Deputy High Court Judge Nick Segal has handed down reasons for sanctioning Powerlong Real Estate Holdings Limited’s second Hong Kong scheme of arrangement, restructuring approximately US$2.9 billion of offshore debt. The judgment provides useful guidance on three recurring flashpoints in scheme sanction hearings: the exclusion of default interest, creditor fees, and class composition.
Default interest
Lenders under certain loan facilities held contractual rights to default interest, yet the scheme required all Scheme Creditors to calculate their entitlement excluding it. Here, the explanatory statement disclosed the point in detail: aggregate default interest across the Existing Loans came to approximately US$3.33 million, only around 0.5% of the affected lenders’ total estimated claims, and including it would have increased recoveries by just 0.04% to 0.16%. Applying the approach in Re Shimao Group Holdings Ltd and Re Sunac China Holdings Ltd, the judge held that a material difference in legal rights does not automatically require separate classes; the question is whether the difference is so stark that creditors cannot sensibly consult together in pursuit of a common interest. On these figures, it was not.
Creditor fees
The scheme provides for the payment of consent fees, work fees and adviser fees. The judge reviewed the authorities and held that fees do not automatically fracture a class merely because some creditors receive them; where a fee is conditional on the scheme becoming effective, the court asks whether it is material enough to influence voting, measured against projected returns under the scheme and in liquidation. Applying that test, the consent fee was unobjectionable since every creditor had equal opportunity to accede to the restructuring support agreement. The work fee was upheld because recoveries here were higher than in comparable cases, support was overwhelming, no creditor objected, and the fee compensated work spanning both the failed 2024 scheme and the current restructuring. The judge added that a more flexible approach to work fees is appropriate where the work was genuinely helpful, and at times essential, to the restructuring, and the sums charged are reasonable and at a market rate. The adviser fees were treated similarly: modest, fully disclosed and unchallenged, notwithstanding growing international judicial concern about the scale of restructuring costs generally.
Shortly before the sanction hearing, Linda Chan J had handed down Re Fantasia Holdings Group Co Limited, which the judge treated as the latest and most directly relevant word on fee materiality. There, a similar work fee ( around 1.55% of outstanding principal) was held to be material against a lower projected recovery, and the class was only preserved because of strong creditor support and no objections. The judge distinguished Re Fantasia on the basis that Powerlong’s projected recoveries were materially higher and support was likewise overwhelming and unopposed, concluding that its work fee did not fracture the class.
Class composition
The previous scheme had used two classes to reflect that holders of certain notes lacked security beyond the company’s guarantee, but the company argued for a single class this time. The judge accepted that in a liquidation all Scheme Creditors held unsecured or effectively unsecured claims, their rights against the company were materially similar, and there was no difference in treatment on a “rights-out” basis. Rights against third parties, such as guarantees from subsidiary obligors, went to creditors’ interests rather than their rights against the company, and so were relevant to fairness rather than to class composition itself. The various differences, whether from the exclusion of default interest, third-party releases, or the cut-off date used for entitlements, were treated as differences of degree rather than differences stark enough to preclude common consultation.
The decision reinforces that Hong Kong’s scheme jurisdiction continues to reward transparent, evidence-based disclosure of default interest and fee arrangements, judged against the correct comparator of scheme and liquidation returns.
José-Antonio Maurellet SC leading Terrence Tai acted for the Company.
Read the judgment here at: https://legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=182438&QS=%24%28powerlong%29&TP=JU
