The High Court reviewed a restructuring plan, despite opposition from a creditor.
Background:
Sino-Ocean Group Holding (SOGH) Ltd. is incorporated in Hong Kong and its shares are listed on the Hong Kong Stock Exchange (HKSE). It has defaulted on its debt and faces enforcement action by numerous groups of creditors.
A winding-up petition was presented in Hong Kong on 27 June 2024 which was adjourned three times. The UK proceedings came under Part 26A of the Companies Act (CA) 2006 and are part of an overall cross-jurisdictional arrangement with Class A shares being governed by Hong Kong law and Class B, C and D by English law.
Long Corridor Asset Management Ltd. appeared at the Sanction Hearing to oppose the restructuration plan. Long Corridor held about US$85.3 million liability which represents about 1.5% of the plan’s liabilities. One of their arguments is that the current restructuration plan is too generous to shareholders as they are still left with 53.8% of the equity in the company and, moreover, the shareholders will obtain this advantage without injecting any new capital. In its opinion, a ‘fairer plan’ would provide greater benefit for the plan’s creditors while diluting existing shareholders. They also contested the relevance of including Class A in the UK restructuration plan, as the relevant claims were governed by Hong Kong law raising concerns of ‘gerrymandering’.
Decision:
The High Court approved the restructuring plan under Section 901F of CA 2006 despite opposition from a creditor. Section 901G of CA 2006 empowers the Court to sanction a plan notwithstanding the dissent of one or more classes, provided that five conditions are satisfied. The use of this power is referred to as a "cross-class cram-down".
The first condition was that “none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative”. The company argued that the relevant alternative would be an insolvent liquidation, while Long Corridor claimed the relevant alternative was another plan that provided a better deal for the creditors. The Court however agreed with the company’s view on relevant alternatives due to the vagueness of Long Corridor’s ‘alternative plan’. Without specific details, the Court can't assess the effect on creditors of any ‘alternative plan’.
Condition B is that “the compromise or arrangement has been agreed by a number representing 75% in value of a class of creditors or (as the case may be) of members.” This threshold was met. The Court rejected Long Corridor’s contention that “Class A creditors are not affected by the plan as it is the Hong Kong Scheme, not the plan that has the effect of binding them as a class: a decision by the English Court cannot affect the Class A creditors and it is unprecedented and unjustified to allow a class that is not itself (as a class) bound by the plan to cram-down other classes.” For the Court, this contention would “militate against the will of Parliament in adopting Part 26A CA 2006, in that it would deny companies that were operating internationally the ability to deal holistically with the different classes of their creditors in accordance with Part 26A if they had classes of debt in a jurisdiction like Hong Kong where some separate scheme was needed to ensure that all those debtors were to be included.” Both Classes A and C could thus be deemed to be cramming classes.
The Court ruled that the plan fairly allocated value between the creditor classes. Even though the plan “may be seen as being unduly generous towards shareholders” there was a good reason linked to the fact that the benefits in the plan company remained a Chinese State-owned enterprise.
Implications:
This case is a good example of a cross-border restructuring involving a parallel scheme of arrangement. It is now very clear that a company can restructure its debt with the consent of one class of creditors, so long as the dissenting creditors would not be any worse off under the plan than they would have otherwise. The Court ruled that the company had done its best to fairly allocate the value preserved or generated by the restructuration and that the departure from the general principle of equal treatment for equal-ranking creditors was justified.
It is also clear that if a dissenting creditor wants to rely on a ‘relevant alternative’ such an alternative must be given in detail and not just a vague potential idea. The decision also underscores that there was nothing artificial in the inclusion of Class A creditors in the UK proceedings and there was a misconception that those shareholders were not bound by the restructuration plan.