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HCMP 453/2016
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
MISCELLANEOUS PROCEEDINGS NO 453 OF 2016
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IN THE MATTER OF section 673(2) of the Companies Ordinance, Chapter 622 of the Laws of Hong Kong
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and
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IN THE MATTER OF Winsway Enterprises Holdings Limited
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| Before: Hon Harris J in Chambers |
| Date of Hearing: 17 May 2016 |
| Date of Decision: 17 May 2016 |
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R E A S O N S F O R D E C I S I O N
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Introduction
1. On 21 March 2016 I gave leave to Winway Enterprises Limited (“Company”) to convene a meeting of a discrete group of creditors (“Scheme Creditors”) in order that they could consider and vote on a proposed scheme of arrangement to restructure the debt of US$309,000,000 arising under senior notes maturing on 8 April 2016 (“Scheme”). A similar order was made by Bannister J on 22 March 2016 in the British Virgin Islands. A meeting pursuant to the two orders took place on 3 May 2016 and the Scheme Creditors voted in favour of the Scheme by approximately 96.5% in number and 98.3% in value thus achieving the required statutory majority. On 4 May 2016 the Company issued a Petition seeking the Court’s sanction, which I granted on 17 May 2016. Bannister J approved the Scheme on 2 June 2016. These are my reasons for approving the Scheme.
Company
2. The Company is incorporated in the British Virgin Islands. On 6 September 2010 it was registered as a non-Hong Kong company under section 333 of what was then Part XI of the Companies Ordinance, Cap 32. It has a registered office in Hong Kong. On 11 October 2010 it was listed on The Main Board of The Stock Exchange of Hong Kong Limited (“HKEX”). The Company is an investment company. Through its subsidiaries it produces and trades coking coal and carries on related business activities mainly in the Mainland[1]. The Company carries on no business in the British Virgin Islands and its activities in Hong Kong are limited and described more fully in [32-33] in which I consider the Company’s connection with Hong Kong.
The Debt and Scheme Creditors
3. On 8 April 2011 the Company entered into an indenture, which governed the issuance by the Company of up to US$500,000,000 of 8.5% senior notes due in 2016 (“Notes”). The Company’s obligations were guaranteed by 14 related companies (“Subsidiary Guarantors”). Deutsche Bank Trust Company Americas was the trustee (“Trustee”). The indenture was governed by the laws of the State of New York. The indenture was subsequently amended and two further guarantors added. Notes in the aggregate principal amount of US$309,000,000 currently remain outstanding along with accrued interest of approximately US$40,000,000. The notes are listed on the Singapore Exchange. The notes were issued in fully registered form. The term “Holder” is defined in the Indenture as “the Person in whose name a Note is registered in the Note register”. All notes are registered in the name of Cede & Co as nominee of The Depositary Trust Company. Title in the Notes is generally held pursuant to a chain of custody. “Scheme Creditors” is defined in the Scheme to include a person with a beneficial interest as principal in the Notes held in global form or global restricted form through the Depositary at the Record Time and which has a right, upon satisfaction of certain conditions, to be issued definitive notes in accordance with the terms of the Notes. I shall use the term Scheme Creditors in these reasons to describe the beneficial owners of the Notes, who are described conventionally in the early commercial documentation as “noteholders”.
4. An event of default occurred under the Indenture on 8 May 2015. Further defaults followed. The Indenture gives the Trustee at the request of the Holder in the event of default the right to make various conventional demands for early repayment. None have been made. The Company started to explore restructuring options in late 2014. In early 2015 it engaged Bondholder Communication Group to identify as many Scheme Creditors as possible. The Company approached a number of significant Scheme Creditors and as a result an ad hoc steering committee was formed that appointed Houlihan Lokey as its financial advisers and Akin Gump as its legal advisers. The steering committee held discussions with a number of other Scheme Creditors to gather views, which led to the steering committee engaging in restructuring discussions with the Company and its advisers.
5. On 8 May 2015 the Company, the Subsidiary Guarantors and the Scheme Creditors comprising the steering committee signed a standstill agreement under which the Scheme Creditors agreed not to pursue enforcement action under the Indenture until 31 May 2015 or such later date as might subsequently be agreed. The date was extended on a number of occasions as the restructuring discussions progressed. Various options were explored unsuccessfully leading the Company to conclude that the most viable option was a rights issue underwritten by its controlling shareholder, Mr Wang Xingchun, to fund a cash payment to Scheme Creditors as part of a restructuring. The discussions culminated in a restructuring support agreement being entered into on 25 November 2015 between the Company, Subsidiary Guarantors and the Scheme Creditors comprising the steering committee (“RSA”), which replaced the standstill agreement and included a term sheet. The term sheet was the subject of substantial further negotiation.
6. Under clause 6 of the RSA, the Company agreed to pay on the restructuring effective date, as defined in the RSA, each consenting Scheme Creditor who became a party to the RSA on or prior to 23 December 2015 a pro rate share of a fee in US dollars for agreeing in advance to any scheme that was subsequently proposed. The consent fee is equivalent to 2% of the outstanding principal and accrued interest as at 25 November 2015 (“Consent Fee”).
7. The restructuring in its final form consists of redemption of the outstanding Notes and all accrued interest amounts up to the date of settlement at a discount, with Scheme Creditors accepting a combination of cash consideration, new shares in the Company and contingent value rights. The Subsidiary Guarantees and associated share charges will be released.
8. The Company considers the Scheme necessary for a number of reasons. First, given the disparate character of the Scheme Creditors getting all of them to agree is impracticable. Secondly, the Hong Kong Court may not recognise the scheme introduced in the British Virgin Islands as compromising the debt which arises under an agreement governed by the laws of the State of New York. This is a complication that I consider in more detail later in this decision, but required in the view of those advising the Company, correctly in my view, the Schemes to be introduced in both Hong Kong and the British Virgin Islands and to be conditional upon the Company obtaining recognition of the Hong Kong Scheme in the United States under Chapter 15 of the United States Bankruptcy Code.
9. The Board of the Company considers that unless the Scheme is implemented the Company will have no alternative to liquidation. The Company is insolvent on a balance sheet basis and only has enough cash to operate because it has not been paying interest on the Notes. On 25 February 2016 the Board resolved to introduce the Scheme in Hong Kong and the British Virgin Islands and apply for recognition of the Hong Kong Scheme under Chapter 15 of the United States Bankruptcy Code seeking recognition of the Hong Kong proceedings as a foreign non-main proceeding and certain other ancillary relief, which would have the effect of enforcing the terms of the Scheme in the United States. It will be appreciated that the United States Bankruptcy Code does not have an equivalent to a scheme of arrangement, which is why the reorganisation of the Company’s debt has been structured in the way I have described.
The Scheme
10. The key terms of the Scheme can be summarised as follows: In consideration for the release in full of all claims of the Scheme Creditors in respect of a liability of the Company or any Subsidiary Guarantor arising directly or indirectly pursuant to, under or in connection with the Indenture and the Notes, the following consideration will be distributed to the Scheme Creditors in accordance with the terms of the Schemes:
(1) cash consideration in a total amount of USD 41,703,334 (the “Cash Consideration”);
(2) scheme shares representing, in aggregate number, 18.75% of the total issued shares in the Company on a fully diluted basis on the Final Distribution Date (as defined in the Scheme) (the “Scheme Shares”); and
(3) CVRs with an aggregate face value of USD 10 million.
11. The Cash Consideration and the Scheme Shares together comprise the “Elective Scheme Consideration”. Under the terms of the Scheme, each Scheme Creditor is entitled to receive a pro rata share of the Elective Scheme Consideration and the CVRs in the proportion that its claim bears to the total claims of all Scheme Creditors. Scheme Creditors’ claims are calculated as at 5:00pm (New York time) on 29 April 2016 (“Record Time”).
12. Scheme Creditors may choose to receive their entitlement to the Elective Scheme Consideration in the form of the Cash Consideration only, the Scheme Shares only or a combination of the two. However, this option is only open to Scheme Creditors who ensure that the required documentation (including a duly completed election form) is submitted such that it is received on or before two weeks before the Scheme meeting.
13. On the “Restructuring Effective Date” the Scheme will become fully effective in accordance...
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