11 September 2018
Re Mongolian Mining Corporation  HKCFI 2035 - the latest case on restructuring foreign companies' foreign law-governed debts involving DVC's José-Antonio Maurellet SC, Yang-Wahn Hew and Jason Yu. Read on to find out whether there was sufficient connection between the Scheme and Hong Kong.
In Re Mongolian Mining Corporation  HKCFI 2035, the court sanctioned a scheme of arrangement which was part of a larger restructuring exercise involving a Cayman scheme of arrangement and scheme recognition in the US under Chapter 15 of the US Bankruptcy Code.
This decision is a useful reminder of a number of scheme practice points, some of which have no previous Hong Kong authority:
(a) a scheme of arrangement may be used to restructure purely secured debts governed by non-Hong Kong law;
(b) foreign expert evidence about the scheme’s effect abroad may be needed to satisfy the court that the scheme will achieve its practical objectives; and
(c) where the bonds are issued in the form of a global note, the underlying beneficial holders may participate directly in the scheme as creditors.
The facts and decision
The scheme of arrangement in this case concerned the debt restructuring of Mongolian Mining Corporation (“Company”), a Cayman-incorporated and Hong Kong-listed company. It was an investment holding company with operating subsidiaries in Mongolia carrying on the business of producing and exporting high quality coking coal.
Due to financial distress, the Company went into Cayman provisional liquidation in July 2016. The Company’s financial indebtedness comprised:
(a) US$600,000,000 senior secured notes, governed by New York law, listed in Singapore, and secured by charges over shares in the Company’s subsidiaries in Hong Kong and Luxembourg (“Old Notes”);
(b) a secured loan facility of US$150,000,000; and
(c) two promissory notes in the aggregate original principal amount of US$52,500,000.
The secured loan facility and promissory notes were restructured bilaterally and consensually. The Old Notes were to be restructured through inter-conditional parallel schemes of arrangement in Hong Kong and the Cayman Islands. The effect of the schemes was that debts owed to the Scheme Creditors would be released and discharged; in return, the Scheme Creditors would obtain new notes and shares in the Company. The effectiveness of the Hong Kong scheme was conditional on the Cayman scheme being sanctioned by the Cayman court and recognised in the US under Chapter 15 of the Bankruptcy Code.
As the Old Notes were held in a global form or global restricted form through the clearing systems, the Scheme Creditors were defined in the scheme as the beneficial holders of the Old Notes who had a right, upon satisfaction of certain conditions, to be issued with definitive notes in accordance with the terms of the Old Notes.
The court was satisfied that the court had scheme jurisdiction over the Scheme Creditors because, while there was statutory definition of ‘creditor’ for scheme purposes, the scheme jurisdiction would extend to contingent and secured creditors, consistent with English case-law. Here because the Scheme Creditors were entitled, upon satisfaction of certain conditions, to be issued with definitive notes in accordance with the terms of the Old Notes, they were contingent creditors for the purposes of the scheme jurisdiction. The court was also satisfied that the Scheme Creditors were properly put in a single class.
As the Company was a foreign company, the court had to be satisfied that there was sufficient connection between the scheme and Hong Kong. Sufficient connection was established because of a number of factors, including the Company being registered as an overseas company in Hong Kong and listed in Hong Kong; one key security agreement securing the Old Notes being governed by Hong Kong law; and approximately 30% of the Scheme Creditors being based in Hong Kong.
The Company produced expert evidence that the Cayman parallel scheme would be granted recognition in the US and thus the Hong Kong scheme would achieve its practical purpose.
The court sanctioned the scheme accordingly.
This decision is a welcome addition to the scheme authorities in Hong Kong. It serves as a useful reminder of how schemes in Hong Kong can be used to restructure foreign companies’ foreign law-governed debts, including notes issued in the form of a single global note.
Yang-Wahn Hew acted on behalf of the Company and obtained leave for a court sanctioned scheme of arrangement.
Look-Chan Ho authored this Case Report