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) 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 © 2023