Introduction

Part 13 of the Companies Ordinance (Cap 622) (the ”CO”) provides that the court has the jurisdiction to sanction a scheme of arrangement between a company and its creditors if a majority in number of the class of creditors (“headcount” test) representing 75% in value of the class of creditors (“majority-in-value” test) present and vote for the scheme. In the recent case of Re Mongolian Mining Corporation (In Provisional Liquidation in the Cayman Islands [2018] HKCFI 2035, the Court of First Instance (the “CFI”) had to determine whether contingent creditors vote in creditors’ meetings in scheme of arrangement. Besides, the CFI also discussed the requirement of sufficient connection between the scheme and Hong Kong as well as summarized the factors to be considered by the CFI in sanctioning a scheme.

Background facts

Mongolian Mining Corporation (the “Company”) is a company incorporated in the Cayman Islands. It is registered in Hong Kong as an overseas company and listed on the Hong Kong Stock Exchange since 13 October 2010. The Company became balance-sheet insolvent and was in provisional liquidation in Cayman Islands since 19 July 2016. The financial indebtedness of the Company comprises, among others, US$600,000,000 notes secured by charges over shares in the Company’s subsidiaries in Hong Kong and Luxembourg. Under the Company’s debt restructuring, it was proposed that those secured creditors will discharge the debts in return of new notes and shares in the Company on the condition that the Cayman restructuring scheme being sanctioned by the Cayman court and recognised in the United States.

On 14 March 2017, the CFI gave leave to the Company to convene a meeting of a group of creditors under section 670 of the CO. The meeting took place on 11 April 2017. All creditors voted in favour of the scheme. On 20 April 2017, the Company issued a petition seeking the court’s sanction, which was granted on 25 April 2017. 

The CFI’s decision

Contingent creditors’ vote

In this case, the creditors in the scheme were merely beneficial holder of the notes, which were held in global form. They would only be issued with definitive notes upon satisfaction of certain conditions in the notes. While there is no statutory definition of “creditor” for the purposes of Part 13 of the CO, the CFI held that creditors are those who have a monetary claim against the company. Thus, persons with contingent claims should be regarded as creditors for the purpose of the scheme and they may vote in the creditors’ meeting in scheme of arrangement.

Sufficient connection

For the court to sanction a scheme of arrangement of a foreign company, it must be shown that there is a sufficient connection between the scheme and Hong Kong. The CFI, in the footnote of the judgment, referred to Re Winsway Enterprise Holdings Ltd [2017] 1 HKLRD 1, which held that the requirement for sufficient connection for the purposes of establishing jurisdiction to sanction a scheme is of a lower standard than that for the purposes of a winding-up petition.

In this case, the CFI is satisfied that there is a sufficient connection between the scheme and Hong Kong based on the facts, in particular, the company registration and listing status in Hong Kong, principal place of business, assets in Hong Kong, applicability of Hong Kong law in governing the debt as well as the whereabouts of the company’s creditors.

Sanction issues

The CFI also summarized the factors to be considered when deciding whether it has jurisdiction to sanction a scheme. They are:-

1.       whether the scheme is for a permissible purpose;

2.       whether the creditors had sufficient similar legal rights;

3.       whether the meeting was duly convened as per the court’s directions;

4.       whether the creditors’ decision was an informed one;

5.       whether the necessary statutory majorities have been obtained; and

6.       whether the scheme is in accordance with the interests of the creditors.

 

The CFI also remarked that it must be satisfied that the scheme will be effective in practice. In the cases where the scheme is conditional upon other events, evidence must be produced to demonstrate that the events are probable in practice.

Scheme of arrangement in Hong Kong

This case summarized the jurisdiction of the court to sanction a scheme of arrangement. In particular, it adopted a wide concept of creditor to also include persons with contingent claims against the company. Nonetheless, there is not yet any formal “corporate rescue” procedure in Hong Kong which provides a moratorium for the distressed company to go through its restructuring steps. Besides, there is also criticism that the cost is high because of heavy court involvement from the convention of the creditors’ meeting to the sanction of the scheme at the end.  

 

For enquiries, please contact our Litigation & Dispute Resolution Department:

E: insolvency@onc.hk                                   T: (852) 2810 1212 W: www.onc.hk                                             F: (852) 2804 6311 19th Floor, Three Exchange Square, 8 Connaught 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 © 2018