Cross-border restructuring – are parallel schemes still worth pursuing?

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Introduction

Re: Da Yu Financial Holdings Limited (formerly known as China Agrotech Holdings Ltd) (in liquidation) [2019] HKCFI 2531 (“Da Yu Case”) is a case concerning parallel schemes of arrangement sanctioned in both Hong Kong and the Cayman Islands. Whilst the Hong Kong Court dealt with the petition seeking Hong Kong Court’s sanction of the scheme of arrangement, the Judge expressed reservation to the practice of parallel schemes and called for closer cross-border coordination in cases of cross-border restructuring.


Background

Da Yu Financial Holdings Limited (formerly known as China Agrotech Holdings Limited) (in liquidation) (the “Company”) is a Hong Kong listed company incorporated in the Cayman Islands. It has been in liquidation in Hong Kong since 9 February 2015. The procedural history of the Da Yu case is as follows:

  1. On 11 June 2019, the Hong Kong Court granted leave for the Company to convene a meeting (the “Scheme Meeting”) of the scheme of arrangement (the “Hong Kong Scheme”) to be entered into between the Company and its general unsecured creditors (the “Scheme Creditors”);
  2. On 5 July 2019, the Scheme Meeting took place and an overwhelming majority of the Scheme Creditors voted in favour of the Hong Kong Scheme;
  3. On 8 July 2019, the Company issued a petition seeking the Hong Kong Court’s sanction of the Hong Kong Scheme;
  4. On 16 July 2019, the Cayman Court sanctioned the Cayman scheme of arrangement (the “Cayman Scheme”); and
  5. On 22 July 2019, the Hong Kong Court sanctioned the Hong Kong Scheme with an undertaking from the Company that all its restructuring and liquidation costs and expenses are subject to taxation. The Judge also granted a permanent stay of the winding-up of the Company.


Sanction of scheme of arrangement

The Court summarized succinctly the legal principles governing the Court’s unfettered discretion to sanction a scheme as follows:

  1. The scheme is for a permissible purpose;
  2. The 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. The meeting was duly convened in accordance with the Court’s directions;
  4. The creditors have been given sufficient information about the scheme to enable them to make an informed decision whether or not to support it;
  5. The necessary statutory majorities have been obtained;
  6. 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, there is sufficient connection between the scheme and Hong Kong, and the scheme is effective in other relevant jurisdictions.

It was made clear that the Court is not a rubber stamp and must reach its own independent view. However, if the sanction principles are satisfied, the Court would be slow to differ from the views of the majority scheme creditors on matters such as what an intelligent, honest person might reasonably think. The Court would regard the scheme creditors as the best judges of their own commercial interests.

Given that all the above legal principles are satisfied, the Court decided to sanction the Hong Kong Scheme but on the condition that all of the restructuring and other expenses being subject to taxation so as to ensure that the Hong Kong Scheme was for the general benefit of the Scheme Creditors as the professional fees appeared to be on the high side but no sufficient information about restructuring and related expenses was given in the present case.


Cross-border coordination

The Judge also expressed his reservation against the usual practice of Hong Kong listed companies using parallel schemes for debt restructuring and considered that such practice was outmoded.

The Judge made reference to the Cayman Scheme judgment and concurred with the remarks therein about the need for cross-border coordination. The purpose of maintaining parallel schemes is to ensure that the scheme creditors cannot disrupt the smooth operation of the scheme by taking hostile action against the company in its place of incorporation even though Hong Kong is where the preponderance of the company’s debts are located. However, requiring foreign office-holders to commence parallel proceedings is the very antithesis of cross-border insolvency cooperation and a crucial feature of cross-border insolvency cooperation is the recognition of foreign proceedings. Therefore, it would be beneficial for the offshore court to provide assistance by giving effect to the Hong Kong scheme of arrangement without requiring the Hong Kong office-holders to go to the trouble of parallel insolvency proceedings in the offshore jurisdiction.


Conclusion

The Da Yu Case challenges the need for parallel schemes in case of cross-border restructuring. The Judge has called for a closer collaboration and cooperation between Hong Kong Court and offshore Court when cross-border restructuring is involved. Therefore, when an offshore company listed in Hong Kong is in liquidation, the company may consider working on one primary scheme of arrangement in Hong Kong and liaise with the offshore Court for recognition proceedings.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2019