Re China Beidahuang Industry Group Holdings Ltd

HCMP 397/2023

[2023] HKCFI 3232

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 397 OF 2023

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REASONS FOR JUDGMENT

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1.At the hearing of the petition dated 22 November 2023 (“Petition”), this Court sanctioned a scheme of arrangement between China Beidahuang Industry Group Holdings Limited (“Company”) and its creditors with unsecured claims (“Creditors”). These are the reasons for my judgment.

A.  BACKGROUND

A1.  The Company

2.The Company was incorporated in the Cayman Islands on 6 September 2000.  It has since 30 November 2000 been registered as an oversea company[1] and a registered non-Hong Kong company[2].  The Company’s principal place of business has been in Hong Kong.  Its shares have since 16 January 2001 been listed on the Main Board of The Stock Exchange of Hong Kong (“SEHK”)[3]. 

3.The Company is an investment holding company.  Its subsidiaries engage in the business of sales and distribution of wine and liquor, trading of food products, construction and development, logistic facilities, office facilities renting, financial leasing, and flotation selection of non-ferrous metals mines and sales of mineral products[4].

4.The Company has been cashflow insolvent in that as at 31 December 2022, it had current assets of HK$8.3 million and current liabilities (exclusive of interest) of HK$553.54 million[5].  The Company had received statutory demands from creditors demanding payment of over HK$82 million but has not been able to comply with them.  This led to winding up petitions being presented against the Company in Hong Kong on 9 January 2023 and in the Cayman Islands on 30 May 2023[6].

5.The unsecured debts owed by the Company as at 31 December 2022 may be classified as follows[7]:

Nature	Amount Outstanding (HK$)	Percentage
Bonds	522,042,832.77	74.8%
Guarantees	78,782,694.82	11.3%
Intercompany Debts	74,263,158.13	10.6%
Service / Working capital	12,886,156.92	1.8%
Professional Fees	6,840,411.40	1.0%
Remuneration, Wages	3,004,521.80	0.4%
Total	697,819,775.84	100%

A2.  The Restructuring

6.In view of its financial position, the Company (assisted by its  financial adviser) has been exploring ways to restructure its debts including engaging in discussions with potential investors. 

7.In October 2022, China Dynamic (Hong Kong) Ltd (“Investor”) expressed interest in participating in a restructuring of the Company’s debts and injecting new fund into the Company for that purpose.  A legally binding term sheet was signed.  The parties had agreed on the terms of a restructuring agreement (“RA”) and the finalised draft was provided to SEHK alongside with a draft announcement on the RA as the latter requires approval by SEHK.  The Company considers that the RA contains price sensitive and, therefore, should only be signed after SEHK approves the draft announcement[8].

8.The restructuring consists of 2 main parts[9]:

(1)  “Subscription”: the Investor will subscribe for 850,000,000 new shares in the Company representing 11.24% of its enlarged issued capital for HK$85 million (“Subscription Proceeds”).  The Subscription Proceeds will be applied to pay the “Initial Cash Payment” under the Scheme in the amount of HK$45 million; professional fees of HK$20 million and Scheme Costs of HK$8 million[10], and the balance will be used as working capital of the Company[11].

(2)  “Scheme”:Under the Scheme,the Creditors are those who have unsecured claims against the Company (“Claims”) as at the date when the Scheme becomes effective (“Effective Date”)[12] whereupon their Claims will be compromised and discharged.  The conditions precedent for the Scheme to become effective include (a) the Scheme being sanctioned by the court; (b) the sanction order having been filed at the Companies Registry; and (c) the Initial Cash Payment is received by SchemeCo within 30 days of Registration Date[13]. 

9.In other words, for the Scheme to become effective, it is incumbent upon the parties having signed and completed the SA, follow by the Company or the Investor transferring HK$45 million out of the Subscription Proceeds to SchemeCo within 30 days after registration of the order sanctioning the Scheme.   

A3.  Convening Hearings  

10.By originating summons filed on 10 March 2023, the Company applied for leave to convene a meeting for its creditors to consider and, if thought fit, approve a proposed scheme then proposed by the Company (“Draft scheme”).   

11.At the convening hearing on 31 July 2023, this Court considered that there were a number of issues in the Draft scheme (and the corresponding description and in the draft composite document) which required to be addressed and rectified:

(1)  Scheme Shares Issues: The Scheme Shares should not be described as part of the “Scheme Assets” as they are not part of the assets to be transferred by the Company to SchemeCo. 

(2)  The Scheme Shares should not be issued to SchemeCo.  Instead, the Scheme Shares should be issued to the Creditors directly unless the Creditors elect to receive cash in lieu of Scheme Shares.

(3)  Scheme Assets issue: The Draft scheme did not stipulate the time limits during which the Scheme Assets are to be realised and the proceeds distributed to the Creditors.  This was undesirable as it means that the Creditors might have to wait a period before they would receive any distribution from the sale of Scheme Assets.  The Company was required to include a long stop date for realisation of Scheme Assets and a time line for distribution of the proceeds to the Creditors in the Draft scheme. 

(4)  Related Parties Debts Issue: The Draft scheme was directed at compromising and discharging the debts owed to the bondholders.  A very substantial part of debts owed to related parties in the aggregate amount of HK$98 million were excluded from the Draft scheme (“Related Parties Debts”). The Company sought to justify the exclusion of the Related Parties Debts on the ground that these parties would withhold demands for payment until the Company had the means to pay.  However, the fact remained that the creditors of the Related Parties Debts were unsecured creditors with the same rights against the Company as the bondholders, and they would be entitled to receive full repayment of their debts after the Company restored to solvency.  There was no reason why these creditors should be treated more favourably than the bondholders (none had been suggested). 

(5)  More importantly, part of the consideration which the bondholders would receive under the Draft scheme are new shares in the Company.  The existence of the Related Parties Debts in the accounts of the Company would diminish the value of the shares to be issued to the bondholders.  It would also affect the solvency of the Company.  

(6)  Disputed Interest Issue: The Company did not agree with the claim made by Central China Dragon Growth Fund SPC (“Fund”), to the extent of HK$226,529,716, which represented default interest (30% p.a.) on the outstanding principal plus accrued interest (which had already included contractual interest at 10% p.a. plus default interest at 30% p.a.) on the ground that it was a penalty (“Disputed Interest”) and the entire amount had not been included in the Company’s audited accounts for 2021 and 2022.  The Disputed Interest was excluded from the Draft scheme.  This was unsatisfactory. In the absence of any agreement from the Fund to waive the Disputed Interest, it would be open to the Fund to claim such Interest after the Draft scheme became effective.  Not only would this affect the solvency of the Company, it would also be unfair to the other Creditors whose claims inclusive of interest would be compromised and discharged under the Draft scheme. 

(7)  China Vered Issue: China Vered Financial Holding Company Ltd (“China Vered”), a shareholder of the Fund, through its solicitors, Messrs. Ashurst, raised a number of complaints about the Company and the Draft scheme, and contended that it was entitled to vote against the Draft scheme.  Some (but not all) of the complaints were addressed by the Company in correspondence. 

(8)  Claims governed by PRC law: Some of the Claims are governed by PRC law.  Applying the Gibbs rule[14], the Draft scheme would not bind them unless they submit to the jurisdiction by inter alia voting at the Scheme Meeting[15]. The Company should approach the relevant Creditors to see if they would participate in the Scheme.   

(9)  Liquidation analysis issue: No liquidation analysis on the estimated recovery to Creditors was provided in the draft composite document. This was unsatisfactory as such analysis  was the comparator for the Creditors to consider whether or not to approve the Draft scheme. 

12.The Company was required to address and rectify the above issues and, where appropriate, make further disclosures in the draft composite document.  The application was adjourned to another convening hearing on 18 August 2023.  Directions were given requiring the Company to publish at its website that the Creditors have the right to request for copies of the documents lodged in support of the application.   

13.At the 2^nd convening hearing on 18 August 2023:

(1)  The Company had addressed most of the issues raised by this Court at the first hearing save for the time limits for realisation of Scheme Assets and distributions to Creditors.  The Company confirmed to the court that it would provide a “Long Stop Date” for the realisation of Scheme Assets and the latest date for distribution of proceeds to the Creditors in the revised scheme to be provided to the Creditors (“Scheme”) with corresponding explanation in the revised composite document containing the Notice of Scheme Meeting (“Notice”), Explanatory Statement and a form of proxy for use at the Scheme Meeting (“Composite Document”) [16].  If the Scheme Administrators cannot complete either of these steps, they are required to apply to the court for extension of time.   

(2)  New allegations were raised by China Vered through Ashurst’s letter sent to the Company and to the court 2 days before the hearing.  This was unacceptable.  If China Vered had any concerns or complaints about the Draft scheme, it should have raised the points by filing evidence and attending the hearing to advance its grounds of objection. This was not done and no explanation has been provided. 

(3)  An order was made (“Convening Order”) directing the Company to publish the Notice and despatch the Composite Document to the Creditors; and leave was given to the Company to convene a meeting for the Creditors to consider the Scheme (“Scheme Meeting”).

B.  THE SCHEME

14.Since the 2^nd convening hearing, the unsecured debts owed by the Company was reduced from HK$697,819,775.86 to HK$684,231,249.08[17] in that:

(1)  The directors had confirmed to the Company on 22 August 2023 that they would waive their claims for unpaid remuneration against the Company; and

(2)  Mr Jiang Jianjun, the former Chairman of the Company (“Mr Jiang”), had confirmed to the Company on 23 August 2023 that he would waive his claim for HK$12,886,156.92 against the Company.   

15.Under the Scheme, the Claims cover the Related Parties Debts and the Disputed Interest.  There are 44 Creditors.  On the Effective Date, all the Claims will be released and discharged[18].  In return, the Creditors will be entitled to receive “Scheme Shares” and “Cash Dividends”in proportion to their claims admitted by the Scheme Administrators (“Admitted Claims”)[19]:

(1)  The “Scheme Shares” represent 5% of the enlarged issued capital of the Company and will be issued to the Creditors directly, or if the Creditors elect to receive cash, the relevant  Scheme Shares will be transferred to SchemeCo for realisation by the Scheme Administrators[20] within 3 months of their issue, and the proceeds will be paid to those Creditors[21].   

(2)  The “Cash Dividends” comprise (a) Initial Cash Payment; (b) the proceeds arising from sale of the “Scheme Subsidiaries”[22] which have estimated value of HK$142 million; and (c) the benefit of any claims which the Company may have against Mr. Jiang[23] (collectively “Scheme Assets”). 

(3)  Amongst the Scheme Assets, the Initial Cash Payment will be transferred to SchemeCo within 30 days of the Registration Date, while the Scheme Subsidiaries and the claims against Mr Jiang will be transferred to SchemeCo on the Effective Date[24].  The Scheme Administrators shall complete the sale of the Scheme Subsidiaries and pay the proceeds into the Scheme Trust Account before the “Long Stop Date”, which is one year from the Effective Date[25].

16.The issue whether the Fund is entitled to claim the Disputed Interest will be assessed and determined by the Scheme Administrators and Adjudicator (on appeal) in accordance with the provisions of the Scheme. 

17.The Scheme Meeting was held on 20 November 2023 at which Creditors representing 94% in value and 87% in number voted for the Scheme[26].

C.  DISCUSSION

18.In considering whether to sanction a scheme of arrangement, the court will consider the following factors[27]:-

(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 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; and

(6)  Whether the court is satisfied in the exercise of its 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.

C1.  Permissible Purpose

19.The purpose of the Scheme is to compromise and discharge the Claims against the Company.  This is a permissible purpose of a scheme of arrangement.

C2.  Classification of Creditors

20.In considering the issue of class, it is the rights of creditors, not their separate commercial or other interests, which determine whether they form a single class or separate classes.  The court should take a broad approach to the composition of classes so as to avoid giving unjustified veto rights to a minority group of creditors[28].

21.There is no issue about classification of Creditors as all the Creditors are creditors with unsecured claims, and their rights against the Company are the same. 

C3.  Compliance with Court’s Directions

22.The Company has complied with all the directions in the Convening Order in that no less than 21 days before the Scheme Meeting[29]:

(1)  The Notice was advertised in the Standard and Sing Tao Daily on 27 October 2023.

(2)  The Composite Document were made available at the Company’s website on 27 October 2023.

(3)  The Composite Document was available for collection by Creditors at the Company’s place of business from 30 October 2023.   

(4)  The Composite Document was sent (a) by prepaid surface mail to those Creditors which had their last known addresses in Hong Kong on 27 October 2023; and (b) by courier to those Creditors which had their last known addresses elsewhere on 27 October 2023. 

(5)  The courier reported that delivery to 4 Creditors outside of Hong Kong was unsuccessful.  The Company took further steps (i.e. by telephone call and/or sending the Composite Document to the solicitors of the relevant Creditor) to inform these Creditors of the time, date and location of the Scheme Meeting.  Only 1 Creditor (to whom HK$240,000 was owed) remained unreachable.  The other 3 Creditors attended and voted at the Scheme Meeting[30].

C4.  Explanation of the Scheme

23.It is the responsibility of the Company to provide sufficient information on the effect of the Scheme in the Explanatory Statement.  The Explanatory Statement has to be perfectly fair and, as far as possible, give all the information reasonably necessary to enable the recipients to determine how to vote and the information needs to be up to date[31].

24.In the present case, the Explanatory Statement has been revised to address the issues raised by the court. It sets out the details in relation to the restructuring and the reasons for implementing the Scheme which include:

(1)  Section 2: Background of the Company and the Group and the circumstances leading to the Scheme.

(2)  Sections 3-4: Summary on the principal features of the Scheme, its advantages and disadvantages.

(3)  Section 5: Risk factors in relation to the Scheme.

(4)  Section 7: Information on the Investor.

(5)  Section 8: Interest of the Company’s directors in the Scheme.

(6)  Section 2.4 and Appendix 6: Comparative analyses and estimates on the returns to the Creditors under the Scheme and in a liquidation scenario.

(7)  Sections 9 & 15: Procedural steps for  attending the Scheme Meeting and participating in the Scheme.

25.There is sufficient information for an honest and intelligent Creditor to make a decision whether or not to approve the Scheme.

C5.  Approval by Requisite Majorities

26.Section 674(1)(a) of the CO provides that a creditor’s scheme must be approved by a majority in number representing at least 75% in value of the creditors present and voting, in person or by proxy. 

27.At the Scheme Meeting, 33 Creditors voted.  The Scheme was duly passed by around 94% (in value) and 87% (in number) of Creditors present and voting at the Scheme Meeting.

28.As regards the issue over the Disputed Interest, at the Scheme Meeting, the Fund (being the largest creditor of the Company) was allowed to vote on its claim for HK$187,969,434.62 and its claim for Disputed Interest was disallowed.  This does not have any bearing on the outcome of the Scheme Meeting given that the Fund voted in favour of the Scheme. 

C6.  View of an Intelligent and Honest Man

29.The court would be slow to differ from the view of the majority who are better judges of whether it is in their interests to approve the Scheme unless there is something glaringly wrong with the Scheme[32]. The Scheme was approved by the requisite majorities of the Creditors at the Scheme Meeting. 

30.The Scheme is one which the Creditors may reasonably approve given that the estimated return is 23.6% (if Disputed Interest is admitted) to 31.4% (if Disputed Interest is not admitted).  The is a much higher return than the estimated return in liquidation scenario at 3.9%. 

31.China Vered continues to oppose the Scheme after the 2^nd convening hearing in that:

(1)  Its solicitors sent further correspondence setting out the various allegations against the Company and its management, all of which were exchanged between the solicitors of the Company and China Vered[33].  

(2)  It commenced proceedings against the Fund in HCA 1505/2023 and applied for an interlocutory injunction to compel the Fund to vote against the Scheme at the Scheme Meeting.  The application was dismissed by Yeung J on 13 October 2023 on the grounds that China Vered has no right to participate in the management of the Fund and failed to establish a good arguable case.

(3)  By letter dated 9 November 2023, the Company requested China Vered to file its evidence as soon as possible if it intends to oppose the Scheme[34]. China Vered has not filed any affirmation nor indicated whether it intends to oppose the Scheme at the sanction hearing. 

(4)  Instead, by letter dated 23 November 2023 Ashurst, on behalf of China Vered, sought to oppose the Scheme on the grounds that (a) the Scheme Meeting is “unrepresentative”; (b) the Explanatory Statement is “wholly deficient”; and (c) “no honest and intelligent person could reasonably approve the Scheme”, and required the Company to produce their letter to the court and addressed the points raised.   

32.As a shareholder of the Fund, China Vered is not a Creditor of the Company and does not have locus to oppose the Scheme.  The dispute between China Vered and the management of the Fund is the subject matter of HCA 1505/2023 and is irrelevant to these proceedings which concerns the Company and the Creditors. 

33.More importantly, if and insofar as China Vered considers that it has valid grounds to oppose the Scheme, at the minimum it should file evidence in advance of the sanction hearing so that the Company could response to its evidence in good time.  This has not been done and no explanation has been provided by China Vered as to why it did not do so. 

34.Mr John Hui (appearing with Mr Terrence Tai), counsel for the Company, submits that the manner in which China Vered sought to oppose the Scheme is objectionable and the court should not give any weight to the grounds belatedly raised in Ashurst’s letter dated 23 November 2023.  Reliance is placed on In re Sunbird Business Services Ltd [2021] Bus LR 401, §§31-34, where Snowden J (as he then was) cited the observations of Hildyard J in In re Stronghold Insurance Co Ltd [2019] 2 BCLC 11 about the growing tendency of creditors floating or trailing generic points without proper explanation, elaboration or evidential base accompanied by disinclination to arrange to be represented at the hearing, which places a burden on the company and also on the court to sift through disparate and sometimes undeveloped points without proper assistance. His Lordship held that the same observations apply at the sanction stage.  No weight would be given to the points made in correspondence without proper particularisation by an opposing party which chose not to turn up at the sanction hearing.

C7.  International Dimension

35.The Company is a foreign company.  For the court to exercise its jurisdiction to sanction a scheme in respect of such company, a sufficient connection between the scheme and Hong Kong needs to be shown[35]. This is satisfied.  The Company is a listed company in Hong Kong and has its principal place of business in Hong Kong and most of the Claims are governed by Hong Kong law.

36.As regards the “utility issue”[36], all but 2 Claims are governed by Hong Kong law or that the Creditors are subject to the in personam jurisdiction of the court.  Of the 2 Creditors whose claims are governed by PRC law, both Creditors (i.e. 江蘇基柱建設工程有限公司 and 王鹏程) voted in favour of the Scheme at the Scheme Meeting.  This is therefore a case where all Creditors are bound by the Scheme.  It is not necessary for the Company to pursue a parallel scheme or seek recognition of the Scheme in any other jurisdiction. 

D.  ORDER

37.To ensure that the Company will take the necessary steps to comply with the conditions for the Scheme to become effective without any unnecessary delay, this Court:

(1)  Directed the Company to file the order sanctioning the Scheme within 7 days of the order; and

(2)  Required the Investor to give an undertaking to the Court that it will sign the RA within 5 business days after SEHK approves the draft announcement on the RA.  The Investor has indicated its agreement to give the undertaking, which is recorded in the order. 

Mr John Hui and Mr Terrence Tai, instructed by Simmons & Simmons, for the Company