Da Yu Financial Holdings Limited (formerly known as China Agrotech Holdings Limited) (in liquidation) [2019] HKCFI 2531 (date of judgment 17 October 2019)
It is an established practice to use parallel schemes of arrangements in restructuring the debts of offshore companies listed in Hong Kong. Restructuring costs are often substantial expenses in a scheme of arrangement which impact directly on the return to scheme creditors. In this case, the Hong Kong Court has provided insightful comments on the use of parallel schemes and the level of restructuring costs against the return to creditors.
Background
Da Yu Financial Holdings Limited (formerly known as China Agrotech Holdings Limited) (in liquidation) (the “Company”) is incorporated in the Cayman Islands and listed on the Hong Kong Stock Exchange. The Company has been in liquidation since early 2015 with its listing status as the only substantial asset. Most of the Company’s debts were governed by Hong Kong law.
The liquidators have found a white knight to pursue debt restructuring and resumption of trading of the Company’s shares. The proposed restructuring involved reorganising the Company’s share capital and issuing new shares to investors, the proceeds of which was used to pay for the acquisition of a new business, the Company’s restructuring expenses and the partial discharge of the Company’s indebtedness. The rate of recovery for creditors was about 4.28% and debt restructuring was to be achieved through parallel schemes in the Cayman Islands and Hong Kong.
The Cayman Court granted sanction to the Cayman scheme on 16 July 2019. On 22 July 2019, Deputy High Court Judge William Wong SC granted sanction to the Hong Kong scheme on the condition that the restructuring costs would be subject to taxation with any cost savings resulting therefrom be distributed to the scheme creditors. The Judge also granted a permanent stay of the winding up to allow the Company’s shares to resume trading.
Legal principles in sanctioning schemes
The Court provided a useful summary of the principles in sanctioning schemes:
- The Court has an unfettered discretion in deciding whether or not to sanction a scheme. While the Court is not a rubber stamp, it would be slow to differ from the views of the majority scheme creditors as they are the best judges of their own commercial interests.
- The Court would take into account the following factors in considering whether to sanction a scheme:
(a) whether the scheme is for a permissible purpose;
(b) whether 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;
(c) whether the meeting was duly convened in accordance with the Court’s directions;
(d) whether creditors have been given sufficient information about the scheme to enable them to make an informed decision whether or not to support it;
(e) whether the necessary statutory majorities have been obtained;
(f) 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
(g) 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 because it would not be a proper exercise of the discretion to sanction a scheme that serves no purpose.
The Court was satisfied that it was appropriate to sanction the scheme subject to issues on restructuring costs.
Restructuring costs
The Court raised concerns about the quantum of restructuring costs as against the rate of return to the scheme creditors. The Court considered the following two questions:
- Taking into account all the circumstances, including the rate of return to scheme creditors and the amount of restructuring and liquidation expenses, whether the relevant scheme is propounded for a permissible purpose for the general benefit of the scheme creditors.
The Court considered that there is no hard and fast rule as to the reasonable amount of restructuring and liquidation expenses vis-à-vis the return to scheme creditors, and it is inappropriate to lay down a specific percentage as a guideline. While agreeing that the amount of restructuring expenses is a matter of contractual arrangement between the investor and the relevant professionals, the Court considered that it has jurisdiction to impose conditions in exercising its functions to sanction schemes of arrangement.
- Whether sufficient information about the scheme was disclosed to the scheme creditors such that they could make an informed decision on whether to support a scheme.
In the present case, the explanatory statement only disclosed the amount of liquidators’ costs and the amount of costs of the legal advisers to the relevant parties without any further breakdown. The Court did not find such disclosure satisfactory. The Court commented that a statement of costs on restructuring costs would be useful to allow the Court to make a gross sum assessment.
Cross border coordination
The Court queried whether the present case justified the need for parallel schemes in both the Cayman Islands and Hong Kong. The Court considered that parallel schemes are an outmoded way of conducting cross border restructuring and requiring foreign office holders to commence parallel proceedings is very antithesis of cross border insolvency cooperation. The Court called for offshore jurisdictions to recognise1 Hong Kong schemes without requiring the liquidators to commence parallel insolvency proceedings in the offshore jurisdictions.
Takeaway points
- Going forward, it will not be surprising that restructuring costs will be under tighter scrutiny by Hong Kong Courts when sanctioning schemes.
- Sufficient disclosure on restructuring costs should be provided in the explanatory statement of a scheme so that scheme creditors as well as the Court can assess the reasonableness of the amount incurred.
- In restructuring offshore companies, practitioners should consider whether an offshore parallel scheme is necessary or they can seek recognition of other schemes in the offshore jurisdiction.
1 Citing Lord Hoffmann in Cambridge Gas Transportation Corpn v Official Committee of Unsecured Creditors of Navigator Holdings plc [2007] 1 AC 508 at para 22