The Cayman Court recently recognised joint provisional liquidators appointed by the Hong Kong court over a Cayman company for the purposes of the company presenting parallel schemes of arrangement to its creditors, which schemes were subsequently approved and sanctioned by both courts.
Part One of this case report, found here, discusses the background to the matter and the key issues considered by the Cayman Court on its scope and jurisdiction to recognise and assist foreign officeholders.
Part Two discusses the principles relevant to sanctioning a scheme of arrangement particularly in circumstances where, as was the case here, the scheme purported to compromise debt which was not governed by Cayman (or Hong Kong) law.
PART TWO
Scheme of Arrangement
As set out in Part One of this case report, the joint provisional liquidators (Ho Kwok Leung Glen and Lai Kar Yan (Derek) of Deloitte) (the “JPLs”) were appointed by the Hong Kong court over Freeman FinTech Corporation, a company incorporated in the Cayman Islands (the “Company”) and were empowered by the Hong Kong court to enter into discussions on behalf of the Company for the purpose of a restructuring.
On 4 November 2020, the JPLs obtained recognition of their foreign appointment from the Cayman court for the purposes of presenting a scheme of arrangement to the Company’s creditors on behalf of the Company.
Following the granting of recognition (and complying with the relevant notice provisions in the recognition order), the JPLs were then empowered to present a petition to the Cayman court on behalf of the Company for the proposed scheme, the purpose of which was to compromise all of the Company’s unsecured indebtedness and return it, and the group, to a position of solvency. The scheme principally involved a cash injection from an investor and a debt for equity swap, following which the Company would continue as a going concern and, following their suspension, the Company’s shares resuming to trade on the Hong Kong Stock Exchange.
A parallel scheme of arrangement was also presented in Hong Kong, being the jurisdiction in which the winding up proceedings were commenced and the law by which the majority of the Company’s debts were governed.
In mid-December 2020, both the Cayman and Hong Kong courts granted convening orders, ordering a single meeting of creditors for the purpose of considering and, if thought fit, approving the schemes. The Cayman and Hong Kong meetings were ordered to be held at the same time (by way of video link), at which all creditors who attended in person or by proxy voted unanimously in favour of the schemes (and therefore the requisite majorities of at least 50% in number and 75% in value were achieved).
Sanction Hearing
The Cayman court was then asked to sanction the Cayman scheme. In his written reasons, Justice Segal helpfully summarised the well-known function of the court at the sanction hearing as follows:
- The court must be satisfied that the provisions of the statute (and the order convening the scheme meeting of creditors) have been complied with;
- The court must be satisfied that the class of creditors which was the subject of the court meeting was fairly represented by those who attended the meeting, and that the statutory majority are acting bona fide and not coercing the minority in order to promote interests adverse to those of the class they purport to represent;
- The court must be satisfied that an intelligent and honest person, a member of the class concerned and acting in respect of his own interest, might reasonably approve the scheme;
- There must be no “blot” on (i.e. defect in) the scheme; and
- There must be no other reason which would preclude the Court from exercising its discretion to sanction the scheme.
Discretion
Justice Segal added the fifth discretionary matter (the first four being frequently cited in Buckley on the Companies Act and In re TDG plc [2009] 1 BCLC 445) on the basis that one such reason which is frequently referred to in the authorities and which arose for consideration in this case was the principle that the Court must be satisfied that the scheme will achieve a substantial effect and that it is not acting in vain. The reason this matter arose for consideration in this case was because there was debt of approximately HK$48m (approximately US$6.2m) (held by one creditor) which was governed by Macau law and which the schemes could not compromise as a matter of Macau law.
Despite being given all of the relevant notices and copies of the scheme documents, the “Macau Creditor” did not make contact with the JPLs, did not return the forms and did not seek to participate in or attend the meeting.
Whilst the Macau Creditor would be treated in Cayman and Hong Kong as bound by the schemes (being effective in both jurisdictions irrespective of the governing law of the debt), since the creditor had not submitted to the jurisdiction of either court, there was a risk that the schemes and sanction orders could not be made effective and enforced against him in the PRC, Macau and other jurisdictions, pursuant to what is known as the Rule in Gibbs – i.e. that discharge of a debt pursuant to a foreign restructuring proceeding would only be recognised if the proceeding took place in (or was recognised in) the jurisdiction of the governing law of the debt – as per Anthony Gibbs & Son v La Societe Industrielle et Commerciale des Metaux (1890) 25 QBD 399.
The Cayman court, therefore, needed to determine (in the exercise of its discretion) whether to sanction the scheme on the basis that, as the Company submitted, the scheme would achieve a substantial effect and the court would not be acting in vain or making an order which had no substantive effect or which would not achieve its purpose.
Utility
The key issue for determination (pursuant to the authorities in a case such as this) is whether the court should exercise its discretion to sanction the scheme having regard to the court’s unwillingness to sanction a scheme which had no or only a limited utility – In the matter of China Lumena New Materials Corp (in Provisional Liquidation) [2020] HKCFI 338.
In Winsway Enterprises Holdings Ltd [2017] 1 HKLRD 1, Justice Harris of the Hong Kong court noted that the utility of the scheme could be called into question if there is a serious question over the extent to which it will be enforceable against foreign creditors. He said:
“Ultimately, the guiding principle is that the court should not act in vain or make an order which has no substantive effect or will not achieve its purpose. The principle does not require either worldwide effectiveness or worldwide certainty. Thus it does not require that the court must be satisfied that the scheme will be effective in every jurisdiction worldwide: its focus is on jurisdictions in which, by reason of the presence there of substantial assets or in which creditors might make claims, it is especially important that the scheme be effective. The court will sanction the scheme provided it is satisfied that the scheme would achieve a substantial effect: Re Lehman Brothers International (Europe) (No. 10) [2018] EWHC 1980 Ch.”
Here, the evidence filed by the JPLs on behalf of the Company demonstrated that:
- the Company’s assets were located in the Cayman Islands or Hong Kong, save for one asset, namely an inter-company receivable owed to the Company by a BVI subsidiary in the Group;
- the Company had no assets in Macau;
- the Company’s assets in the Cayman Islands would be protected by the Cayman scheme;
- the Company’s assets in Hong Kong would be protected by the Hong Kong scheme;
- whilst there was a risk that the Macau Creditor could take action and obtain a judgment in a third jurisdiction which did not recognise the schemes (for example, Macau) and could attempt to enforce that judgment in the BVI, there was no evidence or indication that the Macau Creditor intended to do so;
- in any event, the Company might be able to take steps to prevent execution of such judgment; and
- the Macau Creditor’s debt only amounted to 1-2% of the total debts of the Company and 96% in value of the Company’s creditors supported the scheme.
In light of the above, the Company submitted that any action taken by the Macau Creditor would not adversely or materially affect the implementation of the scheme and the Cayman court should exercise its discretion and grant sanction.
The day before the sanction hearing, the Hong Kong court sanctioned the Hong Kong scheme on the basis that, inter alia, the Hong Kong scheme would prevent the Macau Creditor taking enforcement proceedings in Hong Kong and, accordingly, the Macau Creditor’s debt did not impact adversely on the utility of the scheme.
Cayman sanction
Justice Segal reached the same conclusion the following day. In his judgment, he helpfully summarised the approach which the Cayman court should adopt in the present and similar cases as follows:
- The court needs to take into account all relevant circumstances when deciding whether to exercise its discretion to sanction the scheme;
- The court needs to be provided with evidence as to the circumstances and in particular the realistic risks arising from and associated with a creditor not being bound by the scheme or the sanction order. In this regard, the court does not need certainty as to the position under foreign law – but it ought to have some credible evidence as to the effect that it will not be acting in vain (as per Snowden J in Van Gansewinkel Groep BV [2015] EWHC 2151 (Ch));
- The court needs to consider whether on the evidence it is appropriate to sanction the scheme despite having regard to the risks of enforcement action by creditors who are not bound by the scheme and are likely to be able to take action in other jurisdictions, which assessment will be made in light of the location of the company’s assets and any indication of intentions from the outside creditor/s;
- The court needs to consider the issue of fairness in this context (i.e. where scheme creditors would be taking a haircut despite there being a risk that other creditors could enforce their pre-scheme claims in full). It may be relevant in this context to have regard to the extent to which creditors were made aware of the risks in the explanatory statement before voting.
In considering all of the above, Justice Segal concluded that, in view of the complete radio silence from the Macau Creditor and the absence of any indication that it intended on taking any action, coupled with the fact that the amounts involved were sufficiently small so as to avoid interfering with the implementation of the scheme, and which would not undermine the benefits obtained by scheme creditors, it was appropriate to exercise his discretion to sanction the scheme.
Discussion
This is an important decision as it is the first time the Cayman court has considered (and therefore issued a written judgment) discussing the utility test and the proper approach to granting sanction notwithstanding the existence of scheme debt governed by a foreign law.
It was also a good example of cross-border cooperation at work between the Hong Kong and Cayman courts which ensured a similar and consistent approach was adopted to the foreign law governed debt issue such that both courts were satisfied that the schemes would achieve a substantial effect and could be sanctioned.
