RE ADD HERO HOLDINGS LTD

HCMP 1695/2023 and HCMP 1696/2023

(HEARD TOGETHER)

[2025] HKCFI 310

HCMP 1695/2023

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1695 OF 2023

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1696 OF 2023

____________________

____________________

(HEARD TOGETHER)

__________________________________

REASONS FOR DECISION

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Introduction

1.  China Aoyuan Group Limited (“Holdings”) and Add Hero Holdings Limited (“Hero”) seek the Court’s sanction under section 673 of the Companies Ordinance, Cap. 622 (“Ordinance”), of two schemes of arrangement (“Scheme” or “Schemes” as the context requires) between each of them and the groups of creditors I describe later in these reasons[1]. The purpose of the Schemes is to restructure debt in excess of US$6 billion owed by Holdings and its principal subsidiary Hero, to avoid the liquidation of the business Group of which Holdings is the listed holding company and allow the Group to continue its business as a major property developer principally in the Mainland. The Holdings’ Scheme was approved by Scheme Creditors holding 79.11% in value of Holdings’ Scheme debt at a Scheme meeting held on 28 November 2023 pursuant to an order made on 31 October 2023 convening a meeting of Scheme Creditors to consider and vote on the Scheme. In the case of Hero’s Scheme, Scheme Creditors holding 88.31% in value of the Scheme debt approved the Scheme at a meeting also held on 28 November 2023 pursuant to an order made on 31 October 2023. Hero’s petition is unopposed. Holdings’ petition is opposed by China Ping An Insurance Overseas (Holdings) Limited (“Ping An”).

2.  Holdings also sought the sanction of a parallel scheme in the Cayman Islands in which it is incorporated. The petition in the Cayman Islands was unopposed and heard by Mr Justice Doyle on 7 December 2023, who sanctioned the petition on the same day. I have been provided with a transcript of an ex tempore judgment that he gave[2]. Hero similarly sought sanction of a parallel scheme in the British Virgin Islands (“BVI”) in which it is incorporated. The Hero petition was also unopposed and heard by Madam Justice Mangatal on 8 December 2023 and judgment entered sanctioning the Hero’s Scheme on 13 December 2023.

3.  As is well-known the Mainland property market has been subject to a significant correction and a large number of the Mainland’s major property groups have consequently experienced severe financial difficulties. The highest profile is China Evergrande Group[3], whose holding company, listed in Hong Kong, was wound up in Hong Kong by my colleague Linda Chan J on 29 January 2024, its attempts to introduce a scheme to restructure its debt having failed. One other Mainland property company has successfully sought the Hong Kong Court’s approval of a scheme; Sunac China Holdings Ltd[4], which I sanctioned on 5 October 2023. I sanctioned the Holdings’ Scheme and the Hero’s Scheme on 11 January 2024.

4.  The present Petitions give rise to important issues, which will probably have significance for the restructuring of other Mainland property groups, which will come before the Hong Kong Court as part of the resolution of the challenges developers face, in particular, issues relating to the constitution of the classes of creditors required to approve the Schemes: see [63]–[77]. As I mentioned in [1] the Hero’s Scheme was unopposed and most of this decision deals with the Holdings’ Scheme. The circumstances in which the Hero’s Scheme has been introduced is the same as the Holdings’ Scheme. I explain the Hero’s Scheme to the extent that it differs materially from the Holdings’ Scheme.

The Companies

5.  Holdings was incorporated as an exempted company with limited liability under the laws of the Cayman Islands on 6 March 2007. It is registered as a non-Hong Kong company in Hong Kong with registration number 18322. The shares of the Holdings were listed on the main board of The Stock Exchange of Hong Kong Limited (“HKSE”) (Stock Code: 3883) on 9 October 2007. Trading of the shares on the HKSE were suspended on 1 April 2022 as a result of delayed financial results. Holdings subsequently fulfilled the conditions required for the resumption of trading, which occurred on 25 September 2023. The authorised share capital of Holdings is HK$1 billion divided into 100 billion ordinary shares of a nominal or par value of HK$0.01 each, of which 2.966 billion have been issued and are fully paid up, or credited as fully paid up, with the rest remaining unissued (“Shares”). Approximately 56.01% of the Shares are beneficially held by Guo Zi Wen, the Chairman of Holdings or his family and the remaining 43.99% are held by other shareholders, including the general public.

6.  Holdings is the ultimate holding company of the China Aoyuan Group (“Group”), which comprises Holdings and its directly or indirectly owned subsidiaries in the BVI, Australia, Canada, Hong Kong, and the Mainland. The Group focuses on the development and sale of residential properties and commercial properties. The Group’s projects comprise various types of developments, including residential apartments, commercial apartments, low-density residentials, retail shops and others.

7.  The Group focuses on the Guangdong-HongKong-Macao Greater Bay Area, and covers four other major regions, including Southern China, the core region of Central and Western China, Eastern China, and Bohai Rim. The Group is significal in urban redevelopment in the Greater Bay Area. The Group also has property development and investment projects in Canada and Hong Kong, and holds a 24.68% stake in Aoyuan Healthy Life Group Co Ltd (“Healthy Life”), which is a property management services and commercial operational services provider in China.

8.  The following diagram summarises the Group’s structure.

9.  The Schemes are part of Holdings Plan to restructure and compromise its liabilities and those of its subsidiaries incorporated outside of China (“China Aoyuan Offshore Group”). Certain Scheme Creditors, in addition to their claims against Holdings, also have separate structurally superior claims against members of the Group that are incorporated in China (“China Aoyuan Onshore Group”). It would not be possible for Holdings to include the compromise of those onshore claims as part of the Restructuring without risking a significant impact on the onshore operations of the Group. In particular, any attempt to compromise the onshore claims may trigger enforcement actions being taken by other creditors in the Mainland against the China Aoyuan Onshore Group which would be value-destructive for all stakeholders of the Group. Holdings therefore intends to address the claims against such members of the China Aoyuan Onshore Group through bilateral negotiations and/or restructuring processes in the Mainland, taking into account the value of any Scheme Consideration Entitlement received by such Scheme Creditors pursuant to the Schemes. Holdings believes that the compromise of the liabilities of the China Aoyuan Offshore Group will allow the Group as a whole to comply with its post-restructuring obligations and to trade on a going-concern basis.

The Group’s existing debt

10.  The Group has incurred substantial debt to finance its day-to-day operations and investments. The Group’s debts include the “ICA Debt” and “Non-ICA Debt”, which together I shall call the “Existing Debt”. The Existing Debt is proposed to be subject to the Holdings’ Schemes and the ICA Debt (and one instrument of Non-ICA Debt) is proposed to be subject to the Hero’s Schemes. The total outstanding principal of the Existing Debt is approximately US$6.25 billion and represents approximately 84% of the Holdings’ total debt.

The ICA Debt

11.  The ICA Debt is comprised of:

(1)  12 publicly traded US dollar denominated senior notes governed by New York law and with an aggregate outstanding principal amount of approximately US$3.44 billion (“Existing Public Notes”); and

(2)  three syndicated loans governed by Hong Kong law and with an aggregate outstanding principal amount of approximately US$597 million (“Existing Syndicated Facilities”).

12.  Holdings is the primary obligor of the ICA Debt and the outstanding principal is approximately US$4.03 billion. The ICA Debt is secured, with the benefit of collateral granted under an intercreditor agreement originally dated 23 November 2012, entered into by, among others, Holdings and amongst others, certain subsidiary guarantor pledgers (“ICA”).

13.  The collateral provided under the ICA consists of guarantees granted by certain direct and indirect subsidiaries of Holdings (including Hero) in favour of the holders of the Existing Public Notes (“Existing Public Notes Guarantors”) and the Existing Syndicated Facilities (“Existing Syndicated Facilities Guarantors”) in respect of all of the obligations of the Holdings to pay the principal, premium (if any), and interest under the ICA Debt. Additionally, substantially all of the ICA Debt is secured by a first priority lien over the capital stock of all the Existing Public Notes Guarantors and Existing Syndicated Facilities Guarantors.

The Non-ICA Debt

14.  The Non-ICA Debt is not secured by the ICA collateral. Holdings is the borrower or guarantor under the Non-ICA Debt and the outstanding principal is approximately US$2.22 billion. The Non-ICA Debt consists of:

(1)  Four bilateral facilities provided by certain lenders to Holdings which benefit from a standby letter of credit (“SBLC”). The relevant existing lenders have enforced the SBLCs. Accordingly, the Scheme will only compromise the residual (unsecured) indebtedness owing to those lenders (“Existing Bilateral Facilities (SBLC)”). The total outstanding principal amount under the Existing Bilateral Facilities (SBLC) is approximately US$157 million and they are governed by Hong Kong law.

(2)  Six offshore financing arrangements that were issued or guaranteed by Holdings and are unsecured liabilities of Holdings (“Existing Other Offshore Financings”). The total outstanding principal amount of the Existing Other Offshore Financings is US$438 million and they are governed by Hong Kong law.

(3)  Four private bonds and/or private notes issued by certain companies outside the Group and guaranteed by Holdings (“Existing Private Notes”) The Existing Private Notes unsecured, the total outstanding principal is approximately US$650 million and they are governed by Hong Kong law.

(4)  18 onshore financing arrangements with China-incorporated entities in respect of which Holdings has provided Chinese or Hong Kong law governed guarantees (“Existing Onshore Facilities”). The total outstanding principal under the Existing Onshore Facilities is US$414 million and they are governed by Chinese law with the benefit of certain Chinese or Hong Kong law governed guarantees.

(5)  Five private loans issued by various entities outside the Group in respect of which the Holdings has provided guarantees (“Existing Private Loans”). The total outstanding principal of the Existing Private Loans is approximately US$456 million and they are variously governed by Hong Kong and English law.

(6)  the US$100 million term loan facilities agreement dated 31 December 2020, entered into between, among others, Holdings as borrower, Aoyuan Group Company Limited (“Aoyuan Group Co”) as onshore guarantor and Noble Prestige (Cayman) Limited (“Noble Prestige”) as lender, (“USD100m Noble Prestige Facility”). The USD100m Noble Prestige Facility is governed by Hong Kong law.

As indicated above, the debt instruments constituting the Non-ICA Debt are governed by the laws of Hong Kong, England, or the Mainland.

15.  The Non-ICA Debt constitutes unsecured liabilities of Holdings. However, certain debt instruments under the Non-ICA Debt have the benefit of guarantees or security provided by certain direct and indirect subsidiaries of the Holdings and entities outside of the Group.

Other debt

16.  As well as the ICA and Non-ICA Debt, the Group has the following debts which are subject to the Holdings and Hero’s Schemes:

(1)  Guarantees provided by Holdings in respect of certain offshore project financings. These have the benefit of project assets located in Canada and Hong Kong, and Holdings understands that based on the most recent valuations of these assets, the lenders would be able to receive substantial recoveries. Holdings took the view that such lenders would agree to participate in the Restructuring.

(2)  Various onshore bonds and loans (other than the Existing Debt) guaranteed by Holdings (“Onshore Bank and Other Borrowings”). The Onshore Bank and Other Borrowings consist of project financing in respect of projects near to completion and/or with secured financings where the value of the underlying security is sufficient to cover the outstanding liabilities. Holdings is at various stages of engagement with the relevant lenders and these liabilities are not included in the Schemes.

(3)  Trade and bills payables, other payables, consideration payables for acquisition of subsidiaries and other taxes payables will not be compromised, which is typical for restructurings, since Holdings requires their continued support to maintain its operations on a going concern basis.

(4)  Intercompany payables.

17.  The following tables summarise the Group’s debts in US$ as at 30 June 2023:

(1)  The Existing Debt that is to be subject to Holdings and Hero’s Schemes:

Debt	Outstanding principal amount
Existing Public Notes	3,438,000,000
Existing Syndicated Facilities	596,583,220
Total ICA Debt	4,034,583,220
Existing Bilateral Facilities (SBLC)	157,162,627
Existing Other Offshore Financings	438,143,997
Existing Private Notes	650,000,000
Existing Onshore Facilities	413,772,058
Existing Private Loans	456,257,600
USD100m Noble Prestige Facility	100,000,000
Total Non-ICA Debt	2,215,336,282
Total debt subject to the Schemes	6,249,919,502

(2)  The remaining debt which will not be subject to Holdings and Hero’s Schemes:

Debt	Outstanding principal amount
Offshore project financing	270,835,684
Onshore Bank and Other Borrowings	266,354,383
Debt	Outstanding amount
Trade and other payables	627,543,565
Intercompany payables	50,231,381
Total debt excluded from the Schemes	1,214,965,013

The Group’s financial difficulties

18.  The Group, like many others in the Mainland real estate sector, has been severely and negatively affected by the impact of the COVID-19 pandemic, and the downturn in the sector and capital markets since mid-2021. In this regard:

(1)  The Group has found it very difficult to raise onshore financing because of reduced bank lending for the real estate sector. Offshore capital markets have reacted adversely to the economic downturn in the Mainland, reduced bank lending for mortgage finance for buyers, as well as buyers’ concerns about future income, property price movements, and the ability of developers to complete projects. As a result, the offshore bond market, on which the Group relies heavily for refinancing and growth capital, is effectively closed to privately-owned Mainland real estate companies.

(2)  Sales for residential property in the Mainland has significantly slowed and prices have reduced. As a result, the Group has seen a decrease in revenue in 2023 compared with the corresponding period in 2021, materially and adversely impacting the Group’s ability to generate cash to service its debts.

19.  The confluence of the above factors has had two principal effects. First, it has resulted in a significant deterioration of the Group’s financial position, with the Group’s total revenue decreasing from approximately RMB32.5 billion (US$4.5 billion) for the six-month period ended 30 June 2021 to approximately RMB10.9 billion (US$ 1.5 billion) for the six month period ended 30 June 2023; secondly it has affected the Group’s ability to sustain its existing capital structure.

Events of default and enforcement action

20.  In an announcement on the HKSE dated 19 January 2022, Holdings announced that it would not make payments of principal and interest on certain of the Existing Public Notes and other material offshore indebtedness. This was to ensure that all of its creditors are treated fairly and for the Group to preserve as much liquidity as possible.

21.  As a result of this, creditors have taken steps to enforce their debts including serving statutory demands on Holdings (which remain outstanding) and commencing proceedings in Hong Kong against Holdings and certain subsidiaries. Further, Noble Prestige obtained an arbitral award rendered by the Shanghai International Economic and Trade Commission against Aoyuan Group Co, which is a member of the China Aoyuan Onshore Group, in connection with the guarantee provided by that company in respect of the USD100m Noble Prestige Facility.

22.  Except for the Noble Prestige arbitral award, none of the other proceedings have resulted in a judgment or award being entered against any members of the Group.

Financial position

23.  As at 30 June 2023, Holdings’ non-current assets amounted to approximately RMB735,947 (US$101,850) and Holdings’ current assets amounted to approximately RMB11,736,643,689 (US$1.624 billion). The vast majority of these current assets (RMB11,725,377,589 (US$1.623 billion)) are intercompany receivables, i.e. amounts owing to Holdings from other subsidiaries in the Group.

24.  Holdings’ equity interest in its direct subsidiaries is valued at zero because the security granted by Holdings over the shares of Hero (the intermediate holding company of the Group that holds substantially all of the Group’s onshore and offshore subsidiaries) has become enforceable and because the Group has ceased to be the controlling shareholder of Healthy Life following the disposal of 29.9% of the issued capital of Healthy Life on 17 July 2023.

25.  As at 30 June 2023, Holdings’ main liabilities were current liabilities relating to borrowings and its total indebtedness amounts to approximately US$7.464 billion.

26.  As at 30 June 2023, the Group’s non-current assets on a consolidated basis amounted to approximately RMB24,866.6 million (US$3.441 billion) and the Group’s current assets on a consolidated basis amounted to approximately RMB196,954.3 million (US$27.257 billion).

27.  As at 30 June 2023, the Group’s key assets are primarily the following:

(1)  Properties for sale of approximately RMB137,601.6 million (US$19.0 billion) which mainly comprised completed properties and properties under development.

(2)  Trade and other receivables of approximately RMB30,642.6 million (US$4.2 billion), which mainly comprised other receivables, including the receivables from disposal of equity interests, payments on behalf of customers, temporary payments made for potential property projects, a deposit paid to an independent third party for a short-term borrowing, a receivable from refund of the deposit for land auction and other temporary payments.

(3)  Investment properties of approximately RMB12,509.3 million (US$1.7 billion).

(4)  Amounts due from joint ventures of approximately RMB11,752.6 million (US$1.6 billion).

(5)  Bank balances and cash of approximately RMB3,374 million (US$467 million).

(6)  Restricted bank deposits of approximately RMB3,563 million (US$493 million), which served as security deposits and mortgage guarantees or with restrictions imposed by judicial freeze and creditors.

28.  As at 30 June 2023, the Group’s non-current liabilities on a consolidated basis amounted to approximately RMB8,883 million (US$1.229 billion) and the Group’s current liabilities on a consolidated basis amounted to approximately RMB233,470 million (US$32.311 billion).

The proposed Restructuring

29.  The Group has been involved in extensive negotiations with its major offshore creditors with the aim of implementing a comprehensive financial restructuring for the benefit of all stakeholders, including the Scheme Creditors. The negotiations and discussions have been with certain significant beneficial holders or lenders of record of the Existing Debt (both the ICA Debt and Non-ICA Debt), including an ad hoc group comprising of certain of the holders of the Existing Public Notes or the investment managers or investment advisers to such holders (“Ad Hoc Group”) and a steering/coordination committee of lenders holding the Existing Syndicated Facilities (“CoCom”). Given the ratio of the ICA Debt to Non-ICA Debt (approximately 2:1 or a split of 64.5% to 35.5% of the total Existing Debt), Holdings took the view that a consensual restructuring would likely require the support of creditors holding ICA Debt and creditors holding Non-ICA Debt (as either group could present a “blocking vote” in any scheme of arrangement proposed by Holdings) and accordingly negotiated with both significant beneficial holders or lenders of record of the Existing Debt (both the ICA Debt and Non-ICA Debt).

30.  On 24 March 2023, following discussions with the major offshore creditors, Holdings entered into a standstill agreement with the Ad Hoc Group. Holdings entered into standstill agreements with other offshore creditors on substantially the same terms (together with the standstill agreement referred to above, the “Standstill Agreements”). By 12 June 2023, more than 1,880 offshore creditors, representing approximately 64% of the total outstanding principal amount of the Existing Debt had entered into Standstill Agreements with Holdings.

31.  On 10 July 2023, Holdings entered into the restructuring support agreement (“RSA”) with the Ad Hoc Group. By 22 September 2023, over 1,100 holders of Existing Debt had executed or acceded to the RSA, representing 55% by value of the outstanding principal amount of the Existing Debt, in particular:

(1)  over 72% of the aggregate outstanding principal of the ICA Debt; and

(2)  over 22% of the aggregate outstanding principal of the Non-ICA Debt.

32.  The RSA provides for the Restructuring of the Existing Debt and the obligations of Holdings and Hero. In broad terms, the Restructuring involves the following four schemes of arrangement. Two parallel and inter-conditional schemes of arrangement in respect of Holdings, namely, the Holdings’ Scheme in Hong Kong and its Scheme in the Cayman Islands. Two parallel and inter-conditional schemes of arrangement in respect of Hero, namely, the Hero’s Scheme in Hong Kong and its Scheme in the BVI. Scheme Creditors who have executed or acceded to the RSA have undertaken to vote in favour of the proposed Scheme to effect the Restructuring.

33.  The primary purpose of Holdings’ Schemes and Hero’s Schemes is to achieve an effective release, discharge and/or compromise of the Existing Debt against the Group. Specifically:

(1)  the obligations of Hero and its offshore subsidiaries in respect of the ICA Debt and the USD100m Noble Prestige Facility will be compromised pursuant to the Hero’s Schemes; and

(2)  the obligations of Holdings and its offshore subsidiaries in respect of the ICA Debt and Non-ICA Debt will be compromised pursuant to Holdings’ Schemes, to the extent their obligations were not compromised pursuant to the Hero’s Schemes. In particular:

(a)  the ICA Debt will be fully discharged (to the extent that such obligations were not compromised under the Hero’s Schemes) and the debt instruments cancelled;

(b)  the residual (unsecured) indebtedness of the Existing Bilateral Facilities (SBLC) after the enforcement of the relevant SBLCs will be fully discharged and the debt instruments cancelled;

(c)  the Existing Onshore Facilities will be fully discharged, except for any claims against the onshore China-incorporated obligors, which will be preserved;

(d)  the USD100m Noble Prestige Facility will be fully discharged except for liabilities of Aoyuan Group Co (part of the China Aoyuan Onshore Group) which will be preserved; and

(e)  Holdings’ unsecured guarantee obligations under the Existing Private Notes and Existing Private Loans will be fully discharged. However, liabilities under those debts owed by the China Aoyuan Onshore Group or entities outside the China Aoyuan Group will be preserved.

The Holdings’ Scheme

34.  In broad terms, the Holdings’ Scheme involves each Scheme Creditor fully releasing Holdings and its offshore subsidiaries from their obligations and liabilities under the Existing Debt in consideration for proportionate entitlements in a set of new (or transferred) securities, namely new notes, convertible bonds, and perpetual securities issued by Holdings, as well as new shares of Holdings and transferred shares currently beneficially owned by Mr Guo.

35.  As well as the new securities issued by Holdings under the Holdings’ Schemes, Hero will distribute additional notes and cash consideration under the Hero’s Schemes.

36.  In addition:

(1)  each Scheme Creditor who executed or acceded to the RSA by a certain time and voted in favour of the Schemes will be entitled to receive a payment of cash and new notes (“RSA Fee”);

(2)  certain Scheme Creditors (the Ad Hoc group and certain members of the CoCom) who were involved in negotiating the Restructuring will receive a work fee to compensate those creditors for the associated work, time, and risks (“Work Fee”); and

(3)  the professional fees and expenses associated with the Restructuring of financial and legal advisers to the Company and certain Scheme Creditors (including the Ad Hoc Group) will be paid by the Company (“Adviser Fees”).

The Holdings’ Scheme Debt and Holdings’ Scheme Creditors

37.  As I have explained, the debt that is subject to the Holdings’ Scheme is the Existing Debt. The Scheme separates the Existing Debt into loans and notes as follows:

(1)  The Existing Notes Debt is comprised of the debt under the Existing Public Notes and the Existing Private Notes, excluding Holdings’ Scheme Excluded Liabilities (“Existing Notes Debt”).

(2)  The Existing Loans Debt is comprised of the debt under the various loan agreements, excluding Holdings’ Scheme Excluded Liabilities, as follows (“Existing Notes Debt”):

(a)  the Existing Syndicated Facilities;

(b)  the Existing Bilateral Facilities (SBLC);

(c)  the Existing Other Offshore Financings;

(d)  the Existing Onshore Facilities;

(e)  the Existing Private Loans; and

(f)  the USD100m Noble Prestige Facility.

38.  Holdings’ Scheme Excluded Liabilities are the claims of the Scheme Creditors (whether principal, guarantee and/or security) against Hero, the Existing Public Notes Guarantors, the Existing Syndicated Facilities Guarantors, any member of the China Aoyuan Onshore Group and other entities (which are not part of the China Aoyuan Group). These will not be subject to the arrangement and compromise effected by the Holdings’ Schemes. Scheme Creditors are the persons holding a beneficial interest as principal in the Existing Debt.

The operation of the Holdings’ Scheme

39.  The Holdings’ Scheme in Hong Kong and the Cayman are inter-conditional and upon the Scheme Effective Date, the Company will execute the restructuring documents by the Company on its own behalf and on behalf of the Scheme Creditors. The Scheme appoints the Holdings as agent and attorney on behalf of each of the Scheme Creditors to enter into a number of contractual documents, including deeds of release, to give effect to the compromise and arrangement under the Scheme. This is a commonly used means of implementing a scheme of arrangement: see Re ColourOz Investment 2 LLC[5], following Re Premier Oil plc[6].

40.  The compromises envisaged by the Scheme will take effect on the “Restructuring Effective Date”, which is subject to the “Restructuring Conditions” having been satisfied or waived. The conditions include, among other things:

(1)  both the Hero’s Schemes having been sanctioned and the orders filed at the respective registries (this results in the Restructuring being conditional on the Hero’s Schemes also being sanctioned);

(2)  Hero having obtained approval in principle for the listing of the Hero Notes on the Singapore Stock Exchange;

(3)  Holdings having paid the Adviser Fees, Work Fees and RSA Fees;

(4)  Holdings having obtained approval in principle for the listing of the new notes, convertible bonds, and perpetual securities on the Singapore Stock Exchange; and

(5)  Holdings having obtained the requisite shareholder approval for the issuance of new share capital.

41.  If the Restructuring Effective Date has not occurred on or before the long-stop date, the terms of the Scheme will lapse and the compromises and arrangements provided for by the Scheme will have no effect.

42.  On the Restructuring Effective Date, Holdings will procure that the steps set out in the Scheme occur in sequence to provide to each Scheme Creditor a Scheme Consideration Entitlement in each new (or transferred) security, calculated according to each Scheme Creditor’s proportionate holding of Existing Debt. On the Restructuring Effective Date, conditional on completion of each of the Restructuring Steps, the Scheme Creditors will release and waive its Scheme Claims against the Group.

The Holdings’ Scheme Consideration Entitlements

43.  Each Scheme Creditor is to receive a Scheme Consideration Entitlement calculated by multiplying each Scheme Creditor’s proportionate holding of the Existing Debt by the principal amount of the new financing instruments. The Scheme Consideration Entitlements include the following new securities:

(1)  the new 5.5% secured notes due 2031 in the principal amount of US$500 million to be issued by Holdings on the Restructuring Effective Date pursuant to the Aoyuan New Notes Indenture;

(2)  the new zero coupon mandatory convertible bonds due 2028 in the principal amount of US$143 million to be issued by Holdings on the Restructuring Effective Date pursuant to the Aoyuan MCB Trust Deed;

(3)  the new perpetual securities in the principal amount of US$1.6 billion to be issued by Holdings on the Restructuring Effective Date pursuant to the Aoyuan Perpetuals Fiscal Agency Agreement (as defined in the Scheme);

(4)  the new 1 billion shares to be issued by Holdings on the Restructuring Effective Date; and

(5)  the 400 million Aoyuan Shares, which are beneficially owned by Mr Guo, which are to be transferred.

The Explanatory Statement summarises the terms of the new finance documents pursuant to which the new securities are issued.

Determination and adjudication of Scheme Claims

44.  The Scheme establishes a conventional mechanism for the determination and adjudication of Scheme Claims. The Scheme appoints the “Scheme Administrators” and, in the event a Scheme Creditor disputes the Scheme Administrators’ determination of its Scheme Claim, provides for the appointment of an experienced lawyer or accountant to act as independent “Adjudicator”. Holdings is not required to postpone the Restructuring Effective Date in the event that any Disputed Scheme Claim has not been determined by the Adjudicator on or before the Restructuring Effective Date.

The Fees

45.  As I have explained, each Scheme Creditor who executed or acceded to the RSA by a specified deadline (termed the “RSA Fee Deadline”) and voted in favour of the Schemes will be entitled to receive the RSA Fee.

46.  The RSA Fee will be paid as a combination of cash and Aoyuan New Notes:

(1)  the cash element will be 0.25% of the aggregate amount of existing loans and notes debt held by the relevant creditor by the Scheme Record Date and notified to Holdings; and

(2)  a proportionate amount of US$100 million of Aoyuan New Notes set aside for the payment of the RSA Fees (i.e. the US$100 million is to be distributed proportionately among the recipients of the RSA Fee according to their debt holdings).

47.  The Work Fee is to be paid by Holdings to the Ad Hoc group and certain members of the CoCom. The Work Fee represents commercial compensation for the time and effort expended by the Ad Hoc Group and members of the CoCom to formulate and negotiate the Restructuring. It also compensates the Ad Hoc Group for restricting themselves from trading at various points during the negotiations because they were in receipt of material non-public information. The Work Fee represents less than 0.31% of the aggregate outstanding principal amount of the Existing Debt.

48.  The Adviser Fees are to be paid by Holdings to the financial and legal advisers to Holdings, the financial and legal advisers to the Ad Hoc Group, the financial and legal advisers to the CoCom, and the legal advisers to the Existing Public Notes administrative parties. The Adviser Fees are payments of costs necessarily incurred by the relevant Scheme Creditors in undertaking the role that is typical for a transaction of this kind. The total amount of the Adviser Fees and Work Fees represents less than 0.85% of the aggregate outstanding principal amount of the Existing Debt.

The Likely Alternative to The Scheme

49.  In the event that the Restructuring is unsuccessful, Holdings considers that the likely alternative is that Holdings and the Group would be placed into insolvent liquidation proceedings. Holdings has engaged Kroll to produce the Liquidation Analysis, which is appended to the Explanatory Statement. The Liquidation Analysis assumes that: (a) Holdings and its offshore subsidiaries were placed into liquidation on 31 December 2022 and ceased trading and operations upon liquidation; (b) no material realisations would be available from the Company’s onshore subsidiaries (so the Liquidation Analysis focuses on the offshore subsidiaries); (c) all assets would be sold or realised on a liquidation basis; and (d) creditors would enforce against all secured assets associated with their debts and claim the remaining balances.

50.  In terms of recoveries to Scheme Creditors:

(1)  In a Liquidation scenario, the Liquidation Analysis indicates that, on the basis of the relevant assumptions, in the event of the insolvent liquidation of Holdings and the Group, the Scheme Creditors are expected to have a total recovery rate of approximately 3.7% to 4.2%.

(2)  If the Group continues to operate as a going concern as a result of the Restructuring, the estimated return is 36.1% to each Scheme Creditor based on its Scheme Consideration Entitlement or Blocked Scheme Consideration Entitlement (as applicable).

The Hero’s Scheme

51.  As I have mentioned in [33] the Hero’s Scheme involves each Scheme Creditor fully releasing Hero and certain offshore subsidiaries from their obligations and liabilities under the ICA Debt and USD100m Noble Prestige Facility in consideration for proportionate entitlements in:

(1)  the “Hero Notes” in the principal amount of US$1.8 billion; and

(2)  the “Cash Consideration” (essentially the amount of cash on hand in certain Group company bank accounts after deducting all professional fees incurred in respect of the Restructuring); and

(3)  The additional benefits I have described in [36].

52.  The debt that is subject to the Hero’s Scheme is the ICA Debt and the USD100m Noble Prestige Facility. Scheme Creditors are the persons holding a beneficial interest as principal in that Debt.

53.  The Hero’s Scheme separates the Debt into loans and notes as follows:

(1)  The Existing Public Notes Debt is comprised of the debt under the Existing Public Notes, excluding the Hero’s Scheme Excluded Liabilities.

(2)  The Existing Loans Debt is comprised of the debt under the various loan agreements, excluding the Hero’s Scheme Excluded Liabilities, as follows:

(a)  the Existing Syndicate Facilities; and

(b)  the USD 100m Noble Prestige Facility.

54.  The Hero’s Scheme Excluded Liabilities are the liabilities owed by Holdings to the Scheme Creditors in relation to the Existing Debt and by the Group under the USD100m Noble Prestige Facility.

55.  Each Scheme Creditor is to receive a Scheme consideration Entitlement calculated by multiplying each Scheme Creditor’s proportionate holding of the Debt by the principal amount of the new financing instruments.

56.  The Hero Notes are to be issued on the Restructuring Effective Date in three tranches.

(1)  Tranche A: 7.5% senior secured notes due 2029 in the principal amount of US$650 million;

(2)  Tranche B: 8.0% senior secured notes due 2030 in the principal amount of US$500 million; and

(3)  Tranche C: 8.8% senior secured notes due 2031 in the principal amount of US$650 million.

57.  Each Scheme Creditor will be entitled to a proportionate amounts of each tranche. The Cash Consideration will be the aggregate balance of moneys held in six designated accounts as at the Restructuring Effective Date after deducting all professional fees incurred in respect of the Restructuring, as notified by PwC (in its capacity as a monitoring accountant) to the Ad Hoc Group and the CoCom three business days before the Restructuring Effective Date. The Hero’s Scheme operates in materially the same way as the Holdings’ Scheme.

The principles by which the court determines a scheme

58.  In considering whether to sanction a scheme, the Court applies well-established principles, which I summarised in Re Sunac China Holdings Ltd[7]. They are as follows:

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

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

(3)  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;

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

(5)  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;

(6)  whether the Court is satisfied in the exercise of its discretion that an intelligent and honest man acting in accordance with his interests as a member of the class within which he voted might reasonably approve the scheme; and

(7)  in an international case, whether there is sufficient connection between the scheme and Hong Kong, and whether the scheme is effective in other relevant jurisdictions.

I will address each of these, although only (2) and (4) are controversial.

Was the meeting duly convened in accordance with the Court’s directions?

59.  I am satisfied having read the 3^rd affirmation of Chen Zhi Bin, a director of Holdings, that the order that I made on 31 October 2023 convening a Scheme Meeting of each of Holdings and Hero has been complied with. The Notice of the Scheme Meeting, the Explanatory Statement and Scheme have been circulated and published as directed.

Statutory Majorities

60.  Section 670(1)(a) and (b) of the Ordinance provides that for the purposes of section 673(1)[8] the creditors, or class of creditors, of a company are taken to have agreed to a compromise constituting a scheme of arrangement if a majority in number representing at least 75% in value of the class of creditors present and voting in person or by proxy at a scheme meeting vote in favour of it.

61.  The Scheme Meeting was chaired, as directed by the convening order, by Mr Edward Middleton of Alvarez & Marsal Asia Limited, who has reported to the Court on the conduct of the meeting, which took place without controversy. The detailed results of the Scheme Meeting are set by Mr Middleton in his report. They are as follows:

CATEGORY	VOTE FOR			VOTE AGAINST
	NUMBER OF SCHEME CREDITORS	NUMBER OF VOTES BY VALUE	NUMBER OF VOTES BY %	NUMBER OF SCHEME CREDITORS	NUMBER OF VOTES BY VALUE	NUMBER OF VOTES BY %
TOTAL APPOINTING CHAIRPERSON AS PROXY	1,212	$4,495,325,439	68.43%	56	$1,214,165,518	18.48%
TOTAL APPOINTING OTHER AS PROXY	2	$564,568,561	8.59%	3	$104,975,894	1.60%
TOTAL VOTING IN PERSON	2	$137,103,408	2.09%	2	$53,477,290	0.81%
TOTAL	1,216	$5,196,997,408	79.11%	61	$1,372,618,702	20.89%

62.  As is apparent from the table the required statutory majorities were obtained.

The test for determining classes

63.  I summarise the test for determining classes in Re Sunac China Holdings Ltd[9] at [20]–[22]:

“20. 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 China Oil Gangran Energy Group Holdings Ltd[10]; Re Nasmyth Group Ltd[11].

21. As regards the identification of the appropriate comparator, the established practice is as follows:

‘In the context of a scheme of arrangement the Court must identify the comparator so that it can properly consider both class composition and also whether it produces a result for all scheme creditors which is better than or, at least no worse than, the result which would be achieved in the absence of the scheme’ (Re Lamo Holding BV [2023] EWHC 1558 (Ch) at [76] (Leech J)).

‘In identifying the relevant alternative, the directors of the Company, being advised by their professional advisers, are normally in the best position to identify what will happen if a Scheme or Plan fails’ (Re Fitness First Clubs Ltd [2023] EWHC 1699 (Ch) at [63] (Michael Green J)).

22. In brief, in assessing the Scheme Creditors’ rights, the Court considers what are often referred to as ‘rights in’ and ‘rights out’:

‘[T]he court needs to consider: (i) The rights of the Plan Creditors in the absence of the Plan, sometimes called the rights in; and (ii) Any new rights to which the Plan Creditors become entitled under the Plan or rights out.

If there is a material difference between the rights of the different groups under (i) or (ii), they may, but not necessarily will, constitute different classes’ (Re Yunneng Wind Power Co Ltd [2023] EWHC 2111 (Ch) at [40] (Michael Green J)).”

64.  Lord Millett NPJ explains in [20] of UDL Argos Engineering & Heavy Industries Co Ltd & others[12] that “….. creditors with different and potentially conflicting interests arising from circumstances unconnected with their interests as members of the class are not precluded from attending and voting at a meeting of the class. But while their presence does not invalidate the result of the meeting, it may lead the court to decline to sanction the Scheme.” The court asks first, whether or not the rights to be varied are sufficiently similar to allow creditors to vote in one class and, secondly, if the question is controversial, whether notwithstanding that the court takes the view that the creditors are properly treated as one falling into one class (or possibly two if there are multiple classes) does a sub-set of the creditors have an additional interest, which calls into question whether in supporting a scheme they were motivated by the same considerations as other creditors.

65.  Before turning to consider the characteristics of an additional or conflicting interest that may render a vote unrepresentative, I will address Ms Lam’s argument that the deliberate inter-locking and inter-conditional nature of the two Schemes means that the Scheme Creditors’ rights under the two Schemes as a whole need to be considered when determining whether or not the class had been properly constituted. Central to Ms Lam’s argument is the decision of Snowden J in Re The Baltic Exchange Limited[13]. The scheme in Baltic Exchange was a transfer takeover scheme the object of which was to enable SGX Baltic Investments PTE Ltd to acquire all of the issued shares of The Baltic Exchange Limited, which was a private company with one class of shareholders and a single class of shareholders was convened to consider the scheme. The particular matter that concerned the constitution of the class, which lead to those parts of Showden J’s judgment on which Ms Lam relies are explained in [13]–[14] of the judgment:

“13. The third matter to which Mr. Horan drew my attention is one which, however, I would wish to comment on in a little more detail. It is a particular feature of the Baltic Exchange that it has made use - throughout its recent history at least - of what are called “panellists” who produce or contribute to the freight market indices known as the “Baltic Indices”. The indices rely on panelists giving a daily judgement on the routes that they have been asked to assess. Until now, the panellists have been content to do so voluntarily without any formal contractual arrangements with the Company. They have also been in receipt of free access to certain data to enable them to perform their role.

14. The bidding company, an indirect subsidiary of the Singapore Exchange, wishes that this panellist arrangement be put on to a more formal commercial footing as part of the acquisition process. Accordingly, contracts have been entered into between a wholly-owned subsidiary of the Company and the panellists to deal with the provision by them of this information. Under those arrangements, which are conditional upon the Scheme being sanctioned and the acquisition taken effect, the subsidiary of the Company has promised to procure free membership of the Baltic Exchange for the panellists (which I am told is worth £6,875 each per year) and continued free access to the data (which is worth about £458 each per year). Mr. Horan has also told me that one of the terms of the takeover will be that the level of fees for membership of the Baltic Exchange will be frozen for a total of five years for all members.”

66.  Some of the panellists were shareholders in The Baltic Exchange Limited. The issue was, therefore, whether or not the additional contractual rights made the views of those shareholders unrepresentative of the class of shareholders generally. Ms Lam argued that Snowden J accepted that these additional rights that were not derived from the scheme, but from another contractual arrangement, should be taken into account in determining whether the class had been properly constituted. She relied on [15]–[18]:

“15. These new contractual arrangements, which are conditional upon the sanction and effectiveness of the Scheme are matters, which should be looked at by a court in considering the class and jurisdictional questions. I say that because in a number of cases the court has made it clear that it is not confined to looking at the Scheme document in the narrow sense. Where a scheme is part of, or accompanied by, other arrangements that confer rights or benefits upon some or all of the members or creditors who are to be bound by the scheme, the class question must be answered by reference to all those arrangements taken as a whole.

16. I cite by way of example what Mr. Justice David Richards said in Re Telewest Communications (No.1) [2005] 1 BCC 752 at para.54, where, having referred to certain voting arrangements, he said:

‘A serious issue would arise if in consideration of its agreement to vote in favour of the scheme, or collaterally to it, the bondholder received benefits not available to the other bondholders. In effect, the result would be unequal treatment under the scheme and the bondholder could not, I think, be included in the class.’

17. I returned to this question in the case of Re Stemcor Trade Finance Limited [2016] BCC 194 at paras.17 and 18, where I said, at para.18:

‘I would first say that in deciding the question it is necessary for me not just simply to look at the scheme as a narrow and limited document, I think it is right to look at the scheme in the context of the restructuring as a whole including the rights to be conferred in the other various other restructuring documents which are envisaged to be entered into pursuant to the terms of the scheme. If authority were needed for that proposition, apart from common sense, I think it could be found in the decision of Mr. Justice David Richards in Re Uniq Plc [2012] BCLC 783 at para.24.”

18. In this particular case, therefore, I have to ask the question, as a matter of judgment, whether the ability of the panellists to obtain contractual rights giving them free membership of the Baltic Exchange for the duration of the panellist agreement and continued free access to the certain data distribution is such as to require them to be put into a separate class from other members of the Company.”

67.  Ms Lam also took me to Snowden J’s judgment in Re Sunbird Business Services Limited[14] in which the same approach is explained in [23]:

“23. Finally, and relevantly for the instant case, modern authorities have emphasised that, in assessing how creditor classes should be constituted for the purposes of a scheme, the Court should not adopt a narrow approach and look at a scheme in isolation. The scheme should be looked at in the context of the restructuring as a whole, including, in particular, any rights conferred in other agreements that are provided for under the terms of the scheme, or which are conditional upon it: see e.g. per David Richards J in Re Telewest Communications plc [2004] BCC 342 at paragraph [54]; my own observations to that effect in Re Baltic Exchange Ltd [2016] EWHC 3391 at [17], citing Re Stemcor Trade Finance Ltd [2016] BCC 194 at [17]-[18]; and the recent discussion of this approach by Falk J in Re Codere Finance 2 (UK) Limited [2020] EWHC 2441 (Ch) at [49] et seq..”

68.  Snowden J refers in the passage that I have quoted to [49] of Falk J’s judgment in Re Codere Finance 2 (UK) Limited[15]:

“49. However, the fundamental question is whether the Scheme should be regarded, on a true analysis, as a number of linked arrangements rather than a single arrangement (per Chadwick LJ in Re Hawk). So I need to ask myself what is the ‘arrangement’, and whether there is more than one. The focus of Bowen LJ’s test is on the ability of persons to ‘consult together’ with a view to their ‘common interest’. The focus is on the nature of the arrangement and the decision-making process in respect of it. As a matter of commercial reality, AHC members will have taken the decision to support the Scheme by reference to the whole package of rights to which they were entitled pursuant to the Lock-up Agreement, including the level of conditionality (if any) attached to each element of that package. If the ‘package’ of rights offered and agreed to by some creditors for releasing or varying their existing rights is different to the package available to others, then that might in principle be thought properly relevant to class composition, and not only to the question of the court’s exercise of discretion at the sanction stage.”

69.  In September 2020 Falk J heard an application for an order by Codere Finance 2 (UK) Limited for a meeting of a single class of creditors for the purpose of considering and approving a scheme of arrangement. The scheme creditors were the ultimate holders of two series of notes issued by the scheme company and another group company; their parent being listed on the Madrid stock exchange. The notes were issued in registered global form and traded through Euroclear and Clearstream. The liabilities under the notes and several other liabilities of other group companies including €85 million super senior notes due on 30 September 2023 issued on 29 July 2020 (“interim notes”) benefited from substantially the same guarantee and security package granted by a number of group companies. Falk J accepted that the most likely alternative to restructuring, and thus the comparator for purposes of assessing class composition, was some form of formal insolvency. During the negotiation of the group’s debt restructuring several creditors of the group, including a small proportion of those holding debt arising under the notes, signed a lock-up agreement with several group debtors. The lock-up agreement and associated term sheets provided the following:

“26. …

i) an initial issue discount of 3% on the Interim Notes;

ii) a coupon on the Interim Notes which is 2% higher than the coupon on the New Notes, for the period from issue to the point that the New Notes are issued (12.75% as opposed to 10.75%);

iii) a ‘backstop’ fee of 2.5% of the entire €250 million of NSSNs;

iv) a ‘work fee’ payable to AHC members of 1% of the principal amount of the Existing Notes (totalling around €7.6 million), to be paid on issue of the Interim Notes;

v) the payment by the Group of the AHC’s financial and legal advisers’ fees (anticipated to amount to approximately €6.75 million); and

vi) consent fees, comprising a pro rata share of 0.5% of the principal amount of the Existing Notes to be paid to noteholders who acceded to the lock-up by 20 July (an ‘early bird’ fee)[16] and a further 0.5% of the principal amount of the Existing Notes to be paid to noteholders who acceded by a later date (that later date subsequently being altered to the business day prior to the sanction hearing). Noteholders who qualify for the early bird fee also receive the second consent fee.”

70.  At the hearing to convene a meeting one creditor, Kyma, argued that scheme creditors should vote as two classes with a group (referred to in the judgment as the AHC members) voting in a separate class to other scheme creditors. Kyma argued that the AHC members had negotiated a special package of benefits for themselves, which I have described in the previous paragraph, including the lock-up agreement. Falk J described the fundamental question before him as whether the Scheme should be regarded as a number of linked arrangements rather than a single arrangement and then explained the relevant test in [49], which I have quoted above. It is clear from [49] and [52]–[54] that Falk J took the view that the additional rights including the lock-up agreement negotiated by the AHC members were rights to which the court should have regard when determining class composition. Although they were not rights conferred expressly by the scheme they were rights arising as part of the restructuring of which the scheme formed part rather than genuinely independent of the scheme. However, Falk J concluded that the interim notes should not be regarded as new rights which the scheme confers. He took the view that on a proper analysis they were issued in exchange for the funds advanced for them by the relevant AHC members rather than disguised consideration for the variation of rights under the scheme. Falk J took the opposite view in respect of the work fee, which he considered was clearly linked to the AHC members holding of the existing notes and was close to a form of disguised consideration for support for the scheme. Falk J concluded that the differences, however, were not sufficiently substantial to prevent the scheme creditors consulting and voting together as one class.

71.  In Re Hawk Insurance Co Ltd Chadwick LJ[17], referring to Bown LJ in Sovereign Life, talks of the rights being sufficiently similar that a scheme can be treated as one arrangement; and if the rights are not, as being part of a number of linked arrangements; the test for determining which it is being whether the rights of the creditors are so dissimilar as to make it impossible for them to consult together in their common interest. Zacaroli J refers to Chadwick LJ’s decision in In the matter of Dundee Pikco Limited[18]when explaining that in a scheme with more than one class the fact that certain creditors in each class hold debt in the other class is not regarded as splitting the class of creditors, and that such a scheme is viewed as a series of linked compromises or arrangements. Zacoroli J explains that in his opinion the better view is that in such a scheme there is no difference in the rights, but a difference in the interests of the relevant creditors and, as is well established, a difference in interests does not split the class, although it may be a matter relevant at the sanction hearing when the court comes to consider the issue of a scheme’s fairness. This, argues Holdings, is the correct view to take of the compromise sought to be achieved by the Holdings and Hero’s Schemes.

72.  The issues raised by Ping An are these. Are the only rights to which the court has regard in determining the constitution of a class of creditors the rights compromised and new rights granted under the terms of the scheme? Alternatively, if as a consequence of a restructuring of the company the subject of a scheme, or an associated company in the case of a group restructuring of which a scheme forms part, a scheme creditor acquires other rights or has other existing rights compromised should regard be given to these modifications of a creditor’s rights in determining the class composition?

73.  In [27(3)] of UDL[19] Lord Millett says that “the test is based on similarity or dissimilarity of legal rights against the company….”. He goes on in [27(4)]: “The question is whether the rights which are to be released or varied under the Scheme or the new rights which the Scheme gives in their place are so different that the Scheme must be treated as a compromise or arrangement with more than one class”. This language clearly suggests that it is only the rights compromised by the scheme or granted by it that are relevant to the question of class composition. The reason for not straying beyond the confines of the rights effected by the scheme had been addressed in the previous paragraph. The first identified by Lord Millett is the impracticality in many cases of constituting classes by reference to distinctions other than those arising from the terms of the scheme itself. Lord Millett is referring specifically to interests, but the same consideration applies to rights with which a scheme is not concerned as illustrated by complications considered in Codere Finance. This is not to say that other rights or interests are not relevant. They will be relevant at the stage described by Lord Millett in [27(6)]; the discretionary stage at which the court considers whether the result of the meeting fairly reflected the views of creditors. At that stage the court may discount or disregard votes of creditors who had such other interests or rights that their support for the scheme cannot be regarded as fairly representative of the class; what for convenience I shall refer to in the remainder of this judgment as a “special interest”.

74.  In my view the approach taken by the English courts in Baltic Exchange, Re Sunbird Business Services and Codere Finance, which I accept do support Ping An’s argument that regard should be had to rights altered outside the scheme, as part of the broader restructuring of which the scheme forms part, is not consistent with the Court of Final Appeal’s decision in UDL and, consequently, the law in Hong Kong. It seems to me that those decisions do not sit comfortably with those that I have referred to in [71] such as Dundee Pikco, but it is not for the Hong Kong to reconcile them. I would add one qualification.

75.  In [131]–[132] of his judgment in Re Noble Group Limited[20] Snowden J accepts as a general proposition that payments made by a company to some scheme creditors independently of a proposed scheme and its “associated restructuring agreements”, which are not dependent on the scheme coming into effect are not relevant in determining the composition of a class. Pausing here, it would appear by “associated restructuring agreements” Snowden J has in mind agreements, which may or may not form part of a scheme, for example, a consent fee rather than an agreement, but which viewed commercially might be said to be associated with the restructuring of which the scheme forms part as, for example, in the case of a group restructuring such as that before me now, which involves two independent schemes (in the sense that the sanction and implementation of one is not a condition of the other) of two associated businesses. This being the case Snowden J is accepting as a general proposition that it is the rights altered by the scheme before the court which determines class composition, which is an uncontroversial. He then refers to Richards J’s (as the then was) judgment in Telewest Communications Plc[21] in which it is suggested that a class might be fractured if in consideration of a creditor’s agreement to vote in favour of a scheme a creditor receives benefits not available to other creditors. Snowden J describes such a payment as disguised consideration. I agree that a right to payment granted to some scheme creditors in return for voting for a scheme, can properly be viewed as a relevant right when determining a class. This is because it forms part of the arrangement the company wishes to enter with its creditors, albeit only some of them, and should be included in the scheme; not, to use Snowden J’s language, disguised and omitted from the scheme put before creditors for consideration and resolution and the court for sanction. If it is included in the scheme and it is material this might, depending on the size and the significance of the payment, justify those creditors who the company have agreed to pay, voting in a separate class.

Special Interest

76.  The circumstances in which an additional benefit available to some members of a class, but not others, renders a vote unrepresentative was considered by Hildyard J in [89]–[90] of his judgment in Re Lehman Brothers International (Europe) (in administration)[22]:

“89. I agree with counsel for the Administrators that the mere fact that the majority creditors have a special interest for supporting the scheme does not, without more, entail that the class was not ‘fairly represented’. As appears from Plowman J’s formulation of the guiding principles in In re National Bank Ltd [1966] 1 WLR 819 (see para 65 above), the concern is whether the relevant creditors have a special interest which is adverse to, or clashes with, the interests of the class as a whole. A special interest which merely provides an additional reason for supporting the scheme (without clashing or conflicting with the interests of the class as a whole) does not undermine the representative nature of the vote. This is well established in the authorities both before and after National Bank Ltd. Thus, for example:

(1) In In re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213, 238–239, Lindley LJ said: ‘what the court has to do is to see, first of all, that the provisions of that statute have been complied with; and, secondly, that the majority has been acting bona fide. The court also has to see that the minority is not being overridden by a majority having interests of its own clashing with those of the minority whom they seek to coerce. Further than that, the court has to look at the scheme and see whether it is one as to which persons acting honestly, and viewing the scheme laid before them in the interests of those whom they represent, take a view which can be reasonably taken by business men. The court must look at the scheme, and see whether the Act has been complied with, whether the majority are acting bona fide, and whether they are coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and then see whether the scheme is a reasonable one or whether there is any reasonable objection to it, or such an objection to it as that any reasonable man might say that he could not approve of it.’

(2) In In re Dee Valley Group plc [2018] Ch 55, para 42, Sir Geoffrey Vos C said: ‘The meeting or meetings are called to establish whether or not the court's discretion to sanction a scheme can, as a matter of jurisdiction, be invoked. It is, however, most important in my judgement to consider what the court is doing once it embarks on exercising that discretion. It is then deciding, amongst other things, first whether the statutory pre-requisites have been fulfilled, and secondly whether the class attending the meeting the court called was fairly represented by those attending the meeting, whether the statutory majority were acting bona fide and not coercing the minority in order to promote interests adverse to those of the class they purport to represent. It is quite clear from that exercise that the court is indeed concerned with those matters in sanctioning a scheme. The clue as to what members are supposed to be doing in voting at the court’s class meeting is also, I think, to be found in that second well established formulation. The members are supposed to be fairly representing their class, and acting bona fide, and not coercing a minority in order to promote interests adverse to the class they purport to represent …

‘The test itself is, as I have said, made clear by the exercise that the court undertakes at the sanction stage. That points clearly to the need for the class members at the court meeting to be voting in the interests of the class and not to promote interests adverse to the class they purport to represent …’

(3) I said much the same in In re APCOA Parking Holdings Gmbh (No 2) [2015] Bus LR 374 , para 130: ‘if an allegation is made that a creditor had improper regard to interests other than those of the class to which he belonged, it is necessary for there to be a “but for” link between the collateral interest and the decision to vote in the way that he did. The person challenging the relevant vote must therefore show that an intelligent and honest member of the class without those collateral interests could not have voted in the way that he did. It is not sufficient simply to show that the collateral interest is an additional reason for voting in the manner in which he would otherwise have voted.’

(4) The same view has recently been taken by the Grand Court of the Cayman Islands in In re Ocean Rig UDW Inc ((unreported) 18 September 2017, Grand Ct of the Cayman Islands) with the benefit of full adversarial argument, including the citation of all relevant English and Australian authorities.

90. Further, and particularly as to (b) in para 89 above, I agree also with counsel for the Administrators that the bare existence of an adverse interest is not enough to impugn a creditor’s vote as being unrepresentative of the class. There must be a strong and direct causative link between the creditor’s decision to support the scheme and the creditor’s adverse interest such that it is the adverse interest which drives the creditor’s voting decision. In the absence of such a link, there is simply no sufficient reason to treat the creditor’s vote any differently from those of the rest of the class.”

77.  I agree that a proportion of Scheme Creditors of Holdings had the benefit of guarantees granted by Hero and were able to vote in both the Holdings and Hero’s Schemes on the basis of the full value of their claims and receive Scheme Consideration in both sets of Schemes and this is a special interest (which I note was acknowledged by Holdings in the application for sanction of the Holding’s Scheme before Doyle J in the Cayman Islands), because it is an additional reason for the over-lapping Scheme Creditors to vote in favour of the Holdings’ Scheme. However, it does not seem to me that it has been demonstrated by Ping An that it undermines the representative nature of the vote by the majority at the Holdings’ Scheme Meeting. To do so Ping An would have to prove that the additional benefits obtained by the over-lapping creditors from the approval of the Hero’s Scheme were, or were likely to have been, a material reason for voting for the Holdings’ Scheme. Ping An has adduced no evidence which suggests that this was the case; in fact, Ms Lam did not in argument goes so far as to suggest it was the case. The absence of any evidence or argument that identifies a credible reason for thinking that the over-lapping creditors decision to approve the Holdings’ Scheme was motivated by the benefit to be obtained by approval of Hero’s Scheme is consistent with my decision in respect of the constitution of the class. In practice what might, in my view, reasonably be assumed is that some of the over-lapping creditors considered the two Schemes together, i.e. as a package, but this does not of itself mean that their approach to the decision to support the Holdings’ Scheme was influenced by factors that made their deliberations unrepresentative of those of other Holdings’ Scheme Creditors. As I have demonstrated an additional interest does not fracture a class. Neither does it mean that the deliberations are to be assumed to be unrepresentative. The latter has to be proved.

Adequacy of the Explanatory Statement

78.  An unusual feature of the Holdings’ Scheme Petition was that there was cross-examination of both one of the Liquidators of Holdings (Patrick Cowley) and an expert on behalf of Ping An (Matt Ng, who is also an accountant dealing mainly with insolvency matters). As far as I am aware this is the first time that this has taken place in a scheme in Hong Kong; although there have been occasions on which individual creditors or members (in the case of a privatisation) have addressed the court[23]. Oral evidence was required because it was contended by Ping An that there were material mistakes or insufficiency of information in the Explanatory Statement.

79.  Ping An makes two complaints. First, that the assessment of the recovery rate of 36.1% under the Schemes contained in Kroll’s Report does not present a fair picture, because it uses an outdated share price and does not adequately consider the payment terms of the instruments and Holdings’ ability to generate sufficient cash flow to pay the sums due on them. Secondly, no cashflow forecast has been provided in Holdings’ Explanatory Statement to enable the Scheme Creditors to assess the true value of the Scheme consideration.

80.  As I explain in [23] of Re Century Sun International Ltd[24] a company is under a duty to include in the explanatory statement all the information necessary for creditors to assess whether the scheme is in their best interests or not. The extent of the information required will depend on the facts of the case. Generally, a company will be required to provide specific information to support its predicted outcomes.

81.  There are two components to the first complaint. The first concerns the share price used to assess the recovery rate. Holdings used a November 2023 price. Mr Ng suggests that this should have been discounted. His reason for so contending is that “in theory” the Scheme would put downward pressure on the share price, in addition to having a dilution effect (which Mr Ng calculates would be 25.22%), because a significant proportion of creditors would be likely to sell their shares. Mr Cowley explained that he had taken the view that determining the value of the shares if the Scheme was to be implemented was largely speculative, but the Liquidators considered it reasonable to assume that if the Scheme was approved it was likely to have a positive effect on the share price. Mr Cowley points in his report to the Sunac Scheme (which I have referred to previously[25], which was sanctioned in November 2023) seeing a 38.9% increase in its share price the day after it resumed trading as illustrating what he considers to be the most likely impact of the approval of the Scheme. I think that it is a reasonable assumption that the share price will recover if the Scheme is approved, and, of course, it can never be more than an assumption. One difficulty with Mr Ng’s approach is that it does not consider why the share price was HK$0.18 on 15 November 2023. Without some understanding of what resulted in the price being at that level five weeks after the application was issued for an order convening a meeting of Scheme Creditors it seems to me that not only is Mr Ng’s calculation very much theoretical as he himself acknowledges, but probably it ignores factors operating in the market, which result in the shares trading at HK$0.18. I do not accept that the assumed value of the share price is likely to be misleading and calls into question the reliability of the valuation to extent that justifies rejecting the adequacy of the financial information included in the Explanatory Statement.

82.  The second complaint is that no cash flow forecast has been provided and Ping An argues that something similar to the cash flow forecast and report, which tested the report and pointed out reasons for caution, which was included in the explanatory statement in Re Kaisa Group Holdings Ltd[26], was necessary and that its absence renders the information provided to Scheme Creditors materially inadequate. In cross-examination Mr Cowley explained that the cash flow forecasts had changed during the discussions with creditors; the most material change being the reduction of the debt figure from US$2.9 billion to US$1.8 billion. Mr Ng had used the initial higher figure and his criticism that the cash flow did not support the scheduled debt repayments fell away once this was factored in, which I did not understand Mr Ng to dispute when he was cross-examined. I accept that generally in a restructuring, which involves materially delaying repayment of the debt, a cash flow analysis is desirable in order to demonstrate that the schedule is likely to be met. The analysis should also identify matters that might reasonably be expected to adversely affect the accuracy of the analysis.

83.  In practice, it will commonly be possible for an opposing creditor to identify matters that can plausibly be argued have not been dealt with adequately in an explanatory document, because by its nature a scheme requires the justification of a commercial decision, which involves more than scrutinising numbers; it requires a degree of judgment about the credibility of the restructuring and what it purports to offer creditors in contrast to what return can reasonably be expected if the company is put into compulsory liquidation. What is required is an explanatory statement, which allows creditors to make this assessment. The creditors are likely to vary in terms of commercial and financial sophistication and the effort they are likely to put into understanding the information with which they are presented. The explanatory statement has to achieve at least two things. Provide sophisticated creditors with enough information to assess the scheme and perhaps identify further information they consider is necessary to decide whether or not to support it, but be intelligible to the average creditor. It seems to me that the Explanatory Statement achieves these aims.

Discretionary considerations

84.  Ping An argued that even if I decided in Holdings’ favour the issues I have addressed in earlier sections of these reasons, I should decline to sanction the Holdings’ Scheme, because it is not one that an “intelligent and honest man”, acting in accordance with his interests as a Holdings’ creditor might reasonably approve.

85.  The Court is normally slow to differ from the majority of creditors’ views, as it normally acts on the basis that businessmen are much better judges of what is in their commercial interest than the Court[27]. Whether a compromise of the sort contained in the Holdings’ Scheme is financially preferable to a compulsory winding up is a matter of commercial judgment. Opinions may differ on which course is likely to be most beneficial, but as the language in which the “intelligent and honest man” test is framed indicates the Court will only override the views of the majority if their view seems sufficiently odd that it suggests it was arrived at as a consequence of either a failure properly to assess the terms of the compromise or considerations other than its merits. It is rare for the Court to interfere on this ground and I am only aware of one case in Hong Kong in which a judge considered this to be a ground (although only one amongst others) for declining to sanction a scheme; a privatisation for which the judge considered the offer price was too low[28]. The company’s share price in subsequent years illustrates the danger of the Court straying into the area of commercial judgment.

86.  In practice an argument that the compromise is so unattractive it is not one a hypothetical intelligent and reasonable creditor would approve is likely to be unnecessary, because if it is satisfied it is likely to be because either creditors have not had the scheme properly explained to them (in which case it is likely that the explanatory statement will have been shown to be defective and sanction refused for that reason) or there is evidence to suggest that a statutory majority was only obtained because creditors with some collateral reason for supporting the scheme did so in which case it is likely that they would have had a special interest and their votes discounted. These are more straightforward issues to determine than the commercial merits of a scheme. I have addressed earlier the complaints about the Explanatory Statement and the special interest arguments in the present case.

87.  Ping An argued that the weight that is normally given to the majority creditors’ views should be discounted where inadequate information has been provided and referred me to [22] of Mr Justice Snowden’s judgment in Re Ophir Energy plc[29] as authority for the proposition. What Mr Justice Snowden says is this: “…if the members or creditors have been provided with materially inaccurate, incomplete or otherwise inadequate information, the Court will most likely not be able to place any reliance upon, or give effect to, an affirmative vote at the Court meeting.” I do not read this as supporting, as Ping An argued, that the greater the Court’s concerns about the adequacy of the information provided in the explanatory statement the less weight it will give to the majority view; in other words there is a kind of sliding scale with the Court being readier to review the commercial judgment of the majority (it being in the context of this issue that the proposition is advanced by Ping An) if the Court considers the information provided does not satisfy the criteria I explained in the previous section of this judgment. I disagree. It seems to me that either the Court takes the view that inadequate or misleading information has been provided, in which case it should decline to sanction the scheme for that reason, or it accepts that sufficient and accurate information has been provided and the resolution of the majority of creditors should be taken at face value, namely, in their commercial judgment the compromise offered is preferable to the alternative, which will normally be a compulsory winding up. If the Court is satisfied that the class or classes were properly constituted and adequate information was provided normally the question of whether or not the “intelligent and honest” creditor criteria is satisfied will be moot, but if it is controversial it is to be answered by the Court considering whether on the basis of the evidence before it approving the scheme was a rationale commercial one even if opinions could reasonably differ over it. Ping An’s argument elides the “intelligent and honest man” test with the tests I have referred to in [86]. Questions of commercial judgment, the proper constitution of a class and the adequacy of information engage different considerations, and it is unhelpful to elide them.

88.  Ping An question the assessment of the majority of Scheme Creditors of the merits on the grounds that the recovery rate under the Scheme (0.75%) is lower than Holdings’ assessed recovery rate in an insolvent liquidation (3.7 to 4.2%) and Kroll suggest in their report that the latter may be an underestimation. Also, the cash payment is delayed so long, 8 years, that it does not offer an obvious advantage over an insolvent liquidation. It does not seem to me that these differences are such as to support the conclusion that a decision to support the Scheme was irrational and calls into question the integrity of the support.

Blot or defect in the Schemes

89.  As Ping An correctly submitted the court will assess whether or not there is, what is commonly referred to in the authorities, as a “blot” on the scheme. However, Ping An mischaracterised what constitutes a blot. Ping An argued that it is something considered at the discretion stage of the Court’s deliberation and that, in the present case “In assessing this, the Court is invited to take into account the artificiality of the structure adopted and the manner in which this structure overrides the legitimate interests of creditors: see Re Gategroup Guarantee Ltd [2021] BCC 549 at [12] – [13].”[30] Paragraphs 12 to 13 of Zacoroli J’s decision in Gategroup says nothing relevant to what constitutes a blot on a scheme generally or on facts relevant to the present matter. A blot refers to a fundamental flaw in a scheme that could impede its effective operation: see China Bozza Development Holdings Ltd[31] and Re AVEVA Group Plc. It is not an independent category of consideration at the discretionary stage of the approval process. That having been said I will deal with the substance of the objection.

90.  Ping An argues that the Schemes appear to have been designed for the sole purpose of using Overlapping Creditor votes to reach the requisite statutory majorities to bind Non-Overlapping Creditors, in the absence of a mechanism in Hong Kong for cross-class or cross-creditor group cramdown. This argument is premised on the assumption that the restructuring of the Existing Debt and the ICA Debt could have been structured to release the Overlapping Creditor’s claims against Hero as well. This is said to have been possible as it is established[32] that a guarantor may introduce a scheme of arrangement, which compromises not only the company’s liabilities but also the debts owed by the principal obligors, who are members of the same business group. Commonly the principal obligor will be a subsidiary of the guarantor, which has provided a parent/holding company guarantee. The release of the principal obligor is necessary to avoid creditors undermining the restructuring of the holding company’s liabilities.

91.  It may have been possible to compromise the relevant part of the Non-ICA Debt using the structure suggested by Ping An, but Ping An’s submission simply invites the Court to assess whether there was a better or more appropriate way of restructuring that debt. This is not, however, the function of the Court and the criticism advanced by Ping An is certainly not what in my view can properly be characterised as a blot on the Holdings’ Scheme.

92.  Ping An’s second criticism under this heading is that the ICA Debt is being compromised under the Holdings’ Scheme only to the extent it is not compromised under the Hero’s Scheme, the Schemes having been structured such that the Overlapping Creditors have been able to prove for the entirety of their debt in both Schemes. The consequence of this is that the Overlapping Creditors have been given an unnecessary and artificial right to vote in both Schemes, which functionally gives them a greater say in the outcome of the voting by Scheme Creditors. This is simply a different way of presenting the objection based on the constitution of the class and the alleged presence of a special interest. If the class was properly constituted and the interests of the Overlapping Creditors are not properly viewed as a special interest justifying assessing the level of creditor support without regard to their votes, the criticism advanced by Ping An cannot sensibly be viewed as a blot on the Holdings’ Scheme.

93.  The third and final objection under this heading is that the Overlapping Creditors were only allowed to submit one account holder letter or proxy form in respect of both Schemes, with the result that they had to vote the same way for each of the Schemes. Although, from a presentational perspective it might have been better to have required separate documentation for each Scheme there is no evidence to suggest that it made any difference or that one would have expected an Overlapping Creditor to have voted differently for each Scheme. It does not of itself mean that that in making their decision Overlapping Creditors were influenced by considerations likely to lead to a conclusion as to the attraction of either Scheme different to that of other members of the relevant class.

94.  It seems to me clear that there was no blot on the Holdings’ Scheme.

Lack of Utility

95.  Ping An’s final objection to the Scheme is that it lacks utility. It argues as follows. The Court will not sanction a scheme, which to achieve its intended commercial effect must be recognised in other jurisdictions in order for it to prevent enforcement in them, which would undermine the scheme[33]. Approximately US$270 million of Holdings’ debt is governed by English law. As the Courts of England and Wales still apply the Rule in Gibbs[34] the Holdings’ Scheme will not be recognised as compromising that debt. This is relevant, because of the English law governed debt, US$120 million and US$150 million is owed to King World Facilities, which voted against the Schemes. I accept that if Holdings or Hero had substantial assets in England, against which that debt could be enforced this might call into question the viability and thus the utility of the Schemes. That is not, however, the case. The Companies do not operate or own assets in England and any English judgment would not be enforceable in Hong Kong or in the Cayman Islands and the British Virgin Islands. It is not necessary for Holdings to demonstrate that the Scheme will be effective in every jurisdiction, whose laws govern part of the debt to be compromised[35]. What is necessary is that it is demonstrated that the Scheme will be effective in the jurisdictions in which it needs to be effective to achieve its intended purpose. It seems to me clear that the Schemes will be.

Conclusion

96.  For these reasons I sanctioned the Schemes.