RE SINO-OCEAN LAND (HONG KONG) LTD

HCMP 1124/2024

[2025] HKCFI 1270

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1124 OF 2024

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REASONS FOR JUDGMENT

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1.  By petition presented on 16 January 2025 (“Petition”), Sino-Ocean Land (Hong Kong)  Limited (遠洋地產(香港)有限公司)  (“Company”)  seeks sanction of a scheme of arrangement (“Scheme”)  between the Company and the “Creditors” (as defined in §9 below)  on the terms and subject to the conditions set out in the composite scheme documents (“Scheme Documents”). At the hearing, I sanctioned the Scheme. These are the reasons for my judgment.

A.  FACTUAL BACKGROUND

2.  The Company was incorporated in Hong Kong on 18 April 2005.  It is an indirect wholly owned subsidiary of Sino-Ocean Group Holding Limited (“ListCo”)  (together with its subsidiaries “Group”), which has since 2007 been listed on the Main Board of The Stock Exchange of Hong Kong Limited (stock code: 3377).

3.  The Group is principally engaged in property development and investment in the Mainland and owns 260 projects in various cities and metropolitan regions.  The Group also operates businesses covering senior living, internet data centres, logistic real estate and real estate funds.  The Company is one of the Group’s main financing platforms for bank loans.

4.  Due to the downturn in the real estate property sector in the Mainland, as at 30 June 2024, the Company became insolvent in that its total assets were RMB 49.91 billion while its total liabilities were RMB 55.32 billion.

5.  On 15 September 2023 and 10 November 2023, ListCo announced that it had suspended payments under its offshore debts until a comprehensive restructuring and/or extension solution(s)  had been implemented.

6.  To formulate a debt restructuring proposal, the Company  engaged Houlihan Lokey as its financial advisor and Messrs. Sidley Austin as its legal advisor.

7.  Since October 2023, the Group has been in discussion with significant holders of the “Existing Debt Instruments” (defined in §12 below)  all of which are guaranteed by ListCo, namely:

(1)  The co-ordination committee of lenders of the Existing Syndicated Loans and Existing Bilateral Loan (defined in §9 below)  (“CoCom”), which comprises international, Mainland and local banks. CoCom holds 56.4% of aggregate outstanding principal under the Existing Syndicated Loans and the Existing Bilateral Loan; and

(2)  An ad hoc group of holders of certain English law governed notes, which comprise 7 series of notes with maturity dates ranging from January 2025 to January 2030[1].

8.  On 18 July 2024, a restructuring support agreement was entered into between ListCo, the Company, and the Initial Participating Creditors (defined therein)  (“RSA”).  The RSA contains a term sheet which sets out the principal times of the restructuring and has been amended on 22 September 2024.  

B.  THE SCHEME

9.  The Scheme is put forward by the Company for the purpose of restructuring and compromising all the claims (“Claims”)  which the creditors have against the Company (“Creditors”)  under 2 types of loans, both of which are governed by Hong Kong law (collectively “Existing Loans”):

(1)  “Existing Syndicated Loans”, which are syndicated term loans[2] advanced to the Company and guaranteed by ListCo and the “Subsidiary Guarantors”.

(2)  “Existing Bilateral Loan”, a HK$870 million term loan facility made to the Company and guaranteed by ListCo and the Subsidiary Guarantors.

10.  The outstanding principal under the Existing Loans is US$1.92 billion (equivalent to RMB 13.63 billion).

11.  As the Existing Loans are guaranteed by Listco, for the purpose of compromising and releasing their claims against Listco, they are classified as “Class A” under the restructuring plan proposed by ListCo pursuant to Part 26A of the Companies Act 2006 (“CA 2006”)  under the laws of England and Wales (“Plan”). 

12.  The Plan is a wider restructuring in that it seeks to compromise a total outstanding principal of US$5.64 billion under 4 types of debt instruments (collectively “Existing Debt Instruments”):

(1)  Class A, (i.e. Existing Loans)  with outstanding principal of US$1.92 billion.

(2)  “Class B”, with outstanding principal of US$1.92 billion, which comprises notes with maturity dates in January 2025, May 2026, August 2029 and January 2030,.

(3)  “Class C”, with outstanding principal of US$1.198 billion, which comprises notes with maturity dates in July 2024 and February 2027.

(4)  “Class D”, with outstanding principal of US$0.60 billion, which comprises certain perpetual subordinated guaranteed capital securities.

13.  The Scheme and the Plan are inter-conditional and will only take effect upon satisfaction completion or waiver of the restructuring conditions stipulated therein.

14.  The following liabilities will not be compromised under the Scheme or the Plan:

(1)  5 bilateral loans with total outstanding principal of HK$1,450 million, which will be dealt with bilaterally between the Company and the relevant parties.

(2)  The Company’s current liabilities (excluding borrowings)  of approximately RMB 40.18 billion as of 30 June 2024, which represent the amounts due to the ultimate holding company, subsidiaries, fellow subsidiaries, dividend payables, trade and other payables, and lease liabilities.

(3)  The Company considers there is no immediate risk of the Group entities seeking to recover any of the receivables.

15.  On 18 October 2024, the English court made a convening order in respect of the Plan. The sanction hearing took place on 20 January 2025.  As noted in the judgment of Thompsell J dated 3 February 2025, Re Sino-Ocean Group Holding Ltd [2025] EWHC 205 (Ch)[3]:

(1)  The Plan was supported by creditors present and voting holding (a)  100% in value of Class A; (b)  47.7% in value of Class B; (c)  81.5% in value of Class C; and (d)  34.9% in value of Class D;

(2)  Long Corridor Asset Management Limited, a creditor holding 3%, 1% and 4% by value within Class B, C and D, opposed the Plan.  Its main objection is that the Plan is too generous to shareholders in that after implementation of the Plan, they are still left with 53.8% equity in ListCo, which will have a substantial value. The shareholders obtain this advantage without having to put in any new money against the background that they would receive nothing in the event of a liquidation; and

(3)  Listco sought sanction of the Plan under s.901F of the CA 2006 which provides that, subject to s.901G (which has been referred to as a “cross-class cram down”), the Plan needs to be approved by each class of creditors holding 75% in value present and voting.  As the Plan was not approved by the requisite majority of Class B and Class D, Listco had to satisfy the court that the conditions for exercising the power under s.901G were satisfied. 

16.  On 21 January 2025, the Company sought an adjournment of the sanction hearing of the Scheme pending the English court’s decision on the Plan.  As the Scheme (even if sanctioned)  would not take effect unless the Plan is sanctioned, this Court acceded to the request and adjourned the sanction hearing to 19 February 2025.

17.  On 3 February 2025, the English court sanctioned the Plan. 

18.  Under the Scheme, each Creditor is entitled to receive one or a combination of the following new debt instruments as “Restructuring Consideration”:

(1)  “New Debts” in the form of New Loan and/or New Notes, with aggregate principal of US$1,328 million;[4] and

(2)  “New MCBs” and/or “New Perpetual Securities” being the Claims less the New Debts, with aggregate principal of  US$833 million assuming the Restructuring Effective Date (“RED”)  occurs on 31 December 2024.

19.  The key features of the new debt instruments to be issued under the Scheme are as follows:

(1)  The New Debts have a maturity period of 3 to 8 years and bear interest at 3% p.a., payable semi-annually in cash, both subject to deferral.  They are guaranteed by certain subsidiaries of ListCo and will benefit from security interest or other alternative arrangements over substantially all of the Group’s available offshore assets.

(2)  The New MCBs are mandatory convertible bonds with a maturity period of 2 years and zero coupon, convertible up to 4,464,980,645 new shares in ListCo. 

(3)  The New Perpetual Securities have no fixed redemption date and ListCo retains the right to redeem or repurchase them.  Distribution accrues at 1% p.a. payable semi-annually with a discretionary step-up rate of 1% every 36 months to a maximum of 5%, subject to ListCo’s discretion to defer part of any distribution.

20.  In addition, the following fees are payable to some of the Creditors:

(1)  “Consent Fees”: Creditors who acceded to the RSA by the “Early Consent Fee Deadline” (8 August 2024 5pm)  will receive a fee at 0.1%; and those acceding by the “Base Consent Fee Deadline” (1 November 2024 5pm)  will receive a fee at 0.05% of the principal.

(2)  “Work Fee” at 0.5% payable to CoCom:

(a)  A fixed amount of up to 0.25% of the outstanding principal under the facility agreements beneficially held by CoCom, payable on or before the earlier of (i)  the Longstop Date on 31 March 2025 (“Longstop Date”)  and (ii)  the RED (“Fixed Work Fee”). 

(b)  A fixed amount of up to 0.25% of the outstanding principal under the facility agreements beneficially held by CoCom, payable on or before the RED (“RED Work Fee”).

(3)  “Adviser Fees”: CoCom will be reimbursed with the professional adviser fees incurred.  Together with the Work Fee, they represent 0.47% of the outstanding principal of the Existing Loans.

21.  In consideration of the Scheme Consideration, on the RED, the Company will execute a Deed of Release (on behalf of the Creditors)  to effect the releases of the “Released Persons” from the “Released Claims”:

(1)  The Released Claims comprise:

“any Hong Kong Scheme Claim, Ancillary Claim or any past, present and/or future Claim arising out of, in relation to and/or in connection with: (a)  the Existing Loan Documents; (b)  the preparation, negotiation, sanction or implementation of the Hong Kong Scheme, the Restructuring Documents and/or the RSA; and/or (c)  the execution of the Restructuring Documents and the carrying out of the steps and transactions contemplated in the Hong Kong Scheme in accordance with their terms.”

(2)  The Released Persons are:

“(i)  the Restructuring Companies, the Subsidiary Guarantors, any member of the Group, their respective Affiliates, their respective Personnel and their respective advisers, (ii)  the Existing Agents, (iii)  the New Agents, (iv)  the Holding Period Trustee, (v)  the Information Agent, (vi)  the Restructuring Administrators, (vii)  the Adjudicator, and (viii)  the Advisers; and, regarding each of the above, includes each of their respective predecessors, successors and assigns (where applicable)  and their respective Affiliates, their respective Personnel, and their respective advisers and in their capacities as such.”

(3)  These releases are subject to carve-outs in respect of inter alia (a)  liabilities for fraud, gross negligence, wilful default, or wilful misconduct; (b)  liability of the Advisers or CoCom’s Advisers arising under a duty of care to their clients; and (c)  liability of a director in connection with any negligence, default, breach of duty or breach of trust (“Exclusions”).

22.  The Scheme will take effect upon the sanction of the court, the filing of the sanction order and execution of the Deed of Undertaking[5]. However, the RED will only take effect if all the “Restructuring Conditions” stipulated in clause 19.1 of the Scheme are met or waived by the Longstop Date. 

23.  The Longstop Date may be extended pursuant to clauses 6.6 and 6.9 of the Scheme with the prior written consent of (1)  the Majority CoCom (provided that CoCom holds the “Minimum CoCom Threshold”)  or, (2)  if CoCom does not hold the Minimum CoCom Threshold, the “Majority Participating Creditors”, subject to any Court approval as may be required, provided that the Longstop Date must not be later than 30 September 2025.

C.  DISCUSSION

24.  In considering whether a scheme should be sanctioned, the court considers the following factors summarised in Re Powerlong Real Estate Holdings Ltd [2025] HKCFI 271 at §19:

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

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

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

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

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

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

(7)  if the company which puts forward the scheme is a foreign company, whether there is sufficient connection between the scheme and Hong Kong, and the utility of the court sanctioning the scheme.

25.  Each of the above factors is satisfied.  

C1.  Permission purpose, compliance with directions and statutory majorities

26.  As regards permissible purpose, compliance with the court’s directions and approval by statutory majorities:

(1)  The Scheme is put forward for the purpose of restructuring the Claims so as to allow the Company to restore its solvency.  This is a permissible purpose.

(2)  The directions given at the convening hearing have been complied with.  The scheme meeting was convened and held on 22 November 2024 for the Creditors to consider and approve the Scheme (“Scheme Meeting”).

27.  The Scheme Documents have been circulated in accordance with the court’s convening order dated 31 October 2024.

28.  At the Scheme Meeting, all Creditors present and voting (being 24 Creditors holding 86.2% in value of the Claims)  voted in favour of the Scheme.

C2.  Class issue

29.  In considering the issue of class, it is the rights of creditors (both before and under the scheme), rather than their separate commercial or other interests, which determine whether they form a single class or separate classes.  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 (Re Powerlong §44).

30.  The Creditors are unsecured creditors whose existing rights against the Company are materially identical.  They are also entitled to the same Restructuring Consideration. 

31.  As regards the RSA and the Consent Fees, generally a lock-up agreement and the payment of a consent fee do not fracture a class provided that it was made available to all scheme creditors and the amount, looked objectively, would not have the effect of persuading a creditor to vote in favour of a scheme which it considered to be against its interest or which it might otherwise reject.  In assessing the materiality of the fee, it is the size of the fee as compared to the projected returns under the scheme and in liquidation which is the appropriate comparator (Re Powerlong§28).

32.  In the present case, the RSA and the Consent Fees do not fracture the class because:

(1)  All Creditors had the opportunity to receive the Consent Fees by acceding to the RSA.

(2)  The level of the Consent Fees (0.05% of the outstanding principal, with an additional 0.1% if acceded to the RSA by an earlier deadline)  is relatively modest as compared to the estimated returns under the Scheme (22.5%-25.7%)  and the liquidation scenario (4.7%-9.4%).  

(3)  Objectively assessed, the size of the Consent Fees would not have a material influence on the Creditors’ voting intention.

33.  The relevant principles as regards the Work Fee are summarised in Re Powerlong at §30:

(1)  In general, payments made by a company to some creditors independently of a proposed scheme and its associated restructuring agreements which are not dependent upon the scheme taking effect, ought not to come into the equation for class purposes.  However, where any such prior payment was made to some, but not all, creditors, it must have been made for legitimate reasons and be genuinely independent of the scheme and restructuring.  It should not amount to a disguised part of the consideration offered (§30(1)).

(2)  The court has to consider the following non-exhaustive list of factors: (a)  whether the work fee is small in comparison to the benefits of the scheme; (b)  whether the work is paid in consideration of the work carried out by the ad hoc group, which requires significant time to be spent by senior management at the relevant creditor entities, and in consideration of their inability to trade the relevant instrument during the period when the scheme was being negotiated (§30(2)).

34.  The Fixed Work Fee is payable regardless of whether the Scheme will be implemented, whereas the RED Work Fee is payable only if the RED occurs.  In the present case, I agree with Mr John Scott SC[6] that this does not fracture the class:

(1)  Where the work fees are payable conditionally upon the scheme receiving sanction but not dependent upon how the particular group of members votes,  such an enhancement may not fracture the class if it is a commercial reward for detriment suffered by the group that was not suffered by other participants; and the level of reward for that detriment is not disproportionate (Re NN2 Newco Ltd [2019] EWHC 1917 (Ch)  at §46, per Norris J).

(2)  The Work Fee is to compensate the time and effort expended by CoCom in negotiating with the Company on the terms of the RSA and the Scheme since October 2023.

(3)  The Work Fee represents 0.5% of the outstanding principal owed to CoCom. The amount is not significant as compared to the returns under the Scheme (see §32(2)  above). 

(4)  No Creditor has indicated any objection to the payment of the Work Fee.

35.  As regards the Adviser Fees, they are to reimburse CoCom with the legal expenses and disbursements incurred in preparing and reviewing the restructuring documents. Such fees confer no additional benefit or “disguised consideration” on CoCom and therefore do not fracture the class.

C3.  Information to Creditors

36.  An explanatory statement should be sufficient to enable the Creditors to exercise reasonable judgment on whether the Scheme is in their interest, and to reach a sensible decision as to its benefits.  The Creditors are assumed to be intelligent and can be expected to read the explanatory statement as a whole.  The information in the explanatory statement needs to be up to date (Re Powerlong at §33).

37.  As directed by the court at the convening hearing, the Company has also provided a standalone and consolidated pro forma balance sheet to illustrate its financial position pre- and post-restructuring.  It shows that after implementation of the Scheme, the Company will restore to solvency in that its current liabilities will be reduced from RMB 55.29 billion to RMB 40.65 billion, and it will turn from having net deficits of RMB 5.4 billion to net equity of RMB 9.24 billion.

38.  On 19 November 2024, the Deed of Release and the Scheme have been amended to revise the definitions of “Affiliates” to remove certain third parties erroneously included.

39.  The Explanatory Statement has set out the details of the restructuring and the reasons for implementing the Scheme.  The Creditors are able to form their own view based on the information provided by the Company.

C4.  Discretionary factors

C4.1   Third-party releases

40.  The approach of the court in considering third-party releases has been summarised in Re Yuzhou Group Holdings Co Ltd [2025] 1 HKLRD 69at §§33-38. 

41.  There are 2 categories of third-party releases under the Scheme.

42.  First, a release of ListCo and the Subsidiary Obligors in respect of their obligations under Existing Loans.  Such release is necessary to avoid any ricochet claims which may be brought against the Company (Re Powerlong at §38; Re Yuzhou at §36).

43.  Second, a release of the Company’s Personnel, the Existing Agents, the New Agents, the Holding Period Trustee, the Information Agent, the Restructuring Administrators, the Adjudicator and the Advisers subject to the Exclusions.  This release is necessary for the implementation of the Scheme and is justifiable:

(1)  The release is limited in scope.  It is confined to releasing the liabilities in relation to the Existing Loans, and the preparation and execution of the Scheme.  Both of which are necessary for the implementation of the Scheme.

(2)  The release is subject to the Exclusions and will not fall foul of s.468 of the Companies Ordinance (Cap. 622), which provides that any provision “contained in a company’s articles, or in a contract entered into by a company, or otherwise” which purports to exempt a director from any liability or indemnify the director against any liability in connection with any negligence, default, breach of duty or breach of trust in relation to the company or indemnity against any such liability is void.

(3)  The release is necessary for the implementation of the Scheme as it is unclear whether the Company’s insurance coverage covers the liabilities associated with the Existing Loans, and the Company has not taken out insurance coverage against the Released Persons’ liability associated with the preparation and implementation of the Scheme which would only increase the cost associated with the Scheme.

C4.2   Restructuring Conditions

44.  Where some of the Restructuring Conditions remain unsatisfied as at the date of the sanction hearing, if the evidence before the court shows that the conditions will be satisfied within a reasonably short period of time, the uncertainty in compliance by the Longstop Date is not such as to constitute a reason for the court to withhold sanction (Re Powerlong at §48).   

45.  The Company has been taking steps to satisfy the Restructuring Conditions and it is not aware of any impediments that will prevent the RED from occurring. In particular:

(1)  The English court has sanctioned the Plan on 3 February 2025.

(2)  ListCo has been discussing with AlixPartners Hong Kong, Limited on the engagement letter for the appointment of Monitoring Agent.

(3)  ListCo and its legal advisor have been coordinating with a third-party agent in connection with the application for listing on the Singapore Exchange Securities Trading Limited and do not expect any insurmountable difficulties in obtaining its in-principle approval.

(4)  ListCo and CoCom Advisers have been coordinating the set-up of the MCB Warehousing Arrangement for Creditors who opt for New MCBs.

(5)  The Group submitted initial documents to the National Development and Reform Commission of the PRC (“NDRC”)  in late December 2024, and has been providing additional materials as requested by the NDRC.

(6)  HKEx’s conditional listing approval has been obtained on 19 November 2024 in respect of the MCB Conversion Shares.

(7)  To cover the fees and expenses which are conditions precedent to the Restructuring, the Group expects to receive distributions from a Cayman Islands domiciled investment fund in the near term.

C4.3   Other features of the Scheme

46.  Mr Scott has drawn the court’s attention to the following features of the Scheme.

47.  First, the modification clauses under the Scheme, which inter alia allow the Company to consent to any modifications to the Scheme or any terms or conditions which the court may think fit to approve or impose and which would not directly or indirectly have a material adverse effect on the interest of any Creditor under the Scheme (clause 29.1). The principles on modification of the Scheme have recently been discussed in Re Powerlong Real Estate Holdings Ltd [2025] HKCFI 970.  The presence of such clauses is not a reason against sanctioning the Scheme.

48.  Second, the “Existing Loan Agents” would not be entitled to vote at the Scheme Meeting nor receive any Restructuring Consideration[7], none of whom had cast any votes during the Scheme Meeting.   The purpose of these provisions was to avoid double-counting, which is unobjectionable.

49.  Third, a Creditor under the Scheme is a creditor of Class A under the Plan.  It is only entitled to receive the Restructuring Consideration under either the Scheme or the Plan. This is to prevent any Creditor receiving double benefit. 

C5.  International dimension

50.  The Company is incorporated in Hong Kong and maintains a principal place of business here.  The Existing Loans are governed by Hong Kong law. The release of the Claims under the Scheme would be effective in discharging the liability of the Company and that of the Released Persons (the latter being effected by the Deed of Release)  applying the Gibbs rule[8].

51.  It is not clear (and the Company has not explained)  why it was necessary to include the Existing Loans as Class A in the Plan. Unless there was any basis to think that the Deed of Release would not be effective in releasing ListCo from the liability under the Existing Loans, it seems that it was superfluous for ListCo to include the Existing Loans in the Plan. Apart from a waste of time and costs, it may also create confusion if and insofar as there is any material difference in the terms between the Scheme and the Plan. This however is not a reason for the court to withhold sanction of the Scheme, having regard to the fact that all other requirements have been complied with by the Company.