Re Winsway Enterprises Holdings Ltd
Read the full judgment text of HCMP 453/2016 on BabelCite. This High Court CFI judgment was delivered on 17 May 2016.
1. On 21 March 2016 I gave leave to Winway Enterprises Limited (“ Company ”) to convene a meeting of a discrete group of creditors (“ Scheme Creditors ”) in order that they could consider and vote on a proposed scheme of arrangement to restructure the debt of US$309,000,000 arising under senior notes maturing on 8 April 2016 (“ Scheme ”). A similar order was made by Bannister J on 22 March 2016 in the British Virgin Islands. A meeting pursuant to the two orders took place on 3 May 2016 and the
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HCMP 453/2016 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 453 OF 2016 ____________
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__________________________________ R E A S O N S F O R D E C I S I O N Introduction 1.On 21 March 2016 I gave leave to Winway Enterprises Limited (“Company”) to convene a meeting of a discrete group of creditors (“Scheme Creditors”) in order that they could consider and vote on a proposed scheme of arrangement to restructure the debt of US$309,000,000 arising under senior notes maturing on 8 April 2016 (“Scheme”). A similar order was made by Bannister J on 22 March 2016 in the British Virgin Islands. A meeting pursuant to the two orders took place on 3 May 2016 and the Scheme Creditors voted in favour of the Scheme by approximately 96.5% in number and 98.3% in value thus achieving the required statutory majority. On 4 May 2016 the Company issued a Petition seeking the Court’s sanction, which I granted on 17 May 2016. Bannister J approved the Scheme on 2 June 2016. These are my reasons for approving the Scheme. Company 2.The Company is incorporated in the British Virgin Islands. On 6 September 2010 it was registered as a non-Hong Kong company under section 333 of what was then Part XI of the Companies Ordinance, Cap 32. It has a registered office in Hong Kong. On 11 October 2010 it was listed on The Main Board of The Stock Exchange of Hong Kong Limited (“HKEX”). The Company is an investment company. Through its subsidiaries it produces and trades coking coal and carries on related business activities mainly in the Mainland[1]. The Company carries on no business in the British Virgin Islands and its activities in Hong Kong are limited and described more fully in [32-33] in which I consider the Company’s connection with Hong Kong. The Debt and Scheme Creditors 3.On 8 April 2011 the Company entered into an indenture, which governed the issuance by the Company of up to US$500,000,000 of 8.5% senior notes due in 2016 (“Notes”). The Company’s obligations were guaranteed by 14 related companies (“Subsidiary Guarantors”). Deutsche Bank Trust Company Americas was the trustee (“Trustee”). The indenture was governed by the laws of the State of New York. The indenture was subsequently amended and two further guarantors added. Notes in the aggregate principal amount of US$309,000,000 currently remain outstanding along with accrued interest of approximately US$40,000,000. The notes are listed on the Singapore Exchange. The notes were issued in fully registered form. The term “Holder” is defined in the Indenture as “the Person in whose name a Note is registered in the Note register”. All notes are registered in the name of Cede & Co as nominee of The Depositary Trust Company. Title in the Notes is generally held pursuant to a chain of custody. “Scheme Creditors” is defined in the Scheme to include a person with a beneficial interest as principal in the Notes held in global form or global restricted form through the Depositary at the Record Time and which has a right, upon satisfaction of certain conditions, to be issued definitive notes in accordance with the terms of the Notes. I shall use the term Scheme Creditors in these reasons to describe the beneficial owners of the Notes, who are described conventionally in the early commercial documentation as “noteholders”. 4.An event of default occurred under the Indenture on 8 May 2015. Further defaults followed. The Indenture gives the Trustee at the request of the Holder in the event of default the right to make various conventional demands for early repayment. None have been made. The Company started to explore restructuring options in late 2014. In early 2015 it engaged Bondholder Communication Group to identify as many Scheme Creditors as possible. The Company approached a number of significant Scheme Creditors and as a result an ad hoc steering committee was formed that appointed Houlihan Lokey as its financial advisers and Akin Gump as its legal advisers. The steering committee held discussions with a number of other Scheme Creditors to gather views, which led to the steering committee engaging in restructuring discussions with the Company and its advisers. 5.On 8 May 2015 the Company, the Subsidiary Guarantors and the Scheme Creditors comprising the steering committee signed a standstill agreement under which the Scheme Creditors agreed not to pursue enforcement action under the Indenture until 31 May 2015 or such later date as might subsequently be agreed. The date was extended on a number of occasions as the restructuring discussions progressed. Various options were explored unsuccessfully leading the Company to conclude that the most viable option was a rights issue underwritten by its controlling shareholder, Mr Wang Xingchun, to fund a cash payment to Scheme Creditors as part of a restructuring. The discussions culminated in a restructuring support agreement being entered into on 25 November 2015 between the Company, Subsidiary Guarantors and the Scheme Creditors comprising the steering committee (“RSA”), which replaced the standstill agreement and included a term sheet. The term sheet was the subject of substantial further negotiation. 6.Under clause 6 of the RSA, the Company agreed to pay on the restructuring effective date, as defined in the RSA, each consenting Scheme Creditor who became a party to the RSA on or prior to 23 December 2015 a pro rate share of a fee in US dollars for agreeing in advance to any scheme that was subsequently proposed. The consent fee is equivalent to 2% of the outstanding principal and accrued interest as at 25 November 2015 (“Consent Fee”). 7.The restructuring in its final form consists of redemption of the outstanding Notes and all accrued interest amounts up to the date of settlement at a discount, with Scheme Creditors accepting a combination of cash consideration, new shares in the Company and contingent value rights. The Subsidiary Guarantees and associated share charges will be released. 8.The Company considers the Scheme necessary for a number of reasons. First, given the disparate character of the Scheme Creditors getting all of them to agree is impracticable. Secondly, the Hong Kong Court may not recognise the scheme introduced in the British Virgin Islands as compromising the debt which arises under an agreement governed by the laws of the State of New York. This is a complication that I consider in more detail later in this decision, but required in the view of those advising the Company, correctly in my view, the Schemes to be introduced in both Hong Kong and the British Virgin Islands and to be conditional upon the Company obtaining recognition of the Hong Kong Scheme in the United States under Chapter 15 of the United States Bankruptcy Code. 9.The Board of the Company considers that unless the Scheme is implemented the Company will have no alternative to liquidation. The Company is insolvent on a balance sheet basis and only has enough cash to operate because it has not been paying interest on the Notes. On 25 February 2016 the Board resolved to introduce the Scheme in Hong Kong and the British Virgin Islands and apply for recognition of the Hong Kong Scheme under Chapter 15 of the United States Bankruptcy Code seeking recognition of the Hong Kong proceedings as a foreign non-main proceeding and certain other ancillary relief, which would have the effect of enforcing the terms of the Scheme in the United States. It will be appreciated that the United States Bankruptcy Code does not have an equivalent to a scheme of arrangement, which is why the reorganisation of the Company’s debt has been structured in the way I have described. The Scheme 10.The key terms of the Scheme can be summarised as follows: In consideration for the release in full of all claims of the Scheme Creditors in respect of a liability of the Company or any Subsidiary Guarantor arising directly or indirectly pursuant to, under or in connection with the Indenture and the Notes, the following consideration will be distributed to the Scheme Creditors in accordance with the terms of the Schemes:
11.The Cash Consideration and the Scheme Shares together comprise the “Elective Scheme Consideration”. Under the terms of the Scheme, each Scheme Creditor is entitled to receive a pro rata share of the Elective Scheme Consideration and the CVRs in the proportion that its claim bears to the total claims of all Scheme Creditors. Scheme Creditors’ claims are calculated as at 5:00pm (New York time) on 29 April 2016 (“Record Time”). 12.Scheme Creditors may choose to receive their entitlement to the Elective Scheme Consideration in the form of the Cash Consideration only, the Scheme Shares only or a combination of the two. However, this option is only open to Scheme Creditors who ensure that the required documentation (including a duly completed election form) is submitted such that it is received on or before two weeks before the Scheme meeting. 13.On the “Restructuring Effective Date” the Scheme will become fully effective in accordance with its terms. The Restructuring Effective Date is the date on which all of the Scheme Conditions have been satisfied. The Scheme Conditions include:
14.The Cash Consideration is to be funded by the proceeds of a rights issue pursuant to which new shares will be listed on the HKEX. The Scheme and the rights issue are inter-conditional. The rights issue was underwritten by Famous Speech Limited, a company controlled by Mr Wang’s daughter, rather than Mr Wang. The rights issue and a number of other associated resolutions were approved at an extraordinary general meeting of shareholders on 16 May 2016. Legal Principles 15.The statutory procedure by which a company can compromise its debts with its creditors is contained in Part XIII of the Companies Ordinance, Cap 622. Section 673(2) provides that “The Court may, on application made for the purpose of this subsection, sanction the arrangement or compromise” which is (sub‑section(3)(a) ) “entered into with the creditors of a company, the company or any of the creditors” if (sub‑section 1) the creditors “with whom the arrangement or compromise is proposed to be entered into, agree or agrees to the arrangement or compromise”. Sections 670 and 671 provide the mechanism for creditors to agree to a proposed scheme of arrangement or compromise. An application is made by the company to the court for an order convening a meeting of creditors or a discrete class of creditors if only a section of creditors is affected by the scheme. The notice of any meeting ordered by the court must be accompanied by an explanatory statement. Section 671(3)(b)(ii) provides that it must state the effect of the arrangement or compromise. Section 674(1) specifics when an arrangement or compromise between creditors and a company is treated as agreed for the purposes of section 673(1):
16.The function of the Court in determining a petition to sanction a scheme is summarised in Buckley on the Companies Acts (14th ed) at page 473:
Constitution of the class and the Consent Fee 17.The relevant principles, which determine the constitution of classes was considered by the Court of Final Appeal in Re UDL Holdings Ltd [2]. In [27] of that judgment Lord Millett sets out the principles that emerge from what he notes is a consistent line of authorities. The relevant principles are:
18.In the present case the Scheme Creditors are a discrete group whose legal rights are identical and will be affected in identical terms under the Scheme. The fact that the Scheme results in the release of the Subsidiary Guarantors is not a bar to its acceptance. The release does not give rise to a jurisdictional issue. It is a justifiable component of a compromise between a creditor and the company, and to borrow the language of Patten LJ in Lehman Brothers International (Europe) (in administration) “the release of such third party claims is merely ancillary to the arrangement between the company and its own creditors”[3] Neither is the release of the Subsidiary Guarantors material to the constitution of classes.[4] 19.The provision of a Consent Fee necessarily means that some Scheme Creditors will receive more than others following the implementation of the Scheme. The English courts have considered in a number of cases whether the existence of a lock-up agreement or the payment of a fee for agreeing in advance to be bound by a proposed scheme creates a separate class. In three cases it has been held that it does not: Re DX Holdings Ltd [5], PrimaCom Holdings GmbH v Credit Agricole [6]and Re Seat Pagine Gialle SPA [7]. 20.The rationale for inviting Scheme Creditors to sign in advance an agreement to support a proposed restructuring is in order to reduce the risk of the introduction of a scheme of arrangement proving futile because the company cannot obtain the necessary statutory majority. The Consent Fee is consideration for agreeing in advance to support the Scheme. The issue is whether or not the provision to some Scheme Creditors of the Consent Fee necessitates them voting in different classes. I have already explained that in determining whether or not Scheme Creditors should vote in different classes the relevant test is whether the rights to be released or the new rights which the Scheme gives in their place are so different that the Scheme must be treated as a compromise with more than one class[8]. As Floyd J observes in DX Holdings Ltd [8] this type of class question is fact specific. However, the question will normally be the same: is the right to be paid an additional sum likely to influence materially a scheme creditor in deciding how to vote? Whether or not it may is likely to depend on whether or not the sum is substantial and has been offered in a manner, which creditors are likely to consider fair regardless of whether or not they took advantage of the opportunity to agree in advance to vote in favour of the restructuring. As was the case in the three English schemes to which I have referred the Consent Fee is relatively small, although larger than was the case in the three English schemes. It was available to all Scheme Creditors and it seems me to have been a bona fide attempt to introduce certainty in the progress of the restructuring. In my view it is unlikely to have influenced materially how a Scheme Creditor voted and did not require Scheme Creditors to be divided into two classes for voting purposes. 21.Through the Steering Committee the Scheme Creditors have had the benefit of independent legal and financial advice. In addition, they received an Explanatory Statement. The principles that govern the sufficiency of the explanatory statements are well established. The statement should be sufficient to enable the Scheme Creditors to exercise a reasonable judgment as to whether the Scheme is in their interests, and to reach a sensible decision as to its benefits[9]: Scheme Creditors are assumed to be intelligent and can be expected to read the explanatory statement as a whole[10]. This is particularly so when as in the present case many of the Scheme Creditors of the Company are sophisticated institutional investors. The present Explanatory Statement is, as one would expect, a comprehensive documents explaining the Scheme, the perceived need for it and its advantages to the alternative, which is insolvency. In my view it is clearly adequate. 22.It follows that in my view the class was properly constituted, the necessary statutory majority was obtained, the Scheme was adequately explained through the Explanatory Statement and that the Scheme was one that a creditor might reasonably approve. There are, however, 2 further issues, which need to be addressed:
Jurisdiction 23.The term “company” in that part of section 673(2), which deals with arrangements and compromises between a company and its creditors is defined as follows in section 668(1):
24.In LDK Solar Co Ltd [11] it was argued on behalf of a scheme creditor that the court should not exercise jurisdiction to sanction the scheme of arrangement to compromise the debt owed to creditors. The company was incorporated in the Cayman Islands[12]. It was listed on the Stock Exchange of New York in 2007. For the purposes of the proposed scheme the relevant debt divided into three parts. The first, was a series of senior notes governed by the laws of the State of New York. The second, was a series of redeemable convertible preferred shares the relevant agreements being governed by Hong Kong law. The third was debt which did not fall into the first two groups. Various laws including that of Hong Kong governed the third category of debt. 25.A scheme creditor under the redeemable convertible preferred shares, Apollo, opposed the sanction of the scheme arguing as follows. The definition in section 673(2) should be read as providing that only if it has been demonstrated that the requirements that have to be satisfied before the court will wind up a foreign incorporated company are satisfied is jurisdiction established and the requirements were not satisfied in the case of LDK. The requirements that have to be satisfied before the court will exercise its discretion to wind up a foreign company as explained in LDK and the authorities referred to in it are:
26.Godfrey Lam J rejected this argument. He held in [44] of his judgment after a consideration of the relevant authorities and in particular Re Drax Holdings Ltd [13]:
27.In [48-58] Lam J goes on to consider those matters which connected the company and the scheme with Hong Kong. The principle matter was that the obligations arising under the redeemable convertible preferred shares were governed by Hong Kong law and that as a matter of Hong Kong law a foreign composition does not discharge a debt unless it is under the law governing the debt. Lam J echoed the views of Lawrence Collins J at [30] of Re Drax Holdings Ltd. that it is an important part of the international effectiveness of a restructuring that it is embodied in an arrangement that would be recognised by the courts of the country whose law governs the contractual obligations and that this constituted a material connection. 28.In addition, the company held all the shares of two Hong Kong subsidiaries. It maintained bank accounts in Hong Kong which were used to receive the proceeds of various fund-raising exercises although they held little at the time the scheme were introduced. It held its annual general meetings in Hong Kong [61]. Lam J also considered it relevant that the Hong Kong scheme formed part of the larger structure of the restructuring of the group and that comity would be fostered by assisting in the promotion of a unitary restructuring [62]. He concluded at [63] that:
29.As Lam J points out at [40-41] Apollo’s argument wrongly equated the jurisdiction to wind up a foreign company with the jurisdiction to sanction a scheme. They serve materially different purposes and consequently give rise to materially different considerations. A winding-up order engages the entire Hong Kong statutory insolvency regime. A scheme of arrangement to compromise debt serves a more focused and limited purpose. What is relevant is the connection between the scheme and its function and Hong Kong. A connection which is insufficient to satisfy the first core requirement for exercising the discretion to wind up maybe sufficient connection for the purposes of establishing jurisdiction to sanction a scheme. A common connection is that the debt is governed by Hong Kong law, which in isolation would probably be insufficient connection for the purposes of a winding-up petition. As a matter of Hong Kong law a foreign composition does not discharge a debt unless it is discharged under the law governing the debt. As David Richards J observes in Re Magyar Telecom BV[14] the importance of this connection is the effect which foreign courts may be expected to give to an alteration of those rights in accordance with Hong Kong law. The significance of the law governing the relevant debt being that of the jurisdiction in which a scheme is introduced is illustrated by the recent line of authorities in England of which Re Magyar forms part, culminating in the judgment of Richard Hildyard J in Re Apcoa Parking (UK) Ltd [15] in which the court accepted that despite the COMI of the company being elsewhere the choice of English governing law and the selection of the English court as having jurisdiction in the relevant agreements established sufficient connection even though this had come about as a result of provisions in those agreements enabling a change in the governing law and jurisdiction, if the court is satisfied relevant foreign jurisdictions will recognise the English court’s order sanctioning the scheme. 30.The assumption that the compromise of a creditor’s rights in accordance with the laws which govern them will be recognised in jurisdictions in which a creditor would otherwise be likely to seek enforcement, underpins the efficacy of schemes in a transnational context where the company has little or no other connection with England. As Lawrence Collins J explains in Re Drax Holdings at [30]:
31.As this passage also illustrates it is common, certainly in the Hong Kong context, for there to be parallel schemes in various jurisdictions including:
32.In the present case the debt is not governed by Hong Kong law, but the Company is listed in Hong Kong. The listing clearly constitutes a material connection with Hong Kong. As one would expect as a result of its listing there are various other matters that connect it with Hong Kong. It has a registered office here and leases premises in which it has four staff. It keeps books and accounting records at the office and its auditors are KPMG Hong Kong. Approximately 53.6% of its shareholders are resident in Hong Kong, where it holds its annual general meetings and extraordinary general meetings. In my view these matters constitute sufficient connection to give the court jurisdiction to sanction the Scheme. 33.There are, however, various other factors that support this conclusion. The Company has 20 bank accounts in Hong Kong opened with 6 different banks. It files tax returns on an annual basis with the Hong Kong Inland Revenue. A number of its directors and senior employees are resident in Hong Kong for parts of the year. Approximately half of the Scheme Creditors are located in Hong Kong. Compromise of debt governed by laws of New York 34.At the hearing of the originating summons for an order to convene a meeting of Scheme Creditors to vote on the Scheme I asked to be addressed more fully at the hearing of the Petition if a statutory majority were to be obtained, on the significance of the debt being governed by the laws of the State of New York. It is capable of being significant in one of three ways. First, as to the proper constitution of classes for voting purposes. Secondly, that it would be inconsistent with the common law rule that a foreign composition does not discharge a debt unless it is discharged under the law governing the debt[16]. Thirdly, the Scheme’s efficacy in compromising the debt in the United States, which is one of the purposes of the Scheme. It is necessary before the court exercises its discretion to sanction a scheme for it to be satisfied that it is likely to serve its intended purpose. This consideration is both a component of the requirement that a scheme is one which an intelligent and honest creditor could reasonably approve and relevant to the exercise of the court’s discretion as it would not be a proper exercise of the discretion to sanction a scheme that serves no purpose. 35.As there is only one type of debt, which is governed by the laws of New York the first issue does not arise. Generally, differences in the governing law of the various debts to be compromised do not require creditors to be divided into separate classes for voting purposes[17]. 36.The second issue is answered by the Privy Council’s decision in New Zealand Loan and Mercantile Agency Co v Morrison[18]. The Privy Council held, applying Gibbs, that a scheme of arrangement sanctioned in England under the Joint Stock Companies Arrangement Act 1870 did not prevent a claim being brought in Victoria in respect of a debt governed by the law of Victoria. It did, however, bind all creditors “wherever the creditors may be found, whether in the United Kingdom or in the Colonies or in foreign countries; and within the jurisdiction of the English Courts, all, wherever domicile, will be bound by the result.”[19] The Scheme will, therefore, prevent action being taken within the jurisdiction of the Hong Kong courts regardless of the governing law of the debt. This is one of the principal reasons for introducing a scheme such at the present one. It will prevent action being taken in Hong Kong by a dissident creditor, which interferes with the Company’s listed status. 37.So far as the third issue is concerned I was told at the hearing of the originating summons that it was the intention of the Company to seek recognition in New York pursuant to Chapter 15 of the United States Bankruptcy Code of these proceedings as “foreign non‑main proceedings” on the basis that the Company is listed on the HKEX and for ancillary relief, which would give effect to the terms of the Scheme. Evidence was put before me to demonstrate that it was likely that the Bankruptcy Court in the State of New York would grant recognition and the ancillary relief necessary to compromise the debt in the United States in accordance with the Scheme. Prior to the hearing of the Petition Judge Glenn granted a recognition order and appointed a foreign representative to deal with the Hong Kong proceedings. Judge Glenn deferred consideration of the ancillary relief until after the Hong Kong and British Virgin Island sanction hearings. I am satisfied from the evidence that has been filed that subject to the sanction of the Schemes the ancillary relief will probably be granted and what in practice is the principal purpose of the Scheme will be achieved. Conclusion 38.I am satisfied that the provisions of the Ordinance have been complied with and that for these reasons I have given the Scheme should be sanctioned.
Mr Jeremy Bartlett SC, instructed by Stephenson Harwood, for the applicant [1] The People’s Republic of China excluding Hong Kong and Macau SARs. [2] (2001) 4 HKCFAR 358 [3] [2010] BCC 272 [63] endorsing T&N Ltd [2007] Bus. LR 1411 [53] and applied in La Seda De Barcelona Sa [2010] EWHC 1364 (Ch) [4] Re Magyar Telecom BV [2015] 1 BCLC 418 in which there was one meeting; see Richards J [33] [5] [2010] EWHC 1513 (Ch), Floyd J [7] [6] [2013] BCC 201, Hildyard J [55]-[57] [7] [2012] EWHC 3686 (Ch), Richards J [15]-[22] [8] UDL, supra [27(4)] [9] Re Heron International NV [1994] 1 BCLC 667, at 675. [10] British Aviation Insurance Co Ltd [2006] B.C.C. 14, at [100] [11] [2015] 1 HKLRD 458 [12] The controversial scheme was introduced in Hong Kong along with two other schemes by associated companies one of which was incorporated in Hong Kong the other in the Cayman Islands. Two schemes were also introduced in the Cayman Islands for the two Cayman companies. [13] [2004] 1 WLR 1049 [14] [2013] EWHC 3800 (Ch) [15] [2014] 2 BCLC 285 [16] Anthony Gibbs & Sons v Societe Industrielle et Commerciale des Metaux (1890) 25 QBD 399 [17] Re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385; but see possible qualification discussed in Quincy Mutual Fire Insurance Co [2004] EWHC 1594 [18] [1898] AC 349 [19] Lord Davey pp357-8 |
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