A trio of landmark decisions on scheme practice in Hong Kong
Introduction
Over the past few years, the Hong Kong Court has seen a significant
increase in the number of winding-up petitions in respect of listed holding companies of
Mainland business groups. It is not uncommon for such distressed
companies to seek to restructure its debts through scheme of arrangement
and sometimes parallel schemes of arrangement in both Hong Kong and the
place of the company’s incorporation. In some of the cases, the listed company
is already subject to a delisting decision made by the Stock Exchange and may
be in the process of appealing the delisting decision. This article will
discuss three recent ground breaking judgments which restated the principles in
relation to the scheme of arrangement practices in Hong Kong.
Re Burwill Holdings Ltd (Provisional Liquidators Appointed)
[2021] HKCFI 1318
In Re Burwill Holdings Ltd, the company applied for
sanction of a scheme of arrangement, which was unanimously approved by the
unsecured creditors. However, at the time, the company had already been subject
to a delisting decision. The provisional liquidators had proposed to review
such decision.
The Court refused to sanction the proposed scheme of arrangement and ordered to adjourn the application sine die with liberty to restore, pending the determination of the Listing Review Committee, for the following reasons:
- If the listing of
Burwill Holdings Ltd is to be cancelled, the proposed scheme of
arrangement will collapse and the application to the Court will have been
a waste of judicial resources.
- It is not appropriate for
the Court to make a decision which it might be suggested should influence the
Listing Review Committee’s deliberations and ultimate decision.
Re Grand Peace Group Holdings Ltd
[2021] HKCFI 1563
Grand Peace Group Holdings Ltd (“Grand Peace”), a company which
is listed on the GEM Board of the Stock Exchange, had been subject to a
winding-up petition. The Listing Committee of the Stock Exchange has
recently determined that Grand Peace should be delisted and Grand
Peace had applied to review the decision. The company nevertheless would like
to convene a scheme meeting to consider the restructuring proposal.
Harris J allowed the company to apply to convene a scheme meeting and
observed that although the Court will not hear a petition to sanction a scheme
of arrangement when a determination by the Listing Review Committee is pending,
an application for an order that a meeting of creditors is convened will
normally fall into a different category. The Court will be amenable to
making such order, unless it is concerned that the interests of unsecured
creditors might be prejudiced, for example, the company, instead of the
prospective investors, will be paying the costs. In obiter, his Lordship also
remarked that parallel schemes would not be permitted in future unless it is in
the genuine best interests of unsecured creditors of the company (to be
discussed in details in Re China Oil Gangran case below).
Re China Oil Gangran Energy Group Holdings Ltd
[2021] HKCFI 1592
China Oil Gangran Energy Group Holdings Limited (“China Oil”) is a company incorporated in the Cayman Islands and listed on the Growth Enterprise Market of the Stock Exchange. Cayman soft-touch provisional liquidators (the “PLs”) were appointed over the company in November 2019. With the PLs’ assistance, the company sought to promote parallel schemes in Hong Kong and the Cayman Islands. It is noteworthy here that more than 98% of the debts compromised under the schemes were governed by Hong Kong law.
The Court sanctioned the Hong Kong scheme but held that the Cayman
parallel scheme was unnecessary and unjustifiable. The Court considered that in
the case of a company listed in Hong Kong, whose debt is very largely governed
by Hong Kong law, the principle relevant jurisdiction is Hong Kong. It is Hong
Kong in which a scheme is necessary and any restructuring should proceed on
this basis. It is only necessary to introduce a scheme in the place of
incorporation if there is good reason to believe that absent a scheme sanctioned
in the place of incorporation there is a genuine risk of the company being
wound up there. As most of the debts’ of China Oil were governed by Hong Kong
Law and its creditors are almost exclusively in Hong Kong, the compromise under
the Hong Kong scheme was already effective in the Cayman Islands according to
the Gibbs rule, which provides that a debt is treated as discharged
if it is compromised in accordance with the law governing it. Accordingly, the
Cayman scheme was unnecessary and the costs associated to it were harmful to
the creditors. The Court also reminded the management that incurring parallel
scheme expenses unnecessarily would be inconsistent with their fiduciary duties
to creditors.
Commentary and key take away
As mentioned above, over the past few years, the Hong Kong Court has
seen a significant increase in the number of winding-up petitions in respect of listed
holding companies of Mainland business groups. Many of these distressed
companies have been seeking to restructure the debts through scheme of
arrangements. With the new landmark decisions, it is advised that the
management should seek legal advice and consider thoroughly before pursuing
parallel scheme of arrangement in the company’s place of incorporation as a
matter of course. Where a delisting decision has been made by the Stock
Exchange, the distressed company shall first obtain a decision from the Listing
Review Committee before applying to the court for sanction of a scheme of
arrangement.
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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
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