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Re Hong Kong Airlines Ltd

Judgment Cited authorities 4 Cited in 1 Precedent Map Related
Vincent
JurisdictionHong Kong
Judgment Date20 December 2022
Neutral Citation[2022] HKCFI 3792
Year2022
Subject MatterMiscellaneous Proceedings
Judgement NumberHCMP1474/2022
HCMP1474/2022 RE HONG KONG AIRLINES LTD

HCMP 1474/2022

[2022] HKCFI 3792

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1474 OF 2022

________________

IN THE MATTER OF Hong Kong Airlines Limited (香港航空有限公司)
and
IN THE MATTER OF section 670 of the Companies Ordinance, Chapter 622

________________

Before: Hon Harris J in Court
Date of Hearing: 14 December 2022
Date of Decision: 14 December 2022
Date of Reasons for Decision: 20 December 2022

__________________________________

REASONS FOR DECISION

__________________________________

Introduction

1. The Company seeks the Court’s sanction under Section 673 of the Companies Ordinance (Cap. 622) (“Ordinance”) of a scheme of arrangement between the Company and holders of unsecured debt. After an adjournment, the Scheme Meetings were duly convened on 1 December 2022. The resolutions of the Scheme Meetings were carried by a majority in number of the Scheme Creditors present and voting, in person or by proxy, holding 90.04% of the Unsecured Scheme Claims and 100% of the Critical Lessors Scheme Claims voted.[1]

2. The Scheme seeks to restructure the Company’s indebtedness in order to return the Company to a solvent going concern. Absent restructuring, the Company would be liquidated. A successful restructuring would give the Scheme Creditors a higher recovery:

(a) For the Unsecured Creditors, recovery under the Scheme is estimated to be 5.1%-8.7%, whereas recovery in the Company’s liquidation is estimated to be 0.7%-1.3%.

(b) For the Critical Lessors, recovery under the Scheme is estimated to be 5.1%-10.1%, whereas recovery in the Company’s liquidation is estimated to be 4.1%-5.8%.

3. The Company is a Hong Kong-incorporated entity and is part of a group of 51 companies (“Group”). The Group’s key businesses consist of providing air passenger transport, air cargo transport, and other airline-related services. As its name suggests it is based in Hong Kong and operates regionally.

4. Badly hit by the pandemic, the Company is cash-flow insolvent. The Company’s audited accounts for the year ended 31 December 2021 show the Company having a net current liability of approximately HK$10,748,219,000. As of 31 December 2021, the Company's total indebtedness amounted to approximately HK$49.064 billion, comprising reported liabilities of approximately HK$39.768 billion and guarantee liabilities of approximately HK$9.296 billion.

5. The Company’s creditors include the following categories:

(a) bank lenders and financial creditors;

(b) financial and operating lessors of aircraft and aviation parts;

(c) airport authorities;

(d) hundreds of trade creditors;

(e) holders of the US$683,000,000 7.125% Senior Perpetual Securities ISIN XS1526108235 (“Perpetual Notes”) issued by Blue Skyview Company Limited and guaranteed by, among others, the Company; and

(f) other creditors, excluding the Perpetual Noteholders, with guarantee claims against the Company.

6. The bulk of the Company’s debts are governed by Hong Kong law, while the remaining debts are governed by Mainland law and English law (such as the Perpetual Notes). The Company is very likely to go into liquidation, unless its current indebtedness can be restructured.

7. To return the Company to being a solvent going concern, the Company is pursuing a Group-wide debt restructuring consisting of the following:

(a) raising HK$3 billion from Hong Kong Air Limited (“New Investor”) through the issuance of new shares to the New Investor;

(b) the Scheme;

(c) a restructuring plan under Part 26A of the UK Companies Act 2006 (“UK Plan”), which will compromise the same debts as the Scheme Claims and, in addition, the indebtedness in respect of the Perpetual Notes and the associated guarantees; and

(d) consensual restructurings to resolve certain secured liabilities and other liabilities excluded from the scope of the Scheme and the UK Plan.

8. The Scheme covers most of the Company’s unsecured creditors, other than the Perpetual Notes Creditors to be covered by the UK Plan. The Scheme seeks to discharge the Company’s unsecured indebtedness within the concept of Scheme Claims, which would also entail releasing the Related Debtor and the Related Guarantor (Clause 15 of the Scheme). In return, the Scheme Creditors will be given the following Restructuring Consideration depending on which class the Scheme Creditors fall into:

(a) One class of the Scheme Creditors are the Critical Lessors which are in essence the owner or secured financier of aircraft which the Company plans to retain after completion of the Restructuring (“Retained Aircraft”). Each Critical Lessor will receive (Clause 13 of the Scheme):

(i) In respect of its Reduction Portion, the Cash Option or the Equity Option as selected by the Critical Lessor prior to the Voting Record Time, and a Replacement Claim against AssetCo2;

(ii) In respect of the Reduced CL Debt Amount, fixed monthly instalments, the amount of which depends on the model of the Retained Aircraft. As this is in effect an extension of the Retained Aircraft leases or loan, the Critical Lessor must consent to this treatment of the Reduced CL Debt Amount.

(b) The other class of the Scheme Creditors are the Unsecured Creditors. Each Unsecured Creditor will receive a Replacement Claim against AssetCo1 (Clause 12 of the Scheme).

9. The Scheme Creditors’ recovery analysis is as follows:

(a) For the Unsecured Creditors, recovery under the Scheme is estimated to be 5.1%-8.7%, whereas recovery in the Company’s liquidation is estimated to be 0.7%-1.3%.

(b) For the Critical Lessors, recovery under the Scheme is estimated to be 5.1%-10.1%, whereas recovery in the Company’s liquidation is estimated to be 4.1%-5.8%.

10. The Scheme and the UK Plan are in essence inter-conditional because the approval of both are conditions precedent to the New Investor’s investment. On 9 December 2022, the English court sanctioned the UK Plan, which was unopposed. Sir Alastair Norris handed down his reasons on 14 December 2022.

Criteria which guide the Court in determining whether to sanction a scheme

11. In considering whether to sanction a scheme, the Court applies some well-established principles which I recently summarised in Re China Singyes Solar Technologies Holdings Ltd [2]. The Court considers in particular the following:

(a) whether the scheme is for a permissible purpose;

(b) whether creditors who were called on to vote as a single class had sufficiently similar legal rights such that they could consult together with a view to their common interest at a single meeting;

(c) whether the meeting was duly convened in accordance with the Court’s directions;

(d) whether creditors have been given sufficient information about the scheme to enable them to make an informed decision on whether or not to support it;

(e) whether the necessary statutory majorities have been obtained;

(f) whether the Court is satisfied in the exercise of its discretion 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) in an international case, whether there is sufficient connection between the scheme and Hong Kong, and whether the scheme is effective in other relevant jurisdictions.

Permissible purpose

12. As in Singyes, the Scheme is a genuine debt restructuring of a distressed company. As part of the debt restructuring, it is a permissible purpose for a scheme to release obligations of third parties, such as the scheme company’s guarantors and joint obligors. Where the scheme company is a guarantor, the scheme may release the principal obligors. See Re Unity Group Holdings International Ltd [3] .

13. The Scheme seeks to discharge Related Guarantors and Related Debtors. The Related Debtors are primary obligors where the Company is a guarantor. In order to permit the Scheme to discharge debts owed by the principal obligors (i.e. the Related Debtors), the Company has entered into a number of deeds of contribution, whereby it agreed to be liable to each of such Group Companies (as primary debtors / obligors) to make, on demand, a contribution in respect of any amounts that are paid by that Group Company towards the discharge of its primary liabilities. Accordingly, those Group Companies will have rights of contribution against the Company in respect of their primary liabilities. The use of a deed of contribution to permit a guarantor’s scheme to discharge debts owed by the principal obligors is a well-established technique in England, although the technique is not needed in Hong Kong (Re Unity Group Holdings International Ltd[4]). As there is a parallel UK Plan, the Company consistent with UK practice entered into deeds of contribution.

Class considerations

14. In considering whether creditors are properly classified, the test is whether creditors who are called on to vote as a single class have sufficiently similar legal rights that they could consult together with a view to their common interest at a single meeting. The relevant principles may be summarised thus:

(a) The overarching question is whether the pre and post-scheme rights of those proposed to be included in a single class are so dissimilar as to make it impossible for them to consult with a view to their common interest. If that is the case, separate meetings must be summoned.

(b) The second principle is that it is the rights of creditors, not their separate commercial or other interests, which determine whether they form a single class or separate classes. Conflicting interests will...

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1 cases
  • Re China Beidahuang Industry Group Holdings Ltd
    • Hong Kong
    • 12 December 2023
    ...act in vain and would not exercise its powers to sanction a scheme which does not serve any useful purpose (Re Hong Kong Airlines Ltd [2022] HKCFI 3792 at §30; Re North Mining ...

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