Re China Lumena New Materials Corp. (in Provisional Liquidation)

HCMP 2234/2019

[2020] HKCFI 338

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2234 OF 2019

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REASONS FOR DECISION

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1.I have before me the Company’s petition dated 16 January 2020 seeking the courts sanction under section 673 of the Companies Ordinance of a scheme of arrangement between the Company and the unsecured creditors of the Company. The scheme forms part of a wider restructuring which involves new investors acquiring a controlling stake in the Company with a view to saving the Company’s Hong Kong listed status, which is it’s only asset of any value. Without the realisation of the value of the listing status it is anticipated that the recovery for unsecured creditors will be zero. The Company was incorporated in the Cayman Islands, registered in Hong Kong as a non-Hong Kong company and has been listed since the 16 June 2009. The Company was an investment holding company and the ultimate parent of a group of companies with principal operations in the Sichuan province of the People’s Republic of China with intermediate subsidiaries in the Cayman Islands, the British Virgin Islands, Hong Kong and the Mainland.

The group was principally engaged in the processing and sale of powder thenardite, specialty thenardite and medical thenardite and in the manufacture and sale of polyphenylene sulfide products.  The group’s operations essentially ceased in or around 2014.

2.In February 2015, due to financial distress, the Company was subject to Cayman provisional liquidation.

3.In March 2017, the Provisional Liquidators were recognised and granted assistance by this Court.

4.As the Company’s only asset with clear realisable value is its Hong Kong listing status.  The Provisional Liquidators have sought to “realise” the Company’s listing status so that the Company could resume trading its shares, with a view to maximising creditors’ recovery.

5.The Provisional Liquidators’ efforts led to entry into the restructuring framework agreement with the investors and the submission of the resumption proposal to the Stock Exchange.

6.The Scheme forms part of the resumption proposal.  The Scheme Creditors’ recovery under the Scheme was originally estimated to be about 1% on the basis of the Company’s known indebtedness being about US$980 million.  However, in light of the claims submitted at the Scheme Meeting which amounted to some US$1.5 billion, the Scheme Creditors’ recovery under the Scheme is now estimated to be about 0.7%.  However, absent the Scheme and in a liquidation, the Scheme Creditors will recover nothing: see the 3^rd Affirmation of Man Chun So dated 21 January 2020.

7.On 27 November 2019, the Stock Exchange gave its in-principle approval of the new listing application.

8.In considering whether to sanction a scheme, the court   applies some well-established principles which were recently restated in      Re Mongolian Mining Corp [1] and Re Da Yu Financial Holdings Ltd [2] such that the Court would consider in particular the following:

(1)     whether the scheme is for a permissible purpose;

(2)     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;

(3)     whether the meeting was duly convened in accordance with the Court’s directions;

(4)     whether creditors have been given sufficient information about the scheme to enable them to make an informed decision whether or not to support it;

(5)     whether the necessary statutory majorities have been obtained;

(6)     whether the Court is satisfied in the exercise of it 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; and

(7)     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.

9.I am satisfied that these criteria have been satisfied and that the meeting of scheme creditors was properly conducted and 99% in value of scheme creditors attending in person or in proxy voted in favour of      the scheme.

10.There is only one matter which requires consideration and that is that some of the debt is not governed by Hong Kong law.  This is of particular significance as this is the first case of which I am aware of      a scheme purporting to compromise debt governed by Mainland law.       As I explain in [34] of my decision in Winsway Enterprises Holdings Ltd [3], it is a well-established common-law rule (the Rule in Antony Gibbs & Son v La Société Industrielle et Commerciale des Métaux [4]which is followed in Hong Kong) that a foreign composition does not discharge a debt unless      it is discharged under the law governing the debt. This does not affect      the court’s jurisdiction to sanction a scheme.  The jurisdiction under section 673 is not limited to compromises of rights governed by Hong Kong law.  It is, however, relevant to the exercise of the court’s discretion to approve the scheme as the court will not sanction a scheme, which has no, or limited, utility.  In the present case a significant amount of the debt is held by a Mainland subsidiary of the China Development Bank (“CDB”): approximately 42%.  As there is currently no mechanism for recognition and enforcement of a Hong Kong scheme of arrangement in the Mainland on the face of the matter, it not having been demonstrated to me that a Mainland court would treat the Scheme as compromising the Mainland law debt, this calls into question the utility of the Scheme.

11.One of the provisional liquidators, Man Chun So, has filed an affirmation addressing this issue. He has exhibited a letter from the China Development Bank’s Zhejiang branch explaining that they support the scheme but that their representatives have encountered unexpected difficulties in obtaining approval to leave the Mainland and attend the Scheme Meeting in Hong Kong.  I should add that the China Development Bank’s Hong Kong branch, which is also a creditor, did vote in favour of the Scheme.  In other words CDB has submitted to this Court’s jurisdiction.  This is an exception to the Rule in Gibbs.  In Re OJSC International Bank of Azerbaijan [5].  Henderson LJ at [28] explains: “there is an exception to the [Gibbs] rule if the relevant creditor submits to the foreign insolvency proceeding.  In that situation, the creditor is taken to have accepted that his contractual rights will be governed by the law of the foreign insolvency proceeding”.  Even if this were not the case in my view I would still be justified in sanctioning the scheme.

12.As I explain in Winsway before approving a scheme the court must be satisfied of its utility.  That utility can be called into question if in a transnational context there is a serious question over the extent to which the scheme will be enforcible against foreign creditors.  However, it is well-established that in assessing whether or not this is the case the court takes a robust and practical approach.  For example, in re Perusahaan Perseroan (Persero) PT Perusahaan Penerbangan Garuda Indonesia [6],  an English scheme in respect of an Indonesian company was sanctioned despite the existence of dissenting creditors and despite the fact that there was no parallel scheme in Indonesia or formal recognition of the English scheme in Indonesia.

13.Ultimately, the guiding principle is that the court should not act in vain or make an order which has no substantive effect or will not achieve its purpose.  The principle does not require either worldwide effectiveness or worldwide certainty.  Thus it does not require that the court must be satisfied that the scheme will be effective in every jurisdiction worldwide: its focus is on jurisdictions in which, by reason of the presence there of substantial assets or in which creditors might make claims, it is especially important that the scheme be effective.  The court will sanction the scheme provided it is satisfied that the scheme would achieve a substantial effect:  Re Lehman Brothers International (Europe) (No 10) [7].

14.As there would appear to be no reason to think that there is a Mainland creditor which is likely to try and enforce its claim in Hong Kong against the Company arguing that it is not bound by the Scheme because Mainland law governs its debt, it seems to me that this is a proper case for the court to proceed on the basis that the scheme will probably serve its purpose, has utility and should be sanctioned.

15.I will, therefore, make an order in the terms of the petition sanctioning the scheme.

Mr Look Chan Ho, instructed by Linklaters, for the provisional liquidators