The scheme of arrangement sanctioned in Re China Singyes Solar Technologies Holdings Ltd [2020] HKCFI 467 [2020] HKEC 401 concerned China Singyes Solar Technologies Holdings Limited, a Bermudan company that is registered in Hong Kong as a non-Hong Kong entity. The Company has subsidiaries in the British Virgin Islands, Hong Kong and Mainland China, the latter being where it primarily conducts its operations, and has been in financial difficulty since June 2018, resulting in it defaulting on some of its Mainland and offshore debt obligations.
Not only was the company incorporated overseas, but the existing debt compromised by the scheme was not governed by Hong Kong law; instead it consisted of English law governed bonds and New York law governed notes. The application was made to the Hong Kong Court to seek approval of a scheme that would compromise this foreign debt and be binding on overseas creditors. The Court took this opportunity to re-confirm its position on corporate restructuring as an alternative to liquidation.
Schemes of Arrangement
A scheme of arrangement is a flexible statutory mechanism, which in an insolvency context, can be used by a company to achieve a binding compromise or arrangement with shareholders and/or creditors (or a class of them). A scheme binds all the company's creditors (or a class of them), even if there is a dissenting minority of creditors. Ordinarily, the company would approach the relevant creditors with a proposal, which will then be voted on at a Court convened meeting. Typically under a scheme, the relevant group of creditors accept a compromise on the amount of debt due to them. The Court then has the power to sanction the scheme, making it legally binding on all creditors.
When considering whether to sanction a scheme, the Hong Kong Court will consider a number of well-established factors. In his judgment, Hon Harris J provided some helpful guidance on two of these factors:
1. A class debate?
The Court considered whether creditors voting within the same class had sufficiently similar legal rights that they could consult together with a view to a common interest.
When debt securities are issued as global notes, as was the case in China Singyes, there is a division between legal and beneficial ownership. It is well established that a beneficial owner who is entitled to call for the issuance of definitive notes will be considered a contingent creditor and is, therefore, eligible to vote (Re Noble Group Ltd (No 1) [2018] EWHC 2911, Re Mongolian Mining Corp [2018] 5 HKLRD 48). Therefore, in line with current market practice, the trustee of the bonds and notes confirmed that it would refrain from exercising its votes.
It follows that the creditors had properly voted as a single class because: (i) they were all unsecured; (ii) entitled to the same consideration; and (iii) there were no separate class disputes or conflicts. It is worth noting that some of the creditors received a consent fee, whilst others did not. The Court did not consider the payment to only some of the creditors to be sufficient to fracture the class.
2. A question of jurisdiction?
In determining whether Hong Kong has jurisdiction to sanction an international scheme, the Court will consider whether there is sufficient connection between the scheme and Hong Kong and whether it will be effective overseas.
When determining that there is sufficient connection with Hong Kong, attention was drawn to the fact that China Singyes is listed, registered and managed in Hong Kong and the existing debt securities were also listed in Hong Kong.
Having established the requisite connection with Hong Kong, the next question concerned whether the scheme would be effective in other jurisdictions in light of the so-called 'Gibbs rule', which states that the effective discharge of an obligation is determined by its governing law.
The fact that the notes and bonds were not governed by Hong Kong law did not preclude the Courts from sanctioning the scheme. It is widely recognised that the Hong Kong courts have jurisdiction to sanction schemes that compromise debts governed by any law.
However, when determining whether to sanction a scheme the Court has consideration for whether the scheme would be effective in other relevant jurisdictions; in this instance England and the US. It would not be worthwhile for the Hong Kong courts to sanction a transnational scheme that has no utility in the foreign jurisdiction that governs the underlying debt.
A scheme that is voted for by 100% of the creditors, as was the case with the English law governed convertible bonds, was evidence that it would be effective in that jurisdiction.
However, where not all of the creditors vote in favour, it is for the Court to determine whether there is a risk of the unidentified creditors looking to enforce their rights. More than 99% of the holders of the New York law governed notes voted in favour of the scheme and the risk that the remaining creditors might look to enforce their rights in the US was considered de minimis.
Therefore, in such circumstances the Hong Kong Court was prepared to sanction a scheme with international scope that would be effective in other jurisdictions.
Is the scheme defective?
China Singyes also confirmed that a scheme could be sanctioned despite the fact that it would affect third party rights. In his judgment, Hon Harris J explained that claims against third parties under, for example guarantees, may be compromised by a scheme provided that the release of the claims is "merely ancillary" to the arrangement between the company and its creditors.
Another step in the right direction
Hong Kong does not currently have a statutory restructuring regime. Insolvency laws focus primarily on achieving the best outcome for creditors by realising the value of assets through traditional insolvency mechanisms such as liquidation.
The recent flurry of Hong Kong judgments has reiterated the Courts' approach to transnational restructuring and corporate rescue. From recognising overseas "soft-touch" provisional liquidators to sanctioning schemes for foreign companies, there is an encouraging trend in the development of the common law in order to facilitate corporate rescue; this is welcomed in the absence of the much needed statutory tools for dealing with distressed companies in Hong Kong.
Authored by Jonathan Leitch and Chris Dobby
