In what circumstances will the Court sanction a scheme of arrangement?
Introduction
When a company encounters financial difficulty, one of the ways to
restructure its debts is by entering into a scheme of arrangement with its creditors. Under
section 673 of the Companies Ordinance (Cap. 622), the Court may sanction a
scheme of arrangement. The sanctioned scheme will be binding on the company and
the creditors or class of creditors with whom the arrangement is proposed to be
entered into.
In the
recent case of Re Hong Kong Airlines Limited (香港航空有限公司) [2022] HKCFI
3792, the Court considered
whether to sanction a scheme of arrangement proposed by a major airline based
in Hong Kong.
Facts
Hong Kong Airlines
Limited (“Company”) is a Hong Kong
company providing air passenger transport, air cargo transport and other
airline-related services. As the pandemic hit the aviation industry badly, the
Company became cash-flow insolvent and had a total indebtedness of
approximately HK$49 billion. It is very likely to go into liquidation unless
its current indebtedness can be restructured.
To restore the Company to being a solvent
going concern, the Company is pursuing a Group-wide debt restructuring, which
includes, among others, (1) a scheme of arrangement (“Scheme”) between the
Company and holders of unsecured debt and (2) a restructuring plan under the UK
Companies Act (“UK Plan”) which was
sanctioned by the English court.
The Scheme seeks to discharge the Company’s
unsecured indebtedness within the Scheme claims and release the related debtor
and guarantor, while giving Scheme creditors restructuring consideration in return, such as cash option, equity
option, monthly instalments and replacement claims.
On 1 December 2022, the Scheme meetings were convened, the resolutions of which were carried by a majority in number of the Scheme creditors present and voting in person or by proxy. The Company applied for the Hong Kong Court’s sanction of the Scheme.
Legal principles
The Court will consider
the following factors in deciding whether to sanction a scheme of arrangement:
1. whether the scheme is for a permissible purpose;
2. whether creditors who were called on to vote as a single class had
sufficiently similar legal rights such that they could consult together with a
view to their common interest at a single meeting;
3. whether the meeting was duly convened in accordance with the Court’s
directions;
4. whether creditors have been given sufficient information about the
scheme to enable them to make an informed decision on whether or not to support
it;
5. whether the necessary statutory majorities have been obtained;
6. whether the Court is satisfied in the exercise of its discretion
that an intelligent and honest man acting in accordance with his interests as a
member of the class within which he voted might reasonably approve the scheme;
and
7. in an international case, whether there is sufficient connection
between the scheme and Hong Kong, and whether the scheme is effective in other
relevant jurisdictions.
Decision and reasoning
The Honourable Mr
Justice Harris made an order sanctioning the Scheme for the following reasons:
1. The Scheme is a genuine debt restructuring of a distressed company.
2. The Scheme properly placed the Scheme creditors in two classes such
that the rights of those proposed to be included in each class are similar.
3. The requirements under section 674(1)(b) that the Scheme be approved
by a majority in number representing at least 75% in value of the creditors present
and voting in person or by proxy have been satisfied.
4. The explanatory statement regarding the Scheme and its supplements
are sufficiently informative.
5. Whilst the Scheme contains components which have a degree of
uncertainty, such uncertainty is not sufficient to constitute a reason for the
court to withhold sanction. There are evidence which support that the Scheme
consideration provides creditors with a better return than in an insolvent
liquidation of the Company.
6. Most of the Company’s debts are governed by Hong Kong law. The
remaining debts are governed by UK law and are subject to the UK Plan, therefore
the risk of adverse enforcement by any holder of the Mainland law debt is
remote.
Takeaway
A scheme of arrangement is useful for a company
in distress to restore itself as a solvent going concern. However, the Court is
not a rubber stamp that will sanction every scheme of arrangement proposed by
the company. A company intending to carry out a scheme of arrangement should
consult legal advice and ensure that the proposed scheme can fulfil the requirements
set by the Court.
For enquiries,
please feel free to contact us at: |
E: insolvency@onc.hk T: (852)
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Place, Central, Hong Kong |
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 © 2023 |