Re Powerlong Real Estate Holdings Ltd

HCMP 458/2024

[2025] HKCFI 970

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 458 OF 2024

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REASONS FOR DECISION[1]

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1.In this rather unusual case, the Company applied for an order to modify a term of the Scheme sanctioned by this Court on 17 December 2024 in circumstances where the proposed modification did not have the support of the requisite majority of the Creditors but the Company contended that the court should override the view of the Creditors by allowing the modification.

2.There were 3 summonses before the court:

(1)  The summons dated 4 February 2025 issued by the Company to extend the Longstop Date from 28 February 2025 to 31 May 2025 so as to give the Company additional time to procure the funds required for making the payments due on or before the Restructuring Effective Date (“RED”) (“Modification Summons”);

(2)  The summons dated 19 February 2025 issued by the Instructing AHG Members (as defined in §20 below) seeking leave to adduce the Affirmation of Ronald Wu (“AHG’s Evidence Summons”); and

(3)  The summons dated 21 February 2025 issued by the Company for retrospective leave to file the 5^th and 6^th Affirmations of Hoi Wa Fong (“Company’s Evidence Summons”)

(together “Summonses”).

3.At the hearing, I allowed the AHG’s Evidence Summons and dismissed the Modification Summons and the Company’s Evidence Summons, the costs of which was ordered to be paid by the Company to the Instructing AHG Members.  These are the reasons for my decision.

A.  BACKGROUND

A1.  The Scheme

4.The Company is a Cayman Islands company whose shares have since 2009 been listed on the Main Board of The Stock Exchange of Hong Kong (stock code: 1238).  It is the ultimate holding company of a group of companies engaging in property development investment, and management business (together “Group”).

5.On 17 December 2024, this Court sanctioned the Scheme.  The key terms of the Scheme have been summarised in the Judgment.

6.The Scheme seeks to restructure debts in the aggregate principal amount of about US$2.79 billion under the Existing Debt Instruments comprising (1) the Existing Public Notes; (2) the Northeast Gemini Notes; and (3) the Existing Private Debts.

7.In return for releasing their Claims against the Company, the Creditors will receive Scheme Consideration under one or more of the 4 options.  In addition, the following fees are payable to some of the Creditors:

(1)  Consent Fee: Creditors who have acceded to the RSA by 26 April 2024 are entitled to a Consent Fee at 0.2% of the aggregate principal amount of their Eligible Participating Debt, half of which will be payable on or prior to the RED. 

(2)  AHG Work Fee: The AHG will receive US$11,295,940 as their Work Fees, of which US$2.824 million will be paid on or prior to the RED.

(3)  AHG Advisor Fees / Bank Group’s Advisor Fees: AHG’s advisors and the Bank Group’s advisors will receive US$905,000 and US$558,000 respectively on or prior to the RED.

8.The Scheme takes effect on the Scheme Effective Date upon satisfaction of the Scheme Conditions stipulated in clause 15.  This took place on 17 December 2024, being the date when the court order was registered at the Companies Registry. From that date onwards, the Creditors are bound by the Scheme and cannot take any enforcement action in relation to the Claims.  However, the Creditors will not receive any of the Scheme Consideration until the RED.  For the RED to take place, all the Restructuring Conditions stipulated in clause 16.1 of the Scheme have to be met or waived by 28 February 2025 (“Longstop Date”). 

9.The Restructuring Conditions relevant for present purposes are:

(1)  Compliance by the Company with the terms of the RSA Term Sheet in all material aspects (clause 16.1(d));

(2)  Settlement of various fees by the Company (clause 16.1(g)):

“The settlement in full by the Company of the AHG Work Fee (in accordance with the arrangement as set forth in the AHG Work Fee Letter), the AHG Advisor Fees (as agreed between the Company and the AHG Advisor), the Bank Group’s Advisor Fees (as agreed between the Company and the Bank Group’s Advisors) and all the fees, costs and expenses of all of the Advisors, the Information Agent, the Holding Period Trustee and its counsel, the Blocked Scheme Creditor Tabulation Agent and its counsel, the Existing Notes Trustees and their respective counsels, the Existing Notes Paying and Transfer Agents and Registrars and their respective counsels, the Existing Agents and their respective counsels, the Existing Common Depositaries and their respective counsels, the New Trustees and their respective counsels, the New Agents and their respective counsels, the Chairperson and the Scheme Administrators pursuant to the terms of the Existing Notes Indentures or as agreed between the Company and the relevant party, provided that this obligation to settle in full (subject to any agreed caps (including under the RSA)) all fees, costs and expenses as a Restructuring Condition shall override any payment terms in such arrangements, and provided further that any such party referenced in this Clause 16.1(g), except for the Company, may, in its complete discretion and without prejudice to the Company’s obligation to pay any fees, costs and expenses due to any other party referenced in this Clause 16.1(g), waive the Company’s obligation to settle its fees, costs and expenses in full as a Restructuring Condition.”

(3)  The Company had agreed with the AHG to pay the AHG Work Fee by 5 instalments over 2.5 years after the RED.  Although clause 16.1(g) has not been revised to reflect the parties’ subsequent agreement, this change has been explained in the Explanatory Statement.

10.Pursuant to clause 29 of the Scheme, if the Restructuring Conditions are not met by the Longstop Date, the Scheme will terminate automatically as if it was never effective.

11.The fees and expenses to be paid on or prior to the RED amount to approximately US$21.41 million (“RED Payments”).[2]

A2.  Events after sanction

12.To discharge the RED Payments, the Company intended to use the sale proceeds from a proposed sale of the Group’s carpark property for RMB 205 million and the Group had accepted a tender for that purpose (“Proposed Transaction”).

13.The principal terms of the Proposed Transaction were set out in a term sheet dated 15 October 2024 made between Shanghai Ruilong Investment Management Limited (an affiliate of the Group) as seller and Shanghai Shangche Intelligence Technology Limited (“Shangche”) as purchaser.  Shangche is a subsidiary of SAIC Motor Corp., Ltd and the Proposed Transaction will be funded by Shandong Hi-Speed Company Limited (“Shandong Hi-Speed”), a state-owned enterprise, as a limited partner.  

14.On 20 January 2025, Shangche informed the Company that Shandong Hi-Speed was expected to deliver the written approval of the transaction only by the end of February 2025.  According to the Company, it was at this point that it realised the transaction timeline would be affected in that the Company would not be able to receive the first 2 instalments (in the sums of RMB 51.25 million and RMB 143.5 million) originally expected to be released on 25 January 2025 and 28 February 2025 respectively.

15.According to the Company, the written approval from Shandong Hi-Speed is expected to be available only in around mid-March 2025.

16.As a result, the Company says it is unable to settle the RED Payments by the Longstop Date and it believes that a further 3 months is required to complete the Proposed Transaction.

17.On 4 February 2025, the Company launched a consent solicitation (“Consent Solicitation”) to obtain Creditors’ support for  extension of the Longstop Date to 31 May 2025.  The result of the Consent Solicitation was that:

(1)  68.56% of the Creditors (in value) voted, of which 50.77% voted for the modification and 49.22% voted against.

(2)  The votes for and against modification respectively represented 34.81% and 33.73% of the total outstanding principal amount of the Existing Debt Instruments.

(3)  About 90% of the votes against the modification came from the AHG.

18.The AHG indicated that it would only consider providing its consent if:

(1)  The Company immediately releases the US$4 million in the offshore escrow account to the AHG and its legal advisors for partial settlement of the AHG Work Fee and the AHG Advisors Fee.

(2)  The Company undertakes (a) not to further amend or revise (or attempt to do so) any terms of the Scheme, the Explanatory Statement or the Restructuring Documents; (b) not to appoint any new financial advisor; and (c) to use its best endeavours to secure all necessary funding and regulatory approvals to implement the Restructuring so that the RED shall occur on or prior to the newly proposed Longstop Date.

19.The Company did not accede to the AHG’s requests on the basis that it had to treat all Creditors equally up to the RED.

20.At the hearing, AHG members who together hold 40.9% of the outstanding principal under the Existing Public Notes (representing 31% of the Claims under the Scheme) (“Instructing AHG Members”) oppose the Modification Summons.  Alternatively, the Instructing AHG Members submit that the Longstop Date should only be extended for 1 month on the condition that the Company undertakes that:

(1)  It will not, whether acting by any companies which it controls or otherwise, do anything or omit to do anything in breach of the terms of the Scheme, including (without limitation) the Company’s obligation (under clause 5.3) to use its best endeavours to procure that the RED occurs before the Longstop Date; and

(2)  It will not, whether acting by any companies which it controls or otherwise, propose any alternative restructuring, other than the Restructuring contemplated by, and in strict adherence to, the terms of the Scheme not to inter alia breach the Scheme terms or propose alternative restructuring other than the restructuring contemplated in the Scheme. 

B.  DISCUSSION

21.The court would not lightly allow an application made by a party to vary the terms of a scheme which has been approved by the creditors and sanctioned by the court.  The reason for this is obvious.  A sanctioned scheme is a contractual bargain binding upon the creditors and the company and the parties are expected to comply with its terms. 

22.While the circumstances for seeking modification of the terms of a sanctioned scheme depends on the facts of the case, it seems to me that it is only if the proposed modification is one which is permitted by the scheme that the court would begin to consider the application.  If this is not met, there is no proper basis for a party to ask the court to allow the modification as it is not the function of the court to re-write a contractual bargain reached between the parties or to override the wishes of one party at the behest of the other party.  Even if the proposed modification is one which is permitted by the scheme, the court would be slow to allow the modification unless it falls within the one or more of the following non-exhaustive scenarios:

(1)  The modification is to correct the manifest errors or mistakes in the scheme (Re Equitable Life Assurance Society (No. 2) [2002] BCC 319, §102); or

(2)  The modification is one which has no or minimal substantive effect on the rights or obligations of the parties under the scheme, such that it cannot be said to be an attempt by one or more parties to re-write the contractual bargain.  As observed by Lloyd J in Re Equitable Life, a modification provision in a scheme cannot be used “to foist on a class of creditors something substantially different to what has been approved at the relevant meetings”; or

(3)  The modification is one which, although it has substantive effect on the rights or obligations of the parties under the scheme, the modification has been agreed to by the company (if the modification is sought by the creditors) or the requisite majorities of the creditors (if the modification is sought by the company), and the variation “would not have caused any reasonable shareholder to take a different view in relation to the scheme had it been put before them” (eg., Re Aon plc [2020] EWHC 1003 §18, cited in Re Moody Technology Holdings Ltd [2024] 1 HKLRD 1123, §9(1)); or

(4)  The modification is necessitated by a change of circumstances beyond the control of the parties and the modification is essential to the implementation of the scheme.  For example, in Re Moody, Harris J allowed a modification of a sanctioned scheme which concerned replacement of the scheme administrators on the basis that such modification was  “simply to ensure that the scheme is administered as was originally intended” (§10).

23.In the present case, the Scheme contains a modification clause (clause 27.2) which provides as follows:

“In addition, and with effect from the Scheme Effective Date, the terms and conditions of this Scheme may be modified with the approval of the Court, upon application by the Company or by the Scheme Administrator to the Court, provided that any such modification would not directly or indirectly have any material adverse effect on the interests of any Scheme Creditor under this Scheme. Any modification of the terms and conditions of this Scheme made in accordance with the terms of the RSA and this Clause 27.2 will be binding on the Company, the Existing Subsidiary Obligors and each Scheme Creditor.” (underlined added)

24.Ms Tinny Chan, counsel for the Company, submits that proposed modification is justified because:

(1)  The no “material adverse effect” (“MAE”) condition under clause 27.2 requires certainty of such MAE, or at least a higher degree of likelihood of such effect occurring (citing BM Brazil & Ors v Sibanye BM Brazil & Anor [2024] EWHC 2566 (Comm)).

(2)  The “materiality” required must be significant and substantial given the scale of the Scheme and the Restructuring was intended to be a lengthy process.

(3)  The modification would not have any MAE on the interests of any Creditor because (a) it merely pushes back the timetable of the Restructuring by 3 months; (b) the instalment of AHG Work Fee due on or prior to the RED only constitutes 0.33% of the total debt held by the AHG and the AHG Work Fee would be distributed over 2.5 years from the RED; (c) it would be unfortunate if the Scheme were to lapse because of the delayed initial payment.

25.Ms Tiffany Chan, counsel for the Instructing AHG Members, opposes the Modification Summons for inter alia the following reasons:

(1)  Reliance is placed on Re China Saite Group Co Ltd [2022] HKCFI 1128 where Harris J permitted a modification of the scheme at the sanction stage based on a “no-MAE” clause because (a) the proposed modifications seek only to improve the scheme creditors’ recovery; (b) had the proposed modification been before the scheme meeting, they would not have made any difference to its outcome; and (c) the modifications would not foist on the scheme creditors anything other than what they had voted on at the scheme meeting (§8).

(2)  In the present case, the parties originally agreed to a 5-month period from the date of the RSA Amendment Agreement for the RED to occur.  The proposed modification almost doubles the time (from 5 to 8 months).  Had the Longstop Date been stated to be 6 months from the date of the scheme meetings, the Instructing AHG Members probably would not have voted for the Scheme.

26.I do not think that the authorities on construing the meaning of MAE in termination clauses (such as BM Brazil) are relevant to the issue I have to decide.  The issue is whether the proposed modification “would directly or indirectly have any material adverse effect on the interests of any Scheme Creditor under the Scheme”.  This is to be determined by examining the rights of the Creditors under the Scheme and comparing it with their rights if the proposed modification is allowed.

27.In my judgment, the proposed modification does not fall within clause 27.2.  The modification seeks to defer the RED or the termination of the Scheme by another 3 months.  If allowed, it would have a material adverse effect on the interests of the Creditors in that:

(1)  they would have to wait for a further 3 months to see if the Scheme Conditions in clause 15 would be met or waived in circumstances where there is no certainty as to whether the RED would take place;

(2)  they remain bound by the Scheme for a further 3 months during which they could not take any enforcement action against the Company; and

(3)  even if the Scheme Conditions in clause 15 can be met before the extended Longstop Date, the right of the Creditors to receive the Scheme Consideration would be deferred by 3 months but without any compensation to be paid to them. 

28.For this reason alone, the Modification Summons must be dismissed.

29.Even if, contrary to my view, the proposed modification is one which falls within clause 27.2, I do not consider that it should be allowed for the reasons explained below. 

30.First, the Instructing AHG Members oppose the proposed modification. They consider that if the Company is not able to meet the RED Payments obligations, it casts doubts on its ability to meet future payments under the Scheme, and they consider winding up the Company may result in greater recovery. This is a commercial decision which they are entitled to make. 

31.Second, 49.22% of Creditors (in value) who voted in the Consent Solicitation were against the proposed modification.  This falls far short of the 75% threshold approval prescribed by s.674(1) of the Companies Ordinance (Cap. 622). It is the unchallenged evidence of the Instructing AHG members that they probably would not have voted for the Scheme, had they known that the Longstop Date would have been 6 months from the date of the scheme meetings.  It is not for the court to substitute its view for that of the Creditors, who are the best judge of what is in their own commercial interest.

32.Third, the proposed modification is not and cannot be said to have been necessitated by any unforeseen change of circumstances.  The risk of delay in completion of the Proposed Transaction must have been within the contemplation of the Company as it was mentioned as the source of funds to meet the RED Payments in the affirmation filed in support of the application for sanction.

33.Fourth, as submitted by Ms Tiffany Chan, the evidence does not suggest that the Company has pursued any alternative sources of funding.  The Instructing AHG Members are entitled to take the view that the Company has other sources of funds available but failed to take the necessary steps to ensure that the same will be made available to the Company’s use:

(1)  The Company has deposited US$4 million in an offshore escrow account.

(2)  The Company indirectly holds 63% shares in Powerlong Commercial Management Holdings Company, a listed company in Hong Kong (“ListCo”), which has US$546 million in unrestricted cash and “capital and reserves attributable to shareholders” of US$449 million.  The Company could have procured ListCo to declare and pay a special dividend upstream to fund the RED Payments.   It is only at the hearing that Ms Tinny Chan alludes to the  difficulties in obtaining requisite approval in light of the market conditions, which is not supported by the evidence adduced by the Company.

(3)  The Company had indicated that it planned to pursue a transaction to sell certain assets, to which the Majority AHG had given its consent.  However, since then, the AHG members have not been informed by the Company about the progress of the transaction.  

(4)  The Company has not provided any satisfactory explanation as to why funds cannot be obtained from any alternative source other than the Proposed Transaction. 

34.In any event, it would be futile for the court to extend the Longstop Date unless the AHG agrees to extend the Longstop Date under the RSA:

(1)  Under clause 3.2(o) of the RSA the Company undertook to ensure that the RED shall occur no later than the earlier of “(a) the Longstop Date, or (b) ten (10) Business Days after all Conditions Precedent have been satisfied (or, where applicable, waived)”.  

(2)  Clause 12.4(b) of the RSA provides that any amendment may only be made in writing by: (i) the Company and (ii) the AHG (provided that it holds the “Minimum AHG Threshold”) or, if the AHG does not hold the Minimum AHG Threshold, the “Majority Participating Creditors”.

(3)  As the Majority AHG did not agree to extend the Longstop Date, the Restructuring Condition under clause 16.1(d) of the Scheme would not be met.

Ms Tinny Chan, instructed by Sidley Austin, for the Company

Ms Tiffany Chan, instructed by Latham & Watkins LLP, for the Instructing AHG Members