Re Kaisa Group Holdings Ltd

HCMP 708/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 708 OF 2016

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R E A S O N S   F O R   D E C I S I O N

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Introduction

1.On 10 June 2016 I granted an order sanctioning a scheme of arrangement proposed by Kaisa Group Holdings Limited (“Company”) compromising its offshore debt (“Scheme”) pursuant to section 673 of the Companies Ordinance, Cap 622.  These are my reasons.

The Company and its Debt

2.The Company is incorporated in the Cayman Islands.  Its main business is that of property development in Mainland China. It is the ultimate holding company of a group of companies (“Group”) consisting of a large number of intermediate holding companies incorporated in Hong Kong and the British Virgin Islands, one Cayman intermediate holding company and a large number of companies incorporated in Mainland China.  The Company’s shares are listed on the Main Board of The Stock Exchange of Hong Kong Limited (“HKEX”).  The Company has been a registered non-Hong Kong Company since 16 June 2008.  It has a place of business in Hong Kong.

3.The business of the Group is that of property development, focused historically in the Pearl River Delta in Guangdong Province, but also in other areas of China.  The financing of the Group is divided broadly into two categories: debt in Mainland China, which I shall refer to as onshore debt, and debt incurred outside Mainland China, which I shall refer to as offshore debt.  Both the onshore and offshore debt are being restructured, but pursuant to separate arrangements.  The Scheme only compromises offshore debt.

4.The offshore debts compromised by the Scheme include the following:

(1) Bi-lateral facilities with the Industrial and Commercial Bank of China (“ICBC”) under a facility agreement governed by Hong Kong law, under which approximately US$20 million principal is outstanding;

(2) Bi-lateral obligationswith HSBC under three agreements, two of which are facility agreements governed by Hong Long law and one (relating to an ISDA swap agreement) governed by English law, under which approximately US$107.7 million in aggregate is outstanding (“Existing Offshore Loans”);

(3) Convertible bonds(with an outstanding aggregate principal amount of US$231.6 million upon maturity in December 2015), governed by English law (“Bonds”); and

(4) Five series of High Yield Notes(with an outstanding aggregate principal amount of US$2.2 billion), governed by New York law, with varying maturity dates between 2016 and 2020, and varying rates of interest (“Notes”).

5.Pursuant to the terms of an inter-creditor agreement to which all of the offshore creditors are parties, all of the offshore funding, save only for obligations pursuant to two of the three HSBC agreements, share pari passu in a security package consisting of pledges over shares of some of the Group subsidiaries incorporated outside Mainland China (“Collateral”). The anticipated realisable value of the Collateral in the absence of the Scheme is believed to be negligible.

Restructuring

6.The Scheme is part of a multi-jurisdictional restructuring process, and is the result of lengthy negotiations.  These negotiations resulted in a restructuring support agreement (“RSA”), the terms of which were set out in full in an announcement on the HKEX on 10 January 2016. The holders of the Notes and the Bonds were given the option to sign up to the RSA, binding them to support the Scheme, in return for a consent fee.  An inter-conditional and parallel scheme, in identical terms, was proposed in the Cayman Islands.  The Cayman Court granted leave for the Company to convene a meeting of scheme creditors.  Recognition of the Hong Kong Scheme under Chapter 15 of the US Bankruptcy Code has also been applied for. The Scheme is, therefore, similar to the scheme approved by me on 17 May 2016 compromising the offshore debt of another company listed on the HKEX, namely, Winsway Enterprises Limited ^[1].  Similar legal issues arose in that case and are considered in my reasons for approving that Scheme to which I shall refer in more detail later.

7.The Cayman Scheme was approved by the creditors and an order sanctioning the Cayman Scheme made on 9 June 2016.

8.The Scheme does not reduce the principal amount of the offshore debt.  The Scheme’s objective is to effect an extension of maturities and a reduction in the near-term cash interest expense of the Notes, the Bonds and Existing Offshore Loans, so as to realign the Company’s debt maturity profile to projected cash flows and to provide the Company with the ability to maximise recoveries for Scheme creditors over time.  This is achieved by each Scheme creditor exchanging, under the terms of the Scheme, its existing claims against the Company in return for a right to participate in the “Scheme Consideration”.  The Scheme Consideration consists of a variety of new instruments: (1) a series of new high yield notes (“New Notes”); (2) contingent value rights (“CVRs”); and (3) new mandatorily exchangeable bonds (“New Bonds”).

9.The principal valueof the new instruments to which each Scheme creditor is entitled is equal to the total value of its existing claims against the Company, but there is a rescheduling of the interest rates under the New Notes and the New Bonds.  Scheme creditors are entitled to elect between the different forms of Scheme Consideration. In the event of over-subscription by Scheme creditors for the New Bonds there is a cut-back mechanism to ensure that Scheme creditors receive a proportionate share for which they subscribe.  The Scheme also provides creditors, if they so elect, to share in any potential upside in the Company’s future performance. This is achieved, firstly, by the CVRs, which represent the contingent right to receive cash or (at the Company’s option) shares with an aggregate notional value of 7% of the value of the New Notes, triggered when the implied market capitalisation of the common shares of the Company reaches certain targets.  Second, by the automatic exchange of the New Bonds into exchange convertible bonds on certain events, with those exchange convertible bonds providing for a conversion price into equity below that provided for by the bonds.

10.All Scheme creditors will share pari passu in the Collateral. This is effected by a release of the existing guarantees and pledges provided by certain subsidiaries, and the entry by them into new guarantees and pledges on the same terms in support of the New Notes and the New Bonds.

11.The Scheme meeting was convened on 20 May 2016 pursuant to my order of 19 April 2016.  At the Scheme meeting on 20 May 2016, 1,004 Scheme creditors voted in person or by proxy.  This represents 96.78% of the total known Scheme claims by value.  The Scheme was approved with 99.91% in value of the Scheme creditors voting in favour of it. Only eight Scheme creditors voted against the Scheme.

Legal Principles

12.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):

“The creditors agree to the arrangement or compromise if, at a meeting of the creditors summoned under section 670, a majority in number representing at least 75% in value of the creditors present and voting, in person or by proxy, agree to the arrangement or compromise.”

13.The function of the Court in determining a petition to sanction a scheme is summarised in Buckley on the Companies Acts (14^th ed) at page 473:

“Function of the Court In exercising its power of sanction the court will see, first that the provisions of the statute have been complied with, second that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.”

Constitution of the class

14.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:

“(1) It is the responsibility of the company putting forward the [scheme] to decide whether to summon a single meeting or more than one meeting. If the meeting or meetings are improperly constituted, objection should be taken on the application for sanction and the company bears the risk that the application will be dismissed.

(2) Persons whose rights are so dissimilar that they cannot sensibly consult together with a view to their common interest must be given separate meetings. Persons whose rights are sufficiently similar that they can consult together with a view to their common interest should be summoned to a single meeting.

(3) The test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interests not derived from such legal rights. The fact that individuals may hold divergent views based on their private interests not derived from their legal rights against the company is not a ground for calling separate meetings.

(4) The question is whether the rights which are to be released or varied under the [scheme] or the new rights which the [scheme] gives in their place are so different that the [scheme] must be treated as a compromise or arrangement with more than one class.”

15.The rights of those included in a single class can be subject to material differences, provided that they are not “so dissimilar as to make it impossible for them to consult together with a view to their common interest”.[3] The Court takes a sensible approach to the composition of classes so as to avoid giving unjustified veto rights to a minority group of creditors such that the test for classes becomes an instrument of oppression by a minority.[4]

16.In the present case there are differences in the current rights that the various Scheme creditors have, the significance of which I consider in the following paragraphs.

17.In considering the rights of creditors which are affected by the Scheme, it is essential to identify the appropriate comparator. In the case of rights against an insolvent company where the scheme is proposed as an alternative to a liquidation, the appropriate comparator is the insolvent liquidation of the company.[5]  Those rights may be very different from the creditors’ rights against a company which is solvent and will continue in business.

18.In Re Co-operative Bank PLC [6], Hildyard J applied this test in circumstances where the scheme creditors consisted of holders of different notes, with differing interest rates and maturity dates. He concluded that although at first blush, the different notes would appear to have different rights, once account was taken of the fact that the comparator was “the possibility or real likelihood of insolvency” [15], and the fact that their rights on such an insolvency would be the same, then the creditors could justifiably be treated as one class particularly as the rights conferred by the scheme were the same [16-19].[7]  

19.In an insolvent liquidation, the differences in the contractual rights of Scheme creditors such as differences in maturity dates and different rates of interest are not relevant. The rights of each of them, in a liquidation, is to prove, and receive dividends, in respect of their claim valued as at the date of the commencement of the liquidation. None of them have any entitlement to interest accruing after the commencement of the liquidation.  There is, therefore, no need to constitute different classes for holders of different series of Notes.

20.HSBC has no interest in the Collateral in respect of two of the three obligations owed to it.  However, the liquidation analysis prepared by Deloitte, and included in the Explanatory Statement indicates that the value likely to be realised from that Collateral, being pledges over shares of companies within the Group, is negligible.  Consequently, it was correct for HSBC to vote in the same class of creditors who had the notional advantage of an interest in the Collateral.

21.Prior to the hearing to convene a meeting of creditors 96% of Scheme creditors by value had entered into lock-up agreements committing themselves to vote in favour of the Scheme and, as consideration for that lock-up, are entitled to a consent fee of 1% of the principal amount of their Scheme claims.  I considered the impact of an agreement to pay a consent fee to creditors who agreed in advance to approve a restructuring in Winsway Enterprises [19-20].  There is no material difference between the two Schemes in this regard save that in the present Scheme the Consent Fee is less.  It has no impact on the constitution of the class.

22.As to the currencies of the debts, in order to provide for equality of treatment of Scheme creditors it is necessary to value their Scheme claims in a single currency.  This is a necessary feature of any insolvency distribution scheme, and is inherent in a liquidation.  In this case, all Scheme creditors’ claims that are not already denominated in US$ shall be converted into US$ as at the Record Time.

23.In the event of a liquidation of the Company, all creditors’ claims would be converted into a single currency as at the date of the commencement of the liquidation.  That is the same date upon which claims are valued in a liquidation.  In Re Telewest Communications Plc (No.1)[8], David Richards J considered whether the choice of an exchange rate different from the spot rate applying on the date of valuation of claims in a scheme created any class issue, and held that none arose [23].  The same conclusion was reached in PHS Group Plc [9].  I agree.

24.Finally, the Scheme will have the effect of releasing Scheme creditors’ guarantee claims against certain of the Company’s subsidiaries.   For the reasons I explain in [18] of Winsway Enterprises this is not an impediment to approval of the Scheme and is not material to the constitution of the class.

25.The Scheme has in my view been correctly structured on the basis that creditors’ rights absent the Scheme are materially the same.  The rights granted by the Scheme are the same for all Scheme creditors. Although three different types of instrument are available under the Scheme, so that ultimately certain Scheme creditors may end up with a different package of new instruments to others, they are all granted the same right to elect between the particular instruments and consequently this is irrelevant to the constitution of classes.

26.In my view the Scheme creditors properly voted as one class.  The Scheme creditors were fairly represented in the Scheme Meeting, as creditors representing more than 96% of the known Scheme claims attended.  The necessary statutory majorities required by section 674 of the Companies Ordinance were overwhelmingly attained. 

Jurisdiction

27.In order to justify the Court exercising its jurisdiction to sanction the Scheme it is necessary for the Company to demonstrate sufficient connection between the Scheme and Hong Kong^[10]. The present Scheme has similar features to Winsway Enterprises.  The Company is a registered Non-Hong Kong Company.  It is listed on the HKEX.  Two of the Existing Offshore Loans are governed by Hong Kong law.  It is, therefore, necessary for the Scheme to be introduced and sanctioned in Hong Kong in order to prevent a dissentient creditor with a claim governed by Hong Kong law taking steps in Hong Kong that would interfere with the restructuring the Scheme is intended to effect.  This in my view is sufficient to justify the court exercising jurisdiction to sanction the Scheme, but there are other matters, which demonstrate sufficient connection.  It has an office in Hong Kong.  It has assets in Hong Kong: 33 bank accounts in Hong Kong with 7 Hong Kong based banks.  The Company has 61 Hong Kong incorporated subsidiaries, which act as intermediate holding companies between the Company, its British Virgin Islands subsidiaries and its Chinese subsidiaries.  The Company has negotiated and obtained financing in Hong Kong from Hong Kong based banks, and has signed service agreements with its directors which are governed by Hong Kong law.  Since the Company has been listed, it has held its 2010, 2011, 2012, 2013 and 2014 annual general meetings in Hong Kong.  A significant part of the negotiation with the Scheme creditors was conducted in Hong Kong.  Importantly the Scheme is a necessary component of the larger cross-border restructuring of the offshore debt that includes the Cayman scheme.

28.So far as New York is concerned, it is a condition of the Scheme that recognition of the Hong Kong Scheme under Chapter 15 of the US Bankruptcy Code is obtained.  Evidence was adduced explaining that it is reasonably likely that the New York Bankruptcy Court would recognise the Hong Kong Scheme, as a scheme emanating from a “foreign non-main proceeding”, on the basis that the Company has an establishment in Hong Kong. As a consequence, the relief under Chapter 15 would include enjoining action under the New York law governed Notes.  This is similar to Winsway Enterprises in which the New York Bankruptcy Court recognised the introduction of the Scheme as a “foreign non-main proceeding”.

Provision of Information and the Explanatory Statement

29.The Explanatory Statement included in the Scheme Document is comprehensive and contains a report from Alix Partners containing a review of the trading performance of the Group and a review of the cash flow forecast for the period ending 31 December 2020.  The report tests the forecast and fairly points out a number of reasons for caution and explains that there is no guarantee the cash flow will be sufficient to meet the rescheduled indebtedness.  There is also a report from Deloitte explaining the estimated return for Scheme creditors in the event of an insolvent liquidation of the Group and a valuation of the Group’s property projects by DTZ.

30.As the Explanatory Statement makes clear, one of the issues the Company faces is the lack of up to date audited financial statements.  The last audited financial statements are for the period ending 31 December 2013 and the auditors have raised issues in relation to the Company’s accounts for the period ending 31 December 2014.  An independent committee has been appointed to review the accounts, and FTI Consulting (Hong Kong) Limited has been appointed to assist in that process.  That work is ongoing.  All of this has been a matter of public record for some time as a result of announcements to the HKEX. Although this makes it difficult to assess the current financial state of the Company and how it has evolved in the last 2½ years it seems to me that given the extensive information that has been provided the information satisfies the requirement that the Scheme creditors are provided with sufficient information to enable them to exercise reasonable judgment as to whether the Scheme is in their interests and reach a sensible decision as to its benefits[11]. Given the financial state of the Company the Scheme is self-evidently one which an intelligent and honest member voting in respect of his own interests could reasonable approve. 

Conclusion

31.I am satisfied that provisions of the Ordinance has been complied with and that for the reasons I have given the Scheme should be sanctioned.

Mr Jose Maurellet, instructed by Tanner De Witt, for the petitioner and subsidiary guarantor & the subsidiary guarantor pledgors

Mr Tom Ng, instructed by Tanner De Witt, for the petitioner