No concrete proposal - Hong Kong court calls for debtor companies to show realistic restructuring proposals

A Hong Kong court has reminded debtors of the need to present a credible and realistic restructuring proposal when facing creditors threatening winding up actions. In Re Jiayuan International Group Limited (佳源國際控股有限公司) [2023] HKCFI 1254, the Honourable Madam Justice Linda Chan warned that it is not enough for a debtor company to merely point to commercial discussions with some of the creditors when seeking an adjournment. If the company in question was unable to demonstrate why an adjournment should be granted, there was no basis for the court to deny the petitioning creditor an immediate winding up order.

Planned restructuring

Jiayuan International Group Limited (佳源國際控股有限公司) (the company) was incorporated in the Cayman Islands on 5 May 2015. The company, which was registered as a non-Hong Kong company under the Companies Ordinance (Cap. 622) and with shares listed in Hong Kong, was an investment holding company holding shares in various subsidiaries, which engaged in the development of large scale residential and commercial complexes in the PRC mainland.

The petitioner claimed to be owed more than US$14 million by way of two interest-bearing notes that had fallen due and that the company had failed to comply with a statutory demand. The company opposed the petition, saying the company was taking active steps to restructure its debt.

These steps included a proposal to exchange existing notes for new notes and in respect of which, existing note holders would have to consent to the variation of their rights. The petitioner then apparently chose to support the restructuring proposal and both she and the company applied by way of consent summons to have the petition adjourned for 28 days, then, by further application, for 42 days. Three creditors with total alleged debts of US$109 million also supported the company's plan. Opposing the plan was a major bank owed US$192 million and a creditor owed US$36 million.

Linda Chan J observed that the company had not been able to come up with any restructuring proposal in respect of its debts, "let alone one which has the support of the requisite majorities of creditors." Worse still, the company had recently announced that it intended to terminate the exchange offer.

The court ordered the bank to be substituted as petitioner and to file the re-amended petition. Linda Chan J said the company had "failed to put forward any concrete restructuring proposal in respect of the debts owed to the creditors, let alone one which has the support of the requisite majorities of creditors."

Unreasonable opposition

Directors who unreasonably oppose winding up petitions may also be liable for costs, as seen in Re Carnival Group International Holdings Ltd [2022] HKCFI 2668 and 3097, despite the possibility of appeal (The Carnival entity in that case is not affiliated in any way with Carnival Corporation & plc).

Linda Chan J stressed the obligation on directors to consider whether there is any reasonable prospect of the company avoiding going into insolvent liquidation. She highlighted the responsibility of directors "to take steps to put the company into liquidation so as to bring into operation the statutory scheme of winding up its affairs and assets." (see Hogan Lovells alert The carnival is over - directors face cost consequences of opposing winding up).

The determination of the Hong Kong court to safeguard rights of creditors in the face of dubious restructuring plans remains as firm as ever. This applies when even, as here, the proposal has the support of the petitioning creditor.



Authored by Jonathan Leitch and Nigel Sharman.

Jonathan Leitch
Hong Kong
Chris Dobby
Hong Kong
Mark Lin
Hong Kong
Antonia Croke
Byron Phillips
Hong Kong
Nigel Sharman
Senior Knowledge Lawyer
Hong Kong


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