Re Shanell Ltd

HCMP 173/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 173 OF 2017

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REASONS FOR JUDGMENT

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1.The Company petitioned for an order pursuant to section 673(2) of the Companies Ordinance, Cap 622 for the court to sanction a scheme of arrangement proposed between the Company and its creditors. After the hearing, I sanctioned the Scheme. Here are my reasons.

Background

2.The Company is a private company incorporated in Hong Kong. Its shareholders used to be Mr Chiu (85%), Mrs Chiu (10%) and Mr Ng (5%) (collectively “the Shareholders”).  In May 2016, Huang Guo-Bin (“the Investor”) acquired 51% of the Company’s issued share capital from Mr Chiu detailed below.

3.The Company has a wholly owned subsidiary, Shanell Trading (Shenzhen) Limited (“Shanell Shenzhen”), incorporated in Mainland China.  The Company and Shanell Shenzhen (collectively “the Group”)are engaged in marketing and distribution of plastic materials.

4.The Group had substantial income of over HK$2.4 billion as at 31 December 2014, with a net profit margin of 1-2%.  However, it experienced liquidity problem since the end of 2015 due to the unfavourable movements of exchange rate of RMB against other currencies. 

5.The Company had 24 creditors which were all banking institutions (“the Financial Creditors”).  The estimated total debt was HK$703.6 million.

6.These were believed to be the only creditors as the Company has been settling its liabilities with trade creditors/non-financial institutions on cash basis.  There was also nothing to show that employees were owed any payments.

7.In respect of all but one (Western Union Bank) Financial Creditors, the Shareholders have provided personal guarantees in respect of debts owed by the Company.

8.The Company was heavily insolvent.  Despite its turnover, the profits from the plastics business were not sufficient to repay its debts.  As at 15 April 2016, the Group had unencumbered assets of HK$147 million.

9.The Company engaged Pricewaterhouse Coopers and came up with a scheme of arrangement (“the Scheme”).

The Scheme of Arrangement

10.The Investor acquired 51% shareholding from Mr Chiu at a consideration of HK$6 million, of which HK$1 million had been paid to a third party escrow agent (Mayer Brown JSM).  The Investor would provide working capital to the business for its future operation subject to the Company entering into the Scheme so that the Company would be free from liabilities.  To provide further flexibility to the Scheme, the Company would solicit new investors on terms that would be no less favourable than those offered by the Investor.

11.Under the Scheme, it was anticipated that a special purpose vehicle (“the Scheme Company”) would be set up, which would be solely liable for the admitted claims of each Scheme Creditor against the Company.

12.The assets of the Group, excluding certain assets (“the Excluded Assets”), would be assigned to the Scheme Company and realized.  The Excluded Assets would include the Company’s equity interest in Shanell Shenzhen, the customer and supplier lists, goodwill and IP rights relating to the business of the Group.  All of the Excluded Assets shall remain with the Company for it to continue to operate its business.

13.The Scheme Creditors would be paid pro rata from the assets of the Group.  All enforcement actions against the Company or its property would be withdrawn by the Scheme Creditors and no Scheme Creditors would sue the Company.

14.For Scheme Creditors who also held personal guarantees, they would enjoy pro rata distribution of realized assets.  These assets included sale proceeds of a flat to be assigned by Mr and Mrs Chiu, the share consideration of HK$6 million from the Investor, and dividends from the remaining 49% shares in the Company.  Those 49% shares would be subject to a fixed charge in favour of the Scheme Administrators to be held on behalf of the Scheme Creditors as security.  During the Scheme Period, all the dividend and payments made by the Company to the Shareholders of the 49% would be paid to the Scheme Company directly.

15.The effect of the Scheme would be that:

(a) The Group would continue to operate with the working capital made available by the Investor, utilizing the Excluded Assets.

(b) The 2 current directors, Mr Chiu and Mr Ng would remain employed by the Company post-completion.

(c) The Scheme Creditors would be paid pro rata from the proceeds of realization of the assets of the Group.

(d) Scheme Creditors holding Personal Guarantees would receive on a pro rata basis from assets outside the Group.

(e) When the aggregate proceeds of the Scheme (including the value of assets belonging to the Personal Guarantors) shall reach a predefined net amount of $175 million after deduction of the Scheme claims (or such other amount as agreed upon the by Scheme Creditors Committee which is not less than $160 million and is paid within 6 months), the Personal Guarantors would be released from their obligations under their personal guarantees and the share charge.

16.The Company sought the court’s sanction of the Scheme.

Legal principles for sanction by the court

17.In deciding whether or not to sanction a scheme of arrangement, the court will take into account the following matters:

(a) Whether a scheme is for a permissible purpose. 

(b) Whether members who are called on to vote as a single class have sufficiently similar legal rights that they can consult together with a view to their common interest at a single meeting.

(c) Whether the meeting was duly convened in accordance with the Court’s directions.

(d) Whether members have been given sufficient information about a scheme so as to enable them to make an informed decision, whether or not to support it.

(e) Whether a majority in number representing 75% in value of the members present and voting agree to the arrangement.

(f) The discretionary element of the sanctioning process and in particular whether the Court is satisfied that a scheme is one that an intelligent and honest man acting in respect of his interests as a member of the class within which he votes, might reasonably approve. 

Re Wheelock Properties Ltd [2010] 4 HKLRD 587 at §8, Harris J; Re Cheung Kong (Holdings) Ltd [2015] 2 HKLRD 512 at §29, Ng J.

18.Provided that the members are acting on sufficient information and with time to consider what they are about, and are acting honestly in considering where their commercial interest lies, the Court would normally be reluctant to refuse sanction of a scheme of arrangement approved by the requisite majority as they are much better judgers of what is to their commercial advantage than the Court can be.  This is a practical guide, not a “rule”, to whether or not the scheme of arrangement is fair and to their commercial advantage.  The Court, however, retains the ultimate discretion to sanction or not sanction the scheme, in accordance with established legal principles, to meet the justice of the individual case.  Re Cheung Kong, at §§22-23.

19.Applying the above principles, the Scheme was for a permissible purpose, ie to compromise claims of creditors to avoid liquidation of the Company: Re Perfect Sense Group Ltd [2007] 2 HKLRD 734, Kwan J (as she then was).

20.The Financial Creditors who were called on to vote as a single class had similar legal rights that they could consult together with a view to their common interest at a single meeting.  The Scheme Creditors would enjoy similar legal rights as against the Company.  For those who held Personal Guarantees, any realization of assets for their benefit would come from outside the Group and distributed pro rata.

21.The meeting was duly convened on 28 November 2016 (“the Creditors’ Meeting”) in accordance with the court’s directions dated 12 October 2016 given in HCMP 1439/2016.  

22.I was satisfied that the Scheme documents have been properly served on all the Financial Creditors.  They have been given sufficient explanation in the Scheme documents and sufficient time to enable them to make an informed decision. 

23.Out of 24 Financial Creditors, 20 attended.  The 20 creditors present represented a total value of $616 million.  The total amount to the 4 absent creditors was about $97.9 million.  The Scheme was approved by 100% in number representing at least 75% in value of the creditors present and voting in person or by proxy as required by section 674(1)(a) of the Ordinance.  It was also resolved that SCB, IBT and HSBC be appointed as members of the Scheme Creditors’ Committee.

24.The only change to the Scheme at this hearing was that one of the Administrators of the Scheme shall be changed from Donald Edward Osborn to Choon Onn Chin.  This should not be a controversial matter because the Scheme document provided that the Administrators could be Mr Osborn or his successor.

25.There were other proposed changes to the Scheme set out in Mr Chiu’s second affirmation but they were not pursued, as they represented a substantial change to the terms, for which Scheme Creditors’ approval must be obtained.

26.The Scheme would have the advantage of avoiding liquidation of the Company.  There would be improved recovery by the Scheme Creditors, when compared to liquidation of the Company.  It would enable the Company to continue in business.  The Financial Creditors were all sophisticated banking institutions. The unanimous vote of those present was an indication that they found the Scheme practical, fair and to their commercial advantage.  I find that the Scheme was such that an intelligent and honest man, being a member of the class of Financial Creditors concerned and acting in respect of its interest, might and did reasonably approve. 

27.In exercise of my discretion, I therefore sanctioned the Scheme pursuant to section 673(2) of the Companies Ordinance.

28.I thank Ms Cheung for her assistance.

Ms Elizabeth Cheung, instructed by Adrian Yeung & Cheng, for the petitioner