In Da Yu Financial Holdings Limited (formerly known as China Agrotech Holdings Limited) [2019] HKCFI 2531 (17 October 2019), the Companies Court handed down a landmark decision in relation to an important aspect of schemes of arrangement for debt restructuring –professional fees. The decision also breaks new ground by calling for tighter cross-border coordination and outmoding the practice of “parallel schemes” in different jurisdictions.
Background and Decision
Da Yu Financial Holdings Limited (the “Company”) is a company listed in Hong Kong in the trade of fertilizers, pesticides, and other agricultural and non-agricultural resources products. It is incorporated in the Cayman Islands and registered in Hong Kong as an overseas company with its principal place of business in Hong Kong.
The Company has been in liquidation in Hong Kong since a winding up order was made against it on 9 February 2015, with its listing status as its only remaining substantial asset. In order to realise the value of the listing status, the Company’s liquidators found a “white-knight” investor to pursue a debt restructuring of all the Company’s liabilities with a view to resume trading of the Company’s shares. This involved capital reorganisation and issuing new shares to investors, the proceeds of which would be used to pay for the acquisition of a new business, the Company’s restructuring and liquidation expenses, and a compromise of the Company’s existing indebtedness through parallel schemes of arrangement in Hong Kong (the “Scheme”) (pursuant to section 670 of the Companies Ordinance) and the Cayman Islands (the “Cayman Scheme”). Under the Scheme and the Cayman Scheme, the rate of recovery for the general unsecured creditors would be around 4.28%, compared to nil recovery in the otherwise liquidation scenario.
With leave from the Hong Kong Court, a meeting of the Company’s general unsecured creditors was held on 5 July 2019 for them to consider and vote on the Scheme, during which an overwhelming majority of the creditors present voted in favour of the Scheme. On 8 July 2019, the Company issued a petition seeking the Hong Kong Court’s sanction of the Scheme (the “Petition”).
In the meantime, the Cayman Court also granted leave for the Company to convene a creditors’ meeting for the voting of the Cayman Scheme, and on 16 July 2019, the Cayman court sanctioned the Cayman Scheme.
The Petition was heard by DHCJ William Wong SC on 22 July 2019. At the hearing, the Judge sanctioned the Scheme with an undertaking from the Company that all its restructuring and liquidation costs and expenses would be subject to taxation, and that any cost savings resulting from the taxation process should be distributed to the Scheme Creditors. A permanent stay of the winding-up of the Company was also granted.
As a result, the Company completed its debt restructuring and succeeded in resuming its shares for trading on 26 July 2019.
On 17 October 2019, the Judge handed down his Reasons for Decision for the Petition.
The Court’s discretion to sanction a scheme
The Court laid out succinctly the principles in considering whether to sanction a scheme. Although the Court has an unfettered discretion to sanction a scheme, it will be hesitant to differ from the views of the creditors as long as these principles are satisfied:-
(a) That the scheme is for a permissible purpose;
(b) That 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;
(c) That the meeting was duly convened in accordance with the Court’s directions;
(d) That creditors have been given sufficient information about the scheme to enable them to make an informed decision whether or not to support it;
(e) That the necessary statutory majorities have been obtained;
(f) That 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; and
(g) If in an international case, that there is sufficient connection between the scheme and Hong Kong, and that the scheme is effective in other relevant jurisdictions.
In applying these principles, the Court was concerned in particular with how to draw the line with regards to the ratio of the return to creditors to the restructuring and liquidation costs such that the purpose of the Scheme could still be said to be for the benefit of the creditors, and thus fall within the permissible purpose of propounding a scheme. The Court held that there were no hard and fast rules, nor a specific percentage as a guideline. The question to be asked in every case would be, taking into account all circumstances of the case such as the complexity of the scheme, whether the level of the restructuring and liquidation expenses is reasonable as compared to the rate of return to the creditors.
The court also held that there must be sufficient information in the Explanatory Statement about the restructuring and liquidation expenses such that the creditors and the Court can meaningfully assess the reasonableness of such expenses, and that an informed decision can be made whether the scheme should be supported or not.
In the present case, the Court held that despite the fact that a breakdown of costs had been included in the Explanatory Statement, there was insufficient information for the Court to assess the reasonableness thereof, given that the amount of such costs was significant as compared to the amount available for distribution among creditors.
The Court also held that although the amount of restructuring expenses is a matter of contractual arrangement between the investor and relevant professionals, which are normally not subject to the supervision and taxation of the Court, jurisdiction remains with the Court to impose conditions in exercising its function to sanction schemes. The Court therefore only sanctioned the Scheme on the condition that all of the restructuring and other expenses would be subject to taxation, and any cost savings resulting from the taxation process would be distributed to the creditors.
Cross-border coordination
After observing that it has become an established practice of Hong Kong-listed companies to use parallel schemes for debt restructuring, the Court remarked that such a practice is outmoded – and is in fact the antithesis of cross-border insolvency cooperation. As the raison d’être for recognising foreign proceedings is the avoidance of parallel proceedings, the Court called for all jurisdictions to provide assistance by giving effect to Hong Kong schemes without requiring Hong Kong office-holders to go to the trouble of instituting full-blown parallel insolvency proceedings in the offshore jurisdiction.
Key Takeaways from this Decision
- This is a useful authority summarising both the Hong Kong and English legal principles on the sanctioning of a scheme of arrangement
- Much more attention should be paid to the issue of restructuring and liquidation costs. Adequate information must be set out in the explanatory statement, enabling the creditors and the Court to assess the reasonableness of the costs. Practitioners should expect that failure to do so will result in the Court’s refusal of sanction
- Adequate information includes detailed breakdown of the costs, a detailed description of the nature of the work done, its necessity and complexity, and justification for the level of the costs incurred.
- Practitioners acting for off-shore companies should actively consider doing only one primary scheme (usually in Hong Kong), and liaising with the Court in the off-shore jurisdiction in good time for recognition proceedings.
John Hui acted for the Company and the Liquidators in this application.
