A going concern
Unity Group Holdings International Limited, a Cayman Islands-incorporated, Hong Kong-listed entity, is an investment holding company which conducts energy-saving consultancy and equipment leasing business through its subsidiaries located in Hong Kong, mainland China, Malaysia and the British Virgin Islands.
The company had been experiencing financial difficulties and was likely to go into liquidation unless its current indebtedness, which consisted mainly of loans taken out by the company and guarantees granted by the company for loans that were obtained by its affiliated entities, could be restructured.
A scheme of arrangement meeting was convened on 26 August 2022, in which creditors holding 99.44 percent of the claims voted in favour of the scheme. According to the company, a successful restructuring would provide the scheme creditors with a much higher recovery as opposed to recoveries in a liquidation scenario.
Pursuant to the scheme, all unsecured indebtedness of the company would be released, including the release of guarantors', joint obligors' and third-party security of the company. In return, scheme creditors could elect either for cash or an equity option.
Under the cash option, the scheme creditors would receive five per cent of the principal as the initial cash payment, up to 95 per cent of the principal over 30 months and also interest on the outstanding principal at the rate of 2.5 percent per annum from the effective date.
Under the equity option, the scheme creditors would receive new shares priced at a premium of 25 per cent over the average closing price of the shares for the last five consecutive trading days before the effective date.
To sanction or not to sanction
The Honourable Justice Harris recalled and applied in this case the well-established legal principles governing the sanctioning of a scheme in Hong Kong, as stated in Re China Singyes Solar Technologies Holdings Ltd [2020] HKCFI 467; [2020] HKCLC 379 (see Hogan Lovells alerts: Hot on the heels – Hong Kong Court continues to favour corporate restructuring of overseas entities and Hong Kong court gives creditors the nod to sue despite Chapter 15 scheme recognition).
The court will consider, amongst other, the following questions when determining whether to sanction a scheme:
- Whether the scheme is for a permissible purpose.
- 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.
- Whether the meeting was duly convened in accordance with the court's directions.
- Whether creditors have been given sufficient information about the scheme to enable them to make an informed decision whether or not to support it.
- Whether the necessary statutory majorities have been obtained.
- 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.
- 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.
In this case, the court was of the view that the above requirements had all been satisfied, including that the scheme has international effectiveness in other foreign jurisdictions of practical importance. In this regard, the court suggested a three-pronged approach in determining whether a jurisdiction is of practical importance to the efficacy of a scheme sanctioned in Hong Kong.
Under this approach, the court will consider i) whether there is a material amount of debt to be compromised by a scheme governed by foreign law; ii) whether creditors will take action in a jurisdiction that will not recognize a scheme as compromising the debt; and iii) the amount of debt such that if the amount governed by foreign law is less than the cost required to introduce a parallel scheme, it might be more economical to exclude the debt from the scheme and to settle the debt separately, if ever pursued.
A key contribution
Importantly, the court considered whether the release of debt of the company's subsidiaries which was guaranteed by the company would constitute a permissible purpose for sanctioning the scheme. There is a growing body of Hong Kong, Singapore and English case law in which the courts have found that it is permissible for a scheme to release obligations of third parties connected with a company's debts or owed by a company to third parties, including schemes that release the principal obligors where the scheme company is a guarantor.
In the United Kingdom (UK), a deed of assumption is commonly used to facilitate a guarantor's scheme to discharge debts that are owed by the principal obligors. As explained in In re Noble Group Limited [2019] BCC 349, In re Gategroup Guarantee Limited [2021] EWHC 304 and recently reaffirmed in Re E D & F Man Holdings [2022] EWHC 433, a deed of contribution can be utilized to create a right of contribution and effect "ricochet claims" so that the restructuring plan can compromise the liabilities of the guarantor scheme company and the liabilities of all other group companies as principal obligors. This approach had been adopted by the company by executing a deed of assumption of obligations, making it a joint obligor with the original principal obligors (i.e. the company's subsidiaries).
In Singapore, a guarantor may propose a scheme to release the third party debt owed by the primary obligor without the use of a deed of assumption. In Pathfinder Strategic Credit LP v Empire Capital Resources [2019] SGCA 29; [2019] 2 SLR 7, the scheme applicant was the guarantor of two sets of notes issued by related companies and sought in its scheme of arrangement to discharge the issuers from their obligations under the notes; notably the issuers had failed in their earlier attempts to restructure the notes through a scheme of arrangement.
The Singapore High Court held that that a scheme of arrangement is broad enough to discharge claims against a third party "if there is a sufficient nexus or connection" between the scheme applicant's debt and the third party's debt that is sought to be released and a deed of assumption is not required. The Singapore High Court deemed that the debts of the scheme applicant (in its capacity as guarantor) and the debts of the third parties (in its capacity as issuers of the notes) were thus connected and a nexus had been established. This position was affirmed by the Singapore Court of Appeal in their obiter remarks.
The Honourable Mr. Justice Trower also commented in obiter remarks in Re Swissport Fuelling Limited [2020] EWHC 3414 that "“[it] may be that on the issue of third party releases, the Singapore Court of Appeal has blazed a more straightforward trail which English law ought to follow"”.
The Hong Kong courts in Re Unity Group Holdings International Ltd leaned towards the Singapore court's approach in Pathfinder Strategic Credit LP v Empire Capital Resources. The Honourable Justice Harris saw "no reason to distinguish between, for example, a release of the obligations of a third party guarantor of a company's debts, which is necessary to make a scheme effective…and a release of a principal obligor’s liability, which has been guaranteed by the company".
There could be instances where company advisors are of the view that the use of a deed of contribution makes the scheme effects easier to understand, however, the court did not find it essential provided that the release of third party rights is "necessary in order for the scheme to be effective".
A streamlined approach
Significantly, the scheme in this case is the first scheme introduced in Hong Kong that involves the release of debts owed by principal obligors that have been guaranteed by the scheme company.
Going forward, provided that a sufficient nexus can be established between the release of third party liability and the relationship between the scheme company and the creditors, a deed of assumption will no longer be required to effect a discharge of third-party borrower's debts under a guarantor's scheme.
Authored by Jonathan Leitch, Carol Hartopp Hall, Wei Lun Koh, Nigel Sharman, and Hillary Chung.
