HKCFI 2531 (date of judgment 17 October 2019)
We previously wrote about the liquidation of China Agrotech Holdings Ltd.
The Hong Kong Court sanctioned a scheme of arrangement to be entered into between Da Yu Financial Holdings Limited (formerly known as China Agrotech Holdings Ltd) (the “Company”) and its general unsecured creditors. In doing so, the Court raised concerns over the restructuring and liquidation costs and expenses in considering whether the scheme was for a permissible purpose and the need for parallel schemes.
The Company was incorporated in the Cayman Islands but conducted the majority of its business in Hong Kong and the majority of its debts were incurred in Hong Kong. The Company’s only substantial asset was its listing status which, under Hong Kong law, carries contractual rights and obligations considered to be analogous to a club membership and is a recognised company asset. The Company’s Liquidators proposed a scheme of arrangement with a view to realising the Company’s listing status. A parallel scheme had been sanctioned by the Cayman Court a few days prior to the Hong Kong hearing.
The Court considered the principles governing their discretion to sanction a scheme, making it clear that the Court must reach its own independent view and could not just act as a rubber stamp although it should be slow to differ from the views of the majority scheme creditors who are regarded as the best judges of their own commercial interests. The Court also set out the principles that should be taken into account when considering whether it should sanction a scheme of arrangement and referred to English case law and its summary of the scheme sanction principles.
In considering whether the scheme was for a permissible purpose, the Court raised concerns about the high level of the Liquidators’ restructuring and liquidation costs as compared to the rate of return to the creditors. In particular, the Court was concerned that the scheme could be misused for any purpose other than advancing the interests of the creditors. The Court was reluctant to specify a fixed percentage of the recovered sums that would be an acceptable level for the Liquidators’ costs but concluded that it would have to be considered on a case by case basis with reference to all the circumstances including the rate of return to the creditors. This could lead to heavier scrutiny of Liquidators’ restructuring and liquidation costs and expenses in future schemes of arrangement.
The Court also considered the information provided to the creditors to enable them to form a reasonable judgment on the scheme and noted that very limited information was provided regarding the Liquidators’ costs with no breakdown or anything that would allow the Court and creditors to assess the costs. There was some criticism for this however the Court felt that it would not be right and just to withhold the sanction purely due to lack of information regarding the Liquidators’ costs as this would leave the creditors with nil recovery. A condition was therefore imposed in the sanctioning the scheme requiring all restructuring costs and other expenses to be subject to taxation with any costs savings being distributed to the creditors.
Finally, the Court made some points regarding cross-border coordination following remarks made by the Cayman court. The Court commented that using parallel schemes in circumstances where a company is listed in one country but incorporated offshore was an outmoded way of conducting cross-border restructuring, particularly where there are mechanisms in place to make cross-border restructuring more efficient. The Court referred specifically to the recognition of foreign proceedings and argued that this should be the standard procedure as it avoids the need and expense of having to start parallel proceedings in another jurisdiction. The Court called to other jurisdictions to take these comments to heart and to consider the possibility of recognition of foreign proceedings in cross-border cooperation.