Re Acommerce Group Ltd

HCMP 772/2024

[2024] HKCFI 2216

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 772 OF 2024

___________________

___________________

_______________

J U D G M E N T

_______________

1.There is before the court a petition presented by aCommerce Group Ltd (“Company”) on 9 July 2024 (“Petition”) seeking sanction of a scheme of arrangement (“Scheme”) between the Company and the “Scheme Creditors” (as defined in §12 below) on the terms and subject to the conditions set out in the composite scheme document (“Scheme Document”).

2.The Scheme Document comprises the Letter from the Board, the Explanatory Statement (“ES”), the Scheme, and the Appendices which include the Comparator Analysis prepared by Kroll Pte Ltd (“Kroll”), the independent financial advisor to the Company.

3.The Company is insolvent. It puts forward the Scheme for the purposes of (1) extending the maturity dates of the “Inspire Facility” (as defined in §10(4) below) and the “CNs” (as defined in §10(2) below), and (2) eliminating the liability to pay default interest under the CNs after 31 December 2023 (“Crystallisation Date”)[1]. The Company contends that the Scheme is the only way to restore its solvency and achieve a better outcome for the Scheme Creditors than in a liquidation scenario.

4.The Scheme was approved by 94.1% in number and 81.5% in value of Scheme Creditors who voted at the Scheme Meeting held on 3 July 2024 (“Scheme Meeting”).

5.The Petition is opposed by Government Pension Fund, a pension fund in Thailand (“GPF”). GPF has subscribed a convertible note for US$10 million and is one of the holders of the CNs[2]. GPF filed an affirmation of Pitichai Yungtawesak[3] on 15 July 2024 (“PY 1^st”) to set out its grounds in opposition to the Petition.

6.The Company filed an affirmation of Veerapongse Srivorakul on 10 May 2024 (“VS 1^st”) and a third affirmation of Veerapongse Srivorakul affirmed on 9 July 2024 (“VS 3^rd”).

A.  FACTUAL BACKGROUND

A1.  Corporate background

7.The Company was incorporated in Hong Kong on 11 June 2013.[4] The Company through its subsidiaries (together “Group”) engage in e-commerce business, with headquarters in Thailand and operations across Southeast Asia.

8.As can be seen from the Group’s corporate chart (reproduced in the Schedule hereto), the Company holds 99.999% of the issued shares of aCommerce Group Public Company Ltd, a company incorporated in Thailand (“ThaiCo”) which, in turn, holds (directly or indirectly) 11 subsidiaries incorporated in Hong Kong, Thailand, Indonesia, Malaysia, Philippines, and Singapore.[5]

9.Until around 2023, the Group’s business outlook was positive in that:

(1)  The Group’s revenue grew during Covid-19 pandemic from US$138 million in 2019 to US$279 million in 2022 as a result of consumers having turned to online shopping during the lockdowns, and experienced slight drop to US$268 million in 2023.[6]

(2)  The Group always contemplated offering the shares of ThaiCo at an initial public offering (“IPO”) on The Stock Exchange of Thailand (“SET”) which, if successful, would have been one of the first technology businesses to be listed in Thailand.[7] For this purpose, approval was received from the SET in April 2022 with a view to list ThaiCo in Q2 of 2022. However, the market conditions at that time were unfavourable, and the Group decided to postpone its IPO plan.

(3)  Ultimately, the unfavourable market conditions persisted throughout 2022 and 2023, thus delaying the Group’s IPO plans.[8]

A2.  Financing arrangements

10.The Company has raised funds through equity and debt financing from high net worth individuals, private equity, venture capital and DKSH China Holding Ltd (“DKSH”)[9], which is the Company’s key strategic partner and the largest shareholder[10]:

(1)  US$120 million through issuance of preference shares and warrants (of which US$6 million remain outstanding);

(2)  US$70 million through issuance of 20 convertible notes during the period from 9 December 2020 to 1 October 2021 to various holders (“CN Holders”) with original maturity date of October 2022 (“CNs”);

(3)  US$10 million secured loan from JC CO1 Fund (“JC CO1”), the only secured creditor of the Company, under the facility agreement dated 5 May 2023 between JC COI and the Company (“JC CO1 Agreement”[11]);

(4)  US$10 million unsecured loan from Asia Europe Group Holdings Ltd (“Inspire”)[12], the only unsecured bilateral creditor, under the facility agreement dated 18 October 2022 between Inspire and the Company (as supplemented by an addendum dated 7 March 2023) (“Inspire Facility”)[13]; and

(5)  Other trade creditors incurred in the ordinary course of business.

11.All the debt instruments are governed by Hong Kong law.[14]

12.The Scheme only seeks to compromise the Company’s liabilities owed to CN Holders and Inspire (collectively “Scheme Creditors”)[15]. As at 31 December 2023:

(1)  the amount owed to CN Holders (17 out of the 20 CNs are held by individual holders[16]) was US$74,983,350[17] (cf. US$70.1 million as stated in ES[18]); and

(2)  the amount owed under Inspire Facility was US$10,800,352[19] (cf. US$10.5 million as stated in ES[20]).

13.Upon it becoming apparent that an IPO was not feasible in the immediate term, the Group’s transaction advisor, a global investment bank, contemplated a sale of the Company’s assets in one transaction (“Trade Sale”). However, no Trade Sale materialised.[21]

14.In late 2022, the Company negotiated an extension with each CN Holder to extend the maturity date to February 2023.[22]

15.From October 2022 to May 2023, the Company raised US$19 million from 2 existing lenders, JC CO1 and Inspire, with maturity dates in May 2025 and March 2025 respectively. These facilities were intended to act as bridging financing until the Company was able to achieve a Trade Sale or an IPO (“Other Liquidation Event”).[23]

16.In February 2023, the Company issued notices to all CN Holders notifying them of its pursuit of a Trade Sale which would constitute an Other Liquidation Event.[24] The Group appointed a new transaction advisor for such purpose, and expected this renewed process would be more promising given the improvement in the Company and ThaiCo’s financial situation and the macro-economic environment.[25]

A3.  Arbitration

17.The Company’s position has always been that following the issuance of the notices (described in §16 above), it was entitled to defer redemption of the CNs, such that they would only become due and payable after completion of the contemplated Trade Sale.[26] GPF did not accept this and contended that the notice dated 11 February 2023 issued by the Company to GPF was not a valid notice, such that the Company remained liable to pay default interest at 3.5% per month compounded monthly. On 17 March 2023, the Company commenced arbitration against GPF to resolve the dispute (“Arbitration”).[27]

18.The Arbitration (which the Company ultimately decided not to attend in order to save costs) took place on 17 June 2024. The Tribunal rendered an award on 20 June 2024 (“Award”) holding that[28]:

(1)  the maturity date of the CN held by GPF was extended to 11 February 2023, whereupon the Company was liable to pay US$10,691,506[29] together with default interest;

(2)  the Company owed US$18,152,008 to GPF of which US$7,460,502 was default interest from 11 February 2023 to 20 June 2024;

(3)  the Company shall pay (a) GPF’s legal costs and expenses in the sum of US$1,085,339.07 and disbursements of HK$109,176.32 together with interest; (b) HKIAC’s and Tribunal’s fee of HK$203,776 and HK$1,032,505 respectively; and (c) fees of HKIAC and Tribunal which GPF had paid but not yet refunded (HK$661,607) with interest (collectively “Arbitration Costs”[30]).

19.On the same day, GPF lodged its Proof of Debt for the full amount of the Award.[31]

A4.  Financial Position of Company and Group

20.Although the Group’s business continues to improve, its ability to repay its outstanding obligations depends upon completion of a Trade Sale or an IPO.[32]

21.According to the Group’s unaudited consolidated financial statements, as at 31 December 2023[33]:

(1)  The Group had total assets of US$97 million and net deficit of US$77 million, owing to accumulated losses in the amount of US$198 million; and

(2)  According to the unaudited balance sheet of the Company as at 31 December 2023 (“2023 B/S”), its liabilities and net equity were US$107,915,770 and US$41,904,101 respectively[34].

B.  SCHEME

22.Although the Company describes the Scheme as one which extends the terms of loans owed to Scheme Creditors and postpones some of the Company’s liabilities, and the Scheme Creditors will likely be paid in full in a Trade Sale or IPO[35], on closer analysis, what the Scheme also seeks to achieve is to re-write the contractual entitlements of CN Holders under the CNs in 19 aspects and the most significant of which are[36]:

(1)  to remove the right of CN Holders to receive default interest (where applicable) from 1 January 2024, and replace it with a right to receive interest at much lower rates; and

(2)  to cancel the right of CN Holders to convert the CNs into shares of the Company, and replace it with a right to receive (a) “Mandatory Prepayment” (as defined in §29(1) below), (b) “Mandatory Conversion” (as defined in §29(2) below) of the remaining amounts owed into preference shares, and (c) warrant which entitles them to subscribe for preference shares in the Company.

23.The salient features of the Scheme, with modifications made in response to some of the comments or concerns raised by this Court at the hearing on 5 June 2024 (“Convening Hearing”), may be summarised as follows.[37]

24.First, the Scheme Creditors consist CN Holders and Inspire[38]. The following liabilities are excluded from the Scheme[39]:

(1)  Claims of non-Scheme Creditors: JC CO1 (secured creditor) (US$10.2 million), amount due under the warrants (US$6.2 million) and trade creditors (US$5.7 million)[40]; and

(2)  Arbitration Costs.[41]

25.Second, the Scheme will become effective on the date of satisfaction of the following Restructuring Conditions (“Restructuring Effective Date”)[42], provided that the date is no later than the “Long Stop Date”[43]:

(1)  Each of the “Scheme Conditions”[44] has been satisfied;

(2)  The Company has paid all “Scheme Costs”;

(3)  The amendments to JC CO1 Agreement have become effective; and

(4)  All shareholders’ and board’s approvals to implement the Scheme and the “Restructuring” have been satisfied or waived.

26.Third, on the Restructuring Effective Date, all the claims of the Scheme Creditors (including any outstanding default interest) against the Company as at that date (“Claims”) will be waived and released in consideration of the rights and entitlements they will receive under the Scheme[45].

27.Fourth, the amounts owed under the CNs are treated as having been crystallised on 31 December 2023 (i.e. Crystallisation Date). The effect of adopting the Crystallisation Date is as follows:[46]

(1)  There is an artificial crystallisation of the amounts owed under the CNs as at 31 December 2023 for the purpose of calculating CN Holders’ entitlement to receive payment under the Scheme;

(2)  It limits the right of CN Holders to receive default interest under the CNs up to 31 December 2023[47]. However, it is by no means clear whether this is correct given that:

(a)  §9 in Schedule 2 to the Scheme states that any default interest before the Crystallisation Date will be excluded;

(b)  ES §§6.17-6.18 states that the total amount owed under the CNs as at 31 December 2023 was US$70.1 million, but in the Liquidation Analysis, the total amount owed to the “Convertible Noteholders” as at 31 December 2023 was US$74,983,350;

(c)  ES §6.18 states that the amount owed to GPF as at 31 December 2023 was US$10.5 million, but according to the Award, the amount owed to GPF as at 31 December 2023, inclusive of default interest, was US$15,041,110[48];

(3)  It removes the right of CN Holders to receive any default interest from 1 January 2024, and replaces it with a right to receive interest at escalating rates from 1 January 2024[49] (“Revised Interest”).

28.Fifth, the maturity dates of the CNs and Inspire Facility are extended to 31 December 2025, which may be further extended to 31 December 2026 if approved by a majority of the Scheme Creditors. This is to allow time for the Company to launch an IPO or pursue a Trade Sale[50]:

(1)  In a Trade Sale, the Company expects there will be sufficient cash to repay the Scheme Creditors in full.[51] However, this statement cannot be correct as the Scheme Creditors’ right to receive default interest (at least) from 1 January 2024 is removed.[52]

(2)  In an IPO, CN Holders will be paid in both cash and equity if there is insufficient cash.[53]

29.Sixth, the return to the CN Holders consists of 3 parts:[54]

(1)  60% of the net proceeds from the IPO will be applied towards mandatory prepayment of the CNs pari passu (“Mandatory Prepayment”);

(2)  The remaining amounts under the CNs will be converted into preference shares at a cash conversion premium of 25% (“Mandatory Conversion”); and

(3)  Warrants to subscribe for preference shares up to 15% of the total issued shares of the Company or the Target Company will be issued proportionately to CN Holders in 3 equal tranches on an annual basis.

30.Seventh, as regards Inspire, the amendments to Inspire Facility are set out in Schedule 3 to the Scheme, and the main amendment is that Inspire will receive an one-time extension fee of 1% of the amounts accrued and payable on the maturity date in consideration for the extension of Inspire Facility[55].

31.Kroll prepared a Comparator Analysis dated 7 May 2024. In summary, Kroll opines that:

(1)  Both IPO and Trade Sale exit options would allow the principals owed to the Scheme Creditors to be fully repaid (by a combination of cash and/or the equivalent of shares) and for such creditors to also receive compensation for delayed repayment via the Revised Interest and receipt of warrants. The estimated return in an IPO Scenario and Trade Sale Scenario are set out at §§14 and 22.

(2)  Exit through an IPO remains viable but will require up to 3 years for (a) the Group to achieve sufficient scale and profitability, and (b) market sentiment to recover. This timeline would also enable the Company to explore options for an earlier exit through a Trade Sale in parallel.[56]

(3)  If the Scheme is not approved and implemented, the only alternative available is to enter insolvent liquidation, whereupon the expected return to the Scheme Creditors would be nil for the following reasons:[57]

(a)  The key asset of the Company is its investment in ThaiCo, whose solvency is dependent on the value of ThaiCo and its subsidiaries.[58]

(b)  The Group’s asset-light business model means that in the event of liquidation, any return to unsecured creditors is unlikely as a result of obligations to preferential creditors and local trade creditors owed by its subsidiary entities.[59]

(c)  In the unlikely event that there is surplus after repayment of creditors and costs from shutdown, it would be applied towards the costs of liquidation and the debts owed to secured creditor (JC CO1).[60]

(d)  Based on the Group’s current financial information, there would not likely be any upward dividend to ThaiCo.[61]

32.The Company believes that if the Scheme is not sanctioned or not implemented, it is likely that the Company will be put into liquidation as several notices of default have already been served by creditors[62]. By contrast, the Scheme offers the best prospects of maximising the recovery to Scheme Creditors whilst allowing the Group to continue to carry on its business and avoiding insolvent liquidation.[63]

C.  DISCUSSION

33.In considering whether a scheme should be sanctioned, the court considers the following factors namely, whether[64]:

(1)  the scheme is for a permissible purpose;

(2)  the 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)  in convening the meeting, the court’s directions were complied with;

(4)  the creditors were given sufficient information about the scheme to enable them to make an informed decision;

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

(6)  the court is satisfied 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, compliance with directions & approval by requisite majorities

34.In the present case, I accept the submissions of Mr Victor Joffe SC (leading Mr Justin Ho), counsel for the Company, that the factors identified in §33(1), (3) and (5) are satisfied.

35.First, the purpose of the Scheme is to restructure the debts of the Company, which is a permissible purpose (Re Moody Technology Holdings Limited [2022] HKCFI 1992, §15).

36.Second, the court’s directions given at the Convening Hearing have been complied with. Pursuant to the Convening Order, the Scheme Meeting was duly convened and held on 3 July 2024 by way of online videoconference.[65] In particular, on 14 June 2024 (i.e. 14 days before the Scheme Meeting:[66]

(1)  A Notice of Scheme Meeting (“Notice”) was published on the Company’s website.

(2)  The Notice, Scheme Document, Form of Proof of Debt, Form of Special Proxy, and Form of General Proxy were sent to the Scheme Creditors.

37.Further, following the Court’s observations at the Convening Hearing, a mechanism was put in place for Kroll to be appointed to adjudicate the Claims for both voting and implementation purposes[67]. Kroll is independent of the Company and has adjudicated the 17 Proofs of Debts lodged by the Scheme Creditors for voting purpose, and except the Proof submitted by DKSH (which was partially admitted), all the Proofs were admitted in full.[68]

38.Third, the Scheme was approved by 16 out of 17 Scheme Creditors (i.e. 94.1% in number and 81.5% in value)[69] who attended and voted at the Scheme Meeting, which exceed the requisite majorities stipulated in s.674(1)(a) of the Companies Ordinance (Cap. 622).

39.I turn to the more controversial issues.

C2.  Classification of Scheme Creditors

40.The principles governing constitution of classes have been stated by Lord Millett NPJ in UDL Argos Engineering & Heavy Industries Co Ltd (2001) 4 HKCFAR 358, §27, as follows:

“(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.

(5) The Court has no jurisdiction to sanction a Scheme which does not have the approval of the requisite majority of creditors voting at meetings properly constituted in accordance with these principles. Even if it has jurisdiction to sanction a Scheme, however, the Court is not bound to do so.

(6) The Court will decline to sanction a Scheme unless it is satisfied, not only that the meetings were properly constituted and that the proposals were approved by the requisite majorities, but that the result of each meeting fairly reflected the views of the creditors concerned. To this end it may discount or disregard altogether the votes of those who, though entitled to vote at a meeting as a member of the class concerned, have such personal or special interests in supporting the proposals that their views cannot be regarded as fairly representative of the class in question.”

41.Mr Joffe submits that the following principles are also relevant:

(1)  The courts are keen to avoid giving undue veto rights to minorities and instead take a common-sense approach, since “if one gets too picky about potential different classes, one could end up with virtually as many classes as there are members of a particular group” (Re Anglo American Insurance Ltd [2011] 1 BCLC 755, 764 (Neuberger J)).

(2)  As David Richards J said in Re Telewest Communications plc [2004] BCC 342 §37, class composition is a matter of judgment on the facts of each case, but “a broad approach is taken and … differences may be material, certainly more than de minimis, without leading to separate classes”. Similar sentiments are expressed in Re Noble Group Group Ltd [2018] EWHC 2911 (Ch) §87; Re Kaisa Group Holdings Ltd [2017] 1 HKLRD 18 §15; Re China Beidahuang Industry Group Holdings Limited [2023] HKCFI 3232 §§20-21.

42.Mr Michael Lok (appearing with Ms Jasmine Cheung), counsel for GPF, does not dispute the above principles. He submits that the classification of all Scheme Creditors into one class is improper for 2 main reasons:

(1)  The Scheme Creditors have different accrued rights to default interest, both in respect of entitlements and/or rates[70] (Default Interest Issue).

(2)  Inspire should have been placed in a separate class as it was entitled to a one-time extension fee which was not available to CN Holders[71] (Inspire Issue).

C2.1  Default Interest Issue

43.Insofar as Default Interest Issue is concerned, Mr Lok submits that the Company has not disclosed, let alone confirmed, whether all CN Holders are entitled to receive default interest under their respective CNs and, if so, at what rates:

(1)  There are at least 3 scenarios: (a) those entitled to default interest at the same or similar extent as GPF; (b) those not entitled to receive default interest; and (c) those entitled to default interest but to a lesser extent as GPF.

(2)  For CN Holders who are not entitled to default interest, they may well be receiving 100% recovery. However, the compulsory waiver of default interest deprives GPF of more than 30% of its total claim[72] in that:

(a)  according to the Company’s calculation, the amount owed to GPF as at 31 December 2023 (i.e. Crystallisation Date) was US$10.5 million[73];

(b)  according to the Award, the amount owed to GPF as at 31 December 2023 with default interest was US$15,041,110[74], which represents a haircut of 30.2%;

(c)  the amount owed to GPF as at the Restructuring Effective Date (assuming 19 July 2024) was US$18,358,953, which represents a haircut of 42.8%[75].

(3)  The waiver of default interest means that the distribution to the Scheme Creditors is not on a pro rata basis, unlike in cases such as Telewest, §§8, 40. Whereas in liquidation, CN Holders who are entitled to default interest are entitled to prove pari passu for all interest due up to the time of winding-up (In re Humber Ironworks (1868-69) L.R. 4 Ch. App. 643; McPherson & Keay’s Law of Company Liquidation, 5^th Ed., §§12-007 to 009).

(4)  Unless and until the Company makes clear the Scheme Creditors’ entitlement to default interest (and by how much), the Company cannot demonstrate that the Scheme Meeting was properly constituted by having one single class.

(5)  Pertinently, it has been held that “[w]hether any such differences in existing and new rights make it impossible for creditors to consult together with a view to their common interest requires an evaluation by the court of the economic and business impact of the proposals” (Re Sunbird Business Services Ltd [2020] EWHC 2860, §20). At least for GPF, its default interest is self-evidently substantial (making up 30% of its claim).

44.On the other hand, Mr Joffe submits that GPF’s suggestion that the CN Holders should be grouped together depending on their entitlement to default interest is erroneous, and runs contrary to the authorities identified at §41 above[76] for the following reasons:

(1)  As the Company is insolvent, the starting point when considering the pre-scheme scenario is that the rights of creditors on winding-up is the correct comparator. Such is the position taken in Hong Kong, the UK and Australia:

(a)  UK: Pilkington on Schemes, 3^rd edn. §§6-023-6-029; Re Stronghold Insurance Company Limited [2018] EWHC 2900 (Ch) §§48-53; Re Lecta Paper [2019] EWHC 3615 (Ch) §13; Re Co-Operative Bank PLC [2013] EWHC 4072 (Ch) §15;

(b)  HK: Re Kaisa §§17-18 (citing Re Co-Op Bank);

(c)  Australia: First Pacific Advisors [2017] NSWSA 116 §§82-84.

(2)  Here, on liquidation, all Scheme Creditors will receive nil.

(3)  Under the Scheme, both (a) the rights to be released and (b) the new rights are materially similar across all CN Holders, as:

(a)  the relevant terms in all the CNs providing for default interest are “materially similar”[77]; and

(b)  all entitlement under the Scheme to default interest is waived.

(4)  However, even assuming the entitlement to default interest by CN Holders varies, this makes no difference. In an insolvency scenario, CN Holders’ rights would be the same. Hence, the creditors may justifiably be treated as one class, particularly as the rights conferred by the scheme are the same. This was the conclusion reached in Re Co-Op Bank (as summarised by Harris J in Re Kaisa §18) and the cases cited at §41 above.

(5)  As Harris J stated in Re Kaisa (§19), in insolvent liquidation, the differences in rights, such as differences in maturity dates and rates of interests, are not relevant as none of them have any entitlement to interest accruing after commencement of liquidation.

(6)  Indeed, it has been held that notwithstanding the differences in interest rates and maturities in bonds, this does not require separate meetings so long as those creditors hold the same rights under the scheme (Pilkington §§6-046-6-054; Re Telewest §§23, 40; Re McCarthy & Stone [2009] EWHC 712 (Ch) §7; Re Co-Op Bank §10).

(7)  This is the scenario here, as all CN Holders would receive the same rights under the Scheme and indeed nothing upon insolvent liquidation. The logical tenor of GPF’s submission is that each of CN Holders (which may have differing contractual rights) would need to be placed in a separate class in order to reconcile the minor differences. To do so is not only contrary to common sense, but also contrary to established authorities.

45.In my judgment, the objection raised by GPF is well founded.

46.There is no transparency as to whether all CN Holders are entitled to receive default interest. This is despite the fact that at the Convening Hearing:

(1)  GPF already identified its concerns about the treatment of default interest. Specifically, Mr Lok submitted that (a) the draft Scheme Document provided that the amounts claimed by CN Holders would be crystallised, but there was no explanation as to how such crystallisation would be carried out and nothing to cater for default interest; (b) the draft Scheme Document suggested that if GPF succeeded in the Arbitration, they would not get any compensation for default interest; and (c) GPF did not know how many CN Holders were entitled to receive default interest.

(2)  This Court raised the concern that in the draft Scheme, the definition of “Claims” is not aligned with the date when the Scheme becomes effective (which is necessary to ensure that the “Claims” would cover CN Holders’ right to receive any accrued but unpaid interest including default interest). It was also a matter of concern that the draft Scheme appears to have the effect of removing the entitlement of Scheme Creditors to any default interest accruing after 31 December 2023 but it was not clear whether all CN Holders were entitled to default interest.

(3)  In response, Mr Joffe assured this Court that the draft Scheme Document would be revised to make clear that the “Claims” and “Scheme Claims” would be the amounts claimed up to the date when the Scheme becomes effective, as it was not the intention of the Company to exclude any interest or default interest accrued but not paid to the Scheme Creditors (“Representation”).

47.Leaving aside the point that the Representation is incorrect (which Mr Joffe accepts was a mistake on his part, as the Company all along intended to exclude default interest after the Crystallisation Date), there is no disclosure in the Scheme Document or in the evidence to show whether all CN Holders are entitled to receive default interest and, if so, at what rate:

(1)  There is nothing in the Scheme Document, which runs to 181 pages, where the Company addresses the question as to whether CN Holders (or any of them) are entitled to default interest under the relevant CNs and, if so, at what rates.

(2)  The information on default interest is highly material. In the words of the Company, if default interest were taken into account:

“the level of non-cash returns which Scheme Creditors would be entitled to receive (whether on an IPO scenario, or even on a Trade Sale Scenario) would increase substantially beyond current projections as set out in paragraphs 3.9 to 3.12 (Executive Summary), thereby diluting and decreasing the returns to Existing Shareholders, and significantly damaging the likelihood of the Existing Shareholders providing the requisite approval for the Scheme – which is a Restructuring Condition under paragraph 9.11 (Overview of the Scheme)”.[78]

(3)  Although the Company says in §44 of VS 3^rd “[g]iven that the relevant terms in all Existing Convertible Notes are materially similar, other CN Holders’ claim for default interest, if made, would have been admitted in full as well (although I understand from the Scheme Administrator that apart from GPF, only Indies claimed default interest, which was admitted in full”. There is no explanation as to what “materially similar” means. In any event, the statement only deals with the claims made by CN Holders for voting purpose. It does not say whether all CN Holders are entitled to default interest for the purpose of calculating their entitlement to receive payment under the Scheme (“Distribution Purpose”).

48.In the absence of any disclosure or evidence on CN Holders’ entitlement to default interest, it is not open to the Company to contend that the rights of CN Holders before or after the Scheme are sufficiently similar so that they consult together with a view to their common interest at the Scheme Meeting.

49.The only reasonable inference which can be drawn from the absence of any information on CN Holders’ entitlement to default interest is that it was a deliberate decision on the part of the Company not to make any disclosure as such information, if disclosed, would have revealed that some of CN Holders are not entitled to claim default interest under their CNs (or that they are entitled to claim at a much lower rate). In the following discussion, I will refer to those CN Holders who are not entitled to any default interest under their CNs as “Other CN Holders”. In my view, GPF’s rights are significantly different from the rights of Other CN Holders in that:

(1)  Pre-Scheme: GPF’s claim is much higher than the amount claimed by Other CN Holders by 42% as at the Restructuring Effective Date respectively (see §43(2) above).

(2)  If the Company were put into liquidation on the Restructuring Effective Date (being the relevant date for comparing the return to CN Holders), GPF would be entitled to claim interest at the contractual rate (including the default interest) up to that Date pursuant to s.71(1) of the Bankruptcy Ordinance (Cap. 6), which applies to the Company by virtue of s.264 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32).

(3)  Under the Scheme: GPF is required to give up its right to claim default interest from 1 January 2024 in exchange for the right to receive distribution under the Scheme[79]. However, Other CN Holders do not have to give up such right as they have none. Putting it in another way, there is inequality in treatment between GPF and Other CN Holders and such inequality is material.

(4)  Post-Scheme: GPF’s right to receive payment under the Scheme is calculated by reference to the amount of its claim as at the Crystallisation Date, which represents a discount of 42% whereas Other CN Holders do not have to suffer from such a discount.

50.I do not think that the arguments advanced by Mr Joffe assist the Company. Dealing with his arguments in the same order set out in §44 above:

(1)  §44(1): It is correct that the rights of creditors on winding up is the correct comparator. That is why in considering the rights of the creditors before and after the Scheme, the relevant date is the Restructuring Effective Date (see §49(2) above).

(2)  §44(2): While in the Liquidation Analysis, the projected return to all Creditors will be nil, it is a matter for the Scheme Creditors to decide whether to accept the Scheme or to let the Company to go into liquidation as they (and the other unsecured creditors whose claims are excluded from the Scheme) are the only persons having any real interest in the Company.

(3)  §44(3): For the reasons explained in §§47-49 above, I do not think that the evidence supports the Company’s contention that the rights to be released and the new rights are “materially similar across all CN Holders”.

(4)  §44(4): In an insolvency scenario, the rights of GPF and Other CN Holders are not the same. See §49(1)-(2) above.

(5)  §44(5): Re Kaisa does not assist the Company:

(a)  The scheme put forward by Kaisa treats the creditors equally - it “does not reduce the principal amount of the offshore debt” (§8), and “the principal value of the new instruments to which each scheme creditor is entitled is equal to the total value of its existing claims against the Company” (§9)[80]. It was in this context that the court held that there is “no need to constitute different classes for holders of different series of Notes”.

(b)  In §19 (cited by Mr Joffe), Harris J merely re-affirmed the principle that in an insolvent liquidation, the rights of each creditors “to prove, and receive dividends, in respect of their claim valued as at the date of the commencement of the liquidation”, which is not controversial.

(6)  §44(6): Similarly, the authorities cited by Mr Joffe does not support his argument:

(a)  As stated in Pilkington, §6-046, the general position is that “provided that the tranches share the same priority and enjoy the same rights under the scheme (or RP), small differences in interest rates and maturities do not require a company to hold separate creditor meetings for lenders under the different tranches”. This is not the situation here as GPF’s claim under the Scheme is reduced by 42% whereas Other CN Holders’ claims is not subject to the same reduction.

(b)  In each of the other cases cited, the creditors had the same rights against the company pre-scheme, and/or were entitled to claim the full amounts of their existing claims under the scheme.

(c)  In Re Telewest, the various series of bonds have different maturity dates and are all in default, unsecured and would rank pari passu in a liquidation of Telewest. The scheme involves no alteration of rights amongst the bondholders (§23), and the distribution of the shares under the scheme will be pro rata to their claims as bondholders (§40).

(d)  In Re McCarthy & Stone, the scheme creditors are all secured creditors under term loans, each hold guaranteed securities and share pari passu in all realisations and recoveries. Although under the schemes, they will share the proceeds by reference to the principal sums outstanding, not by reference to accrued interest, the interest differences were so small as compared to the outstanding indebtedness that Norris J took the view that these creditors could consult together (§7).

(e)  In Re Co-Op Bank, the Dated Notes to which the scheme relates comprise 7 different forms of notes with different interest rates and maturity dates. At the convening hearing, Hildyard J considered that it was appropriate for the company to convene a single meeting as there was no practical prospect of the noteholders receiving anything in an insolvency (§9). It does not appear from the discussion whether the noteholders were entitled to claim the full amounts of their existing claims against the company which, if so, would be sufficient to reflect the different interest rates under the various notes.

51.The above reasoning apply with greater force with respect to the right of Inspire:

(1)  Although ES §9.2(a)(iii)(B) states that “the rate of default interest for CN Holders and [Inspire] is similarly high (being 3.5% per month)”, it appears that Inspire is not entitled to default interest given that (a) in ES §9.2(c)(i)(E), it is stated that crystallisation of Inspire’s claim “is not relevant as the repayment of the outstanding accrued interest and principal is only as a bullet at maturity.”; and (b) unlike Schedule 2 to the Scheme (which deals with CNs) where §9 deals with “Crystallisation of Scheme Claims”, in Schedule 3 to the Scheme (which deals with Inspire Facility), there is no such term.

(2)  There is no evidence to suggest that Inspire is entitled to claim any default interest under Inspire Facility.

(3)  Therefore, at least in respect of the right to claim default interest, it cannot be said that the right of Inspire before the Scheme is sufficiently similar as that of GPF.

(4)  Nor can it be said that under the Scheme, the right of Inspire is materially the same as that of GPF as Inspire does not have to give up any right to claim default interest in exchange for the right to receive payment.

52.In view of the substantial difference in the right to claim default interest (1) as between GPF and Other CN Holders, and (2) as between CN Holders and Inspire, I do not think that they can sensibly consult together with a view to their common interest at a single meeting. It follows that the Scheme Meeting was not properly constituted, and the court does not have jurisdiction to sanction the Scheme.

C2.2  Inspire Issue

53.Having concluded that the Scheme Meeting was not properly constituted, it is not necessary to consider the Inspire Issue. Nevertheless, I will deal with the issue briefly.

54.Mr Lok submits that under the Scheme, Inspire is entitled to receive a 1% extension fee, which is not available to the CN Holders. By analogy with well-established case law on consent fee, as explained in Re ColourOz Investment 2 LLC [2020] BCC 926, §§97-103 (Snowden J), and applied in Re E-House (China) Enterprise Holdings Ltd [2023] HKCFI 3117, §§50-52, the fact that the extension fee was not made available to CN Holders can fracture the class.

55.Mr Joffe argues that the rights of those included in a single class can have material differences, provided that they are not so dissimilar so as to make it impossible for them to consult together (Re ColourOz, §78). He submits that in a Trade Sale scenario, the rights and entitlements of the Scheme Creditors are the same. In an IPO scenario, (1) CN Holders would receive cash and shares, and are entitled to enhanced interest and warrants, whilst (2) Inspire would only be entitled to a one-time extension fee, such differences are not so dissimilar as to make it impossible for CN Holders and Inspire to consult together. He contends that the difference in manner in which the Scheme Creditors will receive full recovery of the amounts outstanding is merely a difference in form, not substance.

56.No matter how Mr Joffe puts it, the fact remains that under the Scheme, the extension fee will only paid to Inspire but not CN Holders even though the maturity dates of Inspire Facility and CNs will be extended in the same manner. Therefore, it cannot be said that the new rights of CN Holders and Inspire under the Scheme are sufficiently similar such that they can consult together with a view to their common interest.

C3.  Whether sufficient information provided

57.The principles are well-established:

(1)  It is the responsibility of the company to provide an explanation of “how the schemes will affect a bond holder or creditor commercially. He needs to be given such up to date information as can reasonably be provided on what he can expect if the group were to go into liquidation and as to what he can expect under the schemes.” (Re Heron International NV [1994] 1 BCLC 667, 672g-h, per Sir Donald Nicholls VC).

(2)  The essence of the duty is the requirement of reasonableness or fairness in all the circumstances. In this regard, the courts have applied a more relaxed standard where (a) no reasonable creditor would have changed their decision had the information been disclosed; or (b) when there are imperfections in the materials (Payne, Schemes of Arrangement, 2^nd ed., §2.2.2, pp.36, 38, 39).

(3)  The information in the scheme document must be accurate. In Re South China Strategic Ltd [1997] HKLRD 131, 133H, Rogers J said this:

“The importance of the accuracy of the scheme document cannot be over-emphasized. The documents are usually in a standard format but they are the only material which the shareholders and their advisers will have at their disposal. If they do not accurately portray the underlying facts, the shareholders and their advisers will be misled. Indeed, it is probably fair to say that it is quite likely that the shareholders and their advisers will decide as to whether to attend and how to vote at a meeting not at that meeting but prior thereto. Indeed they will probably decide whether to attend that meeting largely on the basis of the information provided by the company in the scheme document. It can also be said that frequently they will not attend the meeting but that is by the by and one hopes that before proposals are put to company meetings they are properly formulated and presented.”

(4)  As regards the explanatory statements, “the Court takes the view that it is essential to see that the explanatory circulars sent out by the board of the company are perfectly fair and, as far as possible, give all the information reasonably necessary to enable the recipients to determine how to vote … the Court ought to bear in mind these considerations when it has before it, as it often has, a case where the whole matter is really determined by proxies that have been given before the meeting is held” (In re Dorman, Long & Co [1934] Ch 635, 657-658).

58.GPF complains that the ES is deficient in 10 respects, which fall into 8 heads.

59.First, Mr Lok contends that there is no proper explanation or transparency as to the nature and extent of the Scheme Creditors’ entitlement to default interest:

(1)  The ES does not spell out precisely which CN Holders are entitled to default interest, and if so how much. The various qualified references to “default interest” with “if any”[81], suggests that some Scheme Creditors may not be entitled to default interest. This is particularly unacceptable when there are only “seven different groups across 20 separate notes, 17 [sic][82] of which are held by individual CN Holders”.[83]

(2)  The ES gives the wrong impression that none of CN Holders are entitled to default interest under the CNs in that:

(a)  ES §6.18 sets out the amounts owed by the Company to CN Holders as at 31 December 2023, but these amounts (at least so far as GPF is concerned) did not include default interest.

(b)  Although ES §5.10 states that the Company engaged in Arbitration with GPF on a dispute in respect of the CNs and that a final determination was awaited, there is no indication that Scheme Creditors were updated on the Award.

(3)  If, contrary to GPF’s belief, all CN Holders are entitled to default interest, there is no information on how much their entitlement entails:

(a)  VS 3^rd §44 asserts that other CN Holders’ claims for default interest, if made, will be admitted in full, “[g]iven that the relevant terms” in all CNs “are materially similar”. Even taking this at face value, the proportion and amount of default interest are likely to differ substantially as between different CN Holders.

(b)  For example[84], it appears that (i) only GPF, Indies and 4 other CN Holders have issued default notices, (ii) the maturity dates for DKSH and Indies’ CNs differed from that of other CN Holders[85], and (iii) default interest is counted from the maturity date at least for GPF[86].

60.Mr Joffe submits that the contention has no merit for the following reasons:

(1)  The failure to set out each of CN Holders’ respective entitlements to default interest is neither relevant nor necessary as all such entitlements will be waived. In any event, such information pertains only to the amount of the Scheme Claim. It is unclear how such information would be relevant to the decision on how to vote.

(2)  All materially relevant information on the Arbitration has been supplied. The ES clearly explains that: (1) the Award is imminent and that the judgment debt (excluding the Arbitration Costs) will constitute a Scheme Claim;[87] (2) any entitlement to default interest and the Arbitration Costs will be excluded; and (3) for voting purposes all of GPF’s existing entitlements as at the Record Date (i.e. 20 June 2024) will be included.

61.In my view, GPF’s complaint about lack of transparency in respect of the Scheme Creditors’ entitlement to default interest is amply justified.

(1)  As stated in §46 above, the concern about default interest and its treatment under the Scheme was raised by GPF and this Court at the Convening Hearing. Mr Joffe acknowledged the concern and made the Representation in response. If, as the Company now says, the Representation is incorrect, it is all the more necessary for the Company to provide full transparency on the Scheme Creditors’ entitlement to default interest so as to allay the court’s concern.

(2)  There is no conceivable difficulty (none has been alluded to) for the Company to provide information on CN Holders’ entitlement to default interest as there are only 20 series of CNs.

(3)  I do not agree with Mr Joffe’s argument that the information on default interest is irrelevant or unnecessary. For the reasons explained in §49 above, the information on the Scheme Creditors’ entitlement to default interest is not only relevant but also necessary for the Scheme Creditors to determine how to vote at the Scheme Meeting.

(4)  While I agree that all relevant information about the Arbitration has been stated in the ES, it does not answer GPF’s complaint that ES §6.18 is wrong as (at least) GPF is entitled to default interest and its claim as at 31 December 2023 was US$15,041,110 and not US$10.5 million as stated in ES §6.18.

(5)  As stated in §27 above, there are material inconsistencies in the Scheme (Schedule 2, §9), the ES (§§6.17-6.18) and the Liquidation Analysis as to whether default interest, if any, before the Crystallisation Date will be excluded.

62.I agree with Mr Lok’s submission that it is not sufficient for the Company to assert that all default interest “if any” will be waived. Without knowing their individual entitlement (and the extent thereof), CN Holders were simply not in a position to assess the impact of the deprivation of default interest on their recovery rates. As can be seen in cases like Re Telewest (difference in exchange rate approach, §42); Re McCarthy & Stone (different interest rates, §7[88]); Re Primacom Holding GMBH [2013] B.C.C. 201 (different interest rates/maturity dates, §§52[89]-53) and Re Co-Op Bank (different maturity dates, §§9-10, 17-21), the court would need to assess the differing effects with the aid of some form of illustration as to relevant calculations and amounts involved having regard to the rights of Scheme Creditors on liquidation as compared to their rights under the Scheme.

63.In view of the lack of transparency on Scheme Creditors’ entitlement to default interest, coupled with the mistakes and inconsistencies in the Scheme Document identified above, the court cannot be satisfied that the Scheme Creditors were given sufficient information about the Scheme to enable them to come to make an informed decision.

64.Second, Mr Lok submits that the asserted rate of recovery (100% with no haircut)[90] is erroneous, if not misleading, at least for those Scheme Creditors (e.g. GPF) who are in fact entitled to default interest. The underlying assumption that the “amounts outstanding” and “all other amounts payable” do not include default interest in the first place is unfounded. See the disparity in calculation in §43(2) above.

65.Mr Joffe argues that the contention is meaningless. The Company is accurate in stating that the rate of recovery will be 100% in respect of “the Existing Debt”. The Scheme Document makes clear that:[91]

(1)  The 100% recovery rate means that the Scheme Creditor can “stand to recover 100% of the principal amount outstanding and all other amounts payable (in accordance with the terms of the Scheme) in respect of the Existing Debt”.[92]

(2)  Default interest will be excluded[93]; and

(3)  The crystallisation of Scheme Claims will take place on 31 December 2023 excluding default interest.[94]

66.I am unable to accept Mr Joffe’s argument. Far from stating the position clearly:

(1)  The statement in ES §12.5(c) is designed to obfuscate the true position.

(2)  “Existing Debt” is defined as “the obligations, liabilities and indebtedness of the Company under the [CNs] and the [Inspire Facility]” but without specifying the date, as one would expect to see from a scheme. The Scheme Creditors reading this statement would be led into believing that they will be able to recover 100% of their indebtedness under the Scheme when in fact that is not the true position. At the very least, for those Scheme Creditors who are entitled to default interest (such as GPF), they will not be able to recover 100% of their existing debt as their entitlement to default interest has been removed either as at the Crystallisation Date (according to ES §9.2(c)(i)) or altogether (according to Scheme, Schedule 2, §9), depending on which statement is correct.

(3)  Nor do I agree with the contention that the position with regard to treatment of default interest is clear, having regard to the glaring inconsistencies in the various statements within the Scheme Document as identified in §61(5) above.

67.The above misstatement or obfuscation in the Scheme Document on the rate of recovery to Scheme Creditors is fatal as it is an important consideration which would affect the Scheme Creditors’ decision as to whether or not to vote for the Scheme at the Scheme Meeting.

68.For the reasons set out in §§59 to 67 above, I hold that the Company has failed to comply with the duty to provide proper explanation on the material aspects of the Scheme and its effect on the Scheme Creditors. It has also failed to comply with the duty to provide accurate information in the Scheme Document to the Scheme Creditors. Even if, contrary to my view, the classification of Scheme Creditors is proper, I would still refuse to sanction the Scheme for this reason.

69.Mr Lok also makes the following complaints:

(1)  There is no elaboration as to the specific impact of default interest to “Existing Shareholders”[95] returns, notwithstanding the Company’s position that if default interest were taken into account, the returns to Existing Shareholders will be diluted/decreased, thereby significantly damaging the likelihood of Existing Shareholders approving the Scheme[96]. A reasonable creditor will want to be provided with necessary information to understand how any different groups of creditors and any other relevant stakeholders are treated under the scheme in order that he can reach an informed view upon whether the available value are being appropriately allocated between stakeholder groups (Sunbird, §60).

(2)  Although “100% recovery” is premised solely on an IPO or a Trade Sale materialising within the term of the Restructured Notes i.e. by 2025 or 2026[97], the ES contains no sufficient explanation as to their prospects. The only explanation advanced is that the additional time resulting from the Scheme will allow the Company to grow and for market sentiment to recover, to enable an IPO or a Trade Sale achievable[98]. However, on the Company’s own forecast with an assumed compounded annual growth rate of 20.4%[99], it will only achieve breakeven in 2024[100]. For companies purporting to advance a “more advantageous outcome for creditors than a formal insolvency”, they are “well advised to ensure that greater detail is provided … as to the possible alternatives to the scheme and the basis for the predicted outcomes … The provision of such information is likely to be essential if there is a challenge to the scheme” (Re Van Gansewinkel Groep BV & ors [2015] Bus LR 1046, §24; Sunbird, §59).

(3)  The assertion that the Company would likely go into liquidation if the Scheme is not passed[101] and why in liquidation scenario, there is nil return to Scheme Creditors is brief and lacking in specific financial information. However, the Company has net assets of US$41,904,101 as at 31 December 2023 and intercompany receivables of US$16 million[102]. This calls into question whether liquidation is indeed the appropriate comparator and the lack of sufficient information deprives Scheme Creditors of a proper opportunity to assess the same.

(4)  There are potential inaccuracies in stating the amounts of Scheme Creditors’ claims. The Company sets out in ES §6.18 the value of each Scheme Creditor’s Claim as at 31 December 2023, but the summary is inaccurate so far as GPF is concerned as the correct figure should be US$10,691,506[103] (instead of US$10.5 million), which also aligns with the figure in the Award §107(1)(b). The amount has a knock-on effect on the represented returns for Scheme Creditors under the Scheme in the Comparator Analysis[104].

(5)  The Company’s Representation at the Convening Hearing were not disclosed to the Scheme Creditors. Rather, the Scheme Creditors were (cryptically and potentially misleadingly) informed that the amendments in the ES were made “in line with the feedback received from the Court”[105]. The Scheme Creditors are deprived of an opportunity to assess whether GPF’s concerns are valid and whether they have been properly addressed in the end product.

(6)  No detail on restructuring costs/expenses, let alone a detailed breakdown, has been stated in the ES even though these are borne “in full” by the Company[106] (cf. Re Da Yu Financial Holdings Ltd [2019] HKCFI 2531, §44).

70.Mr Joffe’s responses to the aforesaid complaints may be summarised as follows:

(1)  The return to Existing Shareholders goes to the question of discretion whether to sanction the Scheme (Re ColourOz, §77). The correct test is to consider whether an intelligent and honest member of that class without the special interest could not have voted the way the particular creditor did. In this regard, the creditor’s special interest must be the decisive factor compelling its vote. In other words, if it is only something which amounts to an additional reason to support the scheme, that is not sufficient (Re Lehman Brothers International (Europe) (in admin) [2019] BCC 115 §§88-91, 96). There is simply no evidence that the “special interest” (if it could be called that[107]) of CN Holders who are Existing Shareholders was the dominant or causative reason for supporting the Scheme. Rather, the evidence is that the exclusion of default interest is put forward with the predominant objective of ensuring that the Company’s debt load would be sustainable, so as to maximise the chances of a Trade Sale or IPO[108].

(2)  The prospect of an IPO or Trade Sale is set out in ES §7 (“Forecast”):[109]

(a)  The Liquidation Analysis[110] refers to the Forecast and sets out the projected valuations assuming (i) an IPO is achieved by December 2026 (whereupon the Company’s net profit margin is forecasted at 3.1%) and (ii) a Trade Sale by FY24/25 (whereupon the net profit margin is forecasted at 0.1%-2.3%). The assumptions used in preparing the Forecast have also been stated[111].

(b)  The steps taken to execute IPO / Trade Sale are stated[112].

(c)  Any criticism that the Company failed to specify the exact steps to be taken in anticipation of such event[113] is premature and hence unwarranted.

(3)  The reasons why without the Scheme, the Company would likely go into liquidation and why the return to Scheme Creditors would be nil are sufficiently explained in ES §5.12 and the Liquidation Analysis §§28-29, 32-33, 35-38.

(4)  The minor inaccuracies as regards GPF’s claims are “mere imperfections” which do not materially impact the ability of Scheme Creditors to be reasonably informed about the Scheme terms for voting purposes. In any event, a third party adjudicator has been appointed to adjudicate the Claims.

(5)  There is no obligation by the Company to inform the Scheme Creditors of the matters which transpired at the Convening Hearing, so long as the relevant issues have been addressed and catered for in the Scheme Document and sufficiently drawn to their attention.

71.In case this matter goes further, I will briefly state my view on the complaints in the same order as they appear in §69 above:

(1)  §69(1): I do not think it is necessary for the Company to elaborate on the specific impact of default interest to the Existing Shareholders, even assuming the Company has access to such information. The fact that some CN Holders have a separate interest as shareholder of the Company does not fracture the class as it is their rights of CN Holders (rather than their interest), which is relevant to the constitution of the class. More importantly, under the Scheme, it is not proposed to make any payment to the Existing Shareholders. It is difficult to see why a reasonable Scheme Creditor will need to see the specific impact of default interest to the Existing Shareholders.

(2)  §69(2): While it is correct that the “100% recovery” is premised solely on an IPO or a Trade Sale, the Company has provided sufficient information, including the Forecast and the other information identified by Mr Joffe. A reasonable Scheme Creditor would be able to consider the information provided and decides whether or not the “100% recovery” is viable or realistic.

(3)  §69(3): The bases for stating that the Company would likely go into liquidation have been sufficiently stated in the ES, and the statement is fair and reasonable in the circumstances faced by the Company. The net assets and intercompany receivables identified by Mr Lok have already been taken into account by Kroll in preparing the Liquidation Analysis and the reasons why it opines that the return to Scheme Creditors is nil are sufficiently stated.

(4)  §69(4): The inaccuracies in stating the Claims in particular that of GPF’s claim are not “minor” or “mere imperfections” but are material inconsistencies which would affect the decision of how the Scheme Creditors vote on the Scheme. See §61(5) above.

(5)  §69(5): While the Company does not have the obligation to inform the Scheme Creditors of each and every matter discussed at the Convening Hearing, if and to the extent that the concerns and comments raised by the Court are material or need to be addressed by amending the draft Scheme Document and the amendments are substantive, the Company comes under a duty to disclose such matters to the Scheme Creditors, so that they are alive to the concerns and can decide whether the Company has indeed addressed and catered for the concerns. This is particularly so when the Company made the Representation to the Court which it asserts is incorrect. It is unacceptable for the Company to inform the Scheme Creditors that the amendments in the ES were made “in line with the feedback received from the Court” when the statement is clearly incorrect.

(6)  §69(6): The omission to state the costs and expenses in preparing and implementing the Scheme when such costs will be borne by the Company is unacceptable.

72.The complaints about inaccuracies in stating the amounts of Scheme Creditors’ Claims (§69(4) above), the failure to inform Scheme Creditors of the concerns raised by the Court and the decision on the part of the Company in not addressing such concerns (§69(5) above) and the failure to disclose details of the costs and expenses in preparing and implementing the Scheme (§69(6) above) are well founded.

73.In view of the conclusions on the class issue and the sufficiency of information issue, each of which is sufficient for the court not to sanction the Scheme, it is not necessary to consider the discretion issue.

D.  DISPOSITION

74.The Petition is dismissed.

75.As for costs, I make a costs order nisi that the costs of GPF in respect of the proceedings including the costs of the Convening Hearing and all costs reserved, are to be paid by the Company to GPF, to be assessed by way of gross sum assessment, and with certificate for 2 counsel. For this purpose, GPF shall lodge and serve its statement of costs by 29 August 2024 and the Company do provide its comments on the statement, if any, by 3 September 2024.

Mr Victor Joffe SC and Mr Justin Ho, instructed by Baker & McKenzie, for the Company

Mr Michael Lok and Ms Jasmine Cheung, instructed by Allen Overy Shearman Sterling, for the Opposing Creditor (Government Pension Fund)