisdiction to grant leave under s210(1) of the CA in respect of the Proposed Scheme notwithstanding that the scheme applicant is Empire Capital who is a guarantor of the 2015 and the 2017 Notes, and that there are third party debts, including those of the primary obligors, sought to be compromised.”

17.  In Re Swissport Fuelling Limited Trower J remarked obiter that “[i]t may be that on the issue of third party releases, the Singapore Court of Appeal has blazed a more straightforward trail which English law ought to follow”[12]. I also can see force in the Singaporean Court of Appeal’s analysis. The question is whether or not the release of the third party’s obligations to the third party’s creditors comes within section 673 of the Ordinance. As I understand it the deed of contribution entered into by a company and the principal obligor in the cases to which I have referred and also the present one, does not create a new economic right. The deed of contribution is used to make clear that in the event of a claim being advanced against a principal obligor, which is a member of the group of which the company the subject of the scheme forms part, it will trigger a right to recover from the Company albeit under the deed of contribution rather than the guarantee. In Re Century Sun International[13] I explain that a scheme can properly contain provisions that release third party rights if it is necessary in order for the scheme to be effective. I can see no reason to distinguish between, for example, a release of the obligations of a third party guarantor of a company’s debt, which is necessary to make a scheme effective (i.e. the restructuring returns the company to commercial and financial viability) and a release of a principal obligor’s liability, which has been guaranteed by the company. Both are permissible. If this is correct there is no need for a deed of contribution. There may be cases in which the relevant arrangements are such that it is thought by a company’s advisors that entering a deed of contribution makes the effect of the scheme easier to understand, but in my view it is not necessary.

Class composition

18.  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 as follows:

(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[14].

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

20.  The release of the Creditors’ rights against third parties would not create any class issue. In [21] of Re Century Sun International Ltd[15] I agreed with the decision in Re Ocean Rig UDW[16] where Parker J held:

“Importantly in applying the test the court is concerned with the rights (as distinct from interests) between the company and the scheme creditors alone, and not in respect of any third parties.”

In Re Indah Kiat International Finance Co BV[17], Snowden J held in [65]–[66]:

“As is well known, the test for the composition of classes focuses on a comparison of existing rights against the scheme company and the treatment of those rights under the scheme…

Likewise, in Re Primacom Holding GmbH [2011] EWHC 3746 (Ch); [2013] B.C.C. 201 Hildyard J said, at [44]:

‘… in determining whether the constituent creditors’ rights in relation to the company are so dissimilar as to make it impossible for them to consult together with a view to their common interest the court must focus, and focus exclusively, on rights as distinct from interests. The essential requirement is that the class should be comprised only of persons whose rights in terms of their existing and the rights offered in the replacement, in each case against the company, are sufficiently similar to enable them to properly consult and identify their true interests together.’”

The release of the principal obligor’s rights does not change the character of the creditor rights released. The central feature of the scheme is the release of all unsecured claims creditors may have against the Company. The release of a principal obligor is a way of achieving this result. The relevant feature is that the rights against the principal obligor are mirrored by the right the creditor has against the Company (assuming as one properly can) if a claim is made against the principal obligor and it is not met. It may be that there will be incidences in which a creditor of a principal obligor wishes to argue that the release of its rights give it a different interest in the scheme, which is relevant to whether the scheme should be sanctioned, but this will be a matter to consider at the discretionary stage of the approval process.

Compliance with Convening Order

21.  The Convening Order has been complied with.

Statutory majorities

22.  During the Scheme Meeting held on 26 August 2022, the Creditors duly voted in favour of the Scheme: see the Chairperson’s Report. 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 Creditors present and voting in person or by proxy have been satisfied.

Information provided to Scheme Creditors

23.  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”[18]

24.  In my view the Explanatory Statement clearly satisfies the requirements of section 671(3) in particular the Explanatory Statement makes clear that the Scheme is an alternative to the Company’s liquidation, estimates the likely returns for Creditors in a liquidation and under the Scheme, together with the likely timescales for such recoveries and explains the Company’s business rationale for avoiding a liquidation, hence the Board’s recommendation for the Scheme.

Discretionary element: the “intelligent and honest man” test

25.  The Court should be slow to differ from the majority 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[19]. The primary object of the Scheme is that, upon the Scheme becoming effective, the Scheme Creditors’ Claims will be discharged and in return they will be entitled to be given cash a distribution, convertible bonds or a combination of both under the terms of the Scheme. The Scheme consideration provides the Scheme Creditors with a much better return than in an insolvent liquidation of the Company. 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.

International effectiveness

26.  In an international case, the Court considers 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].

27.  Although there is no parallel scheme or recognition application in any jurisdiction, the Scheme is expected to be internationally effective because all the Claims are governed by Hong Kong law. The equivalent English position is instructive:

“Under generally accepted principles of private international law, a variation or discharge of contractual rights in accordance with the governing law of the contract will usually be given effect in other countries.”[20]

“There is no requirement for a scheme to be effective in every jurisdiction worldwide, provided that it is likely to be effective in the key jurisdictions in which the company operates or has assets. Where the governing law of the debt affected by the scheme is English law, it is inherently likely that the scheme will be recognised abroad.”[21]

Disposition

28.  I will make an order in the terms of the draft order submitted to me.