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Re Zhongliang Holdings Group Company Ltd

Judgment Cited authorities 21 Cited in Precedent Map Related
Vincent
JurisdictionHong Kong
Judgment Date19 March 2024
Neutral Citation[2024] HKCFI 808
Subject MatterMiscellaneous Proceedings
Judgement NumberHCMP1631/2023
Year2024
HCMP1631/2023 RE ZHONGLIANG HOLDINGS GROUP COMPANY LTD

HCMP 1631/2023

[2024] HKCFI 808

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1631 OF 2023

________________________

IN THE MATTER of Zhongliang Holdings Group Company Limited （中梁控股集團有限公司）
and
IN THE MATTER of Section 673 and 674 of the Companies Ordinance (Cap 622)

________________________

Before: Hon Harris J in Court
Date of Hearing: 23 February 2024
Date of Decision: 23 February 2024
Date of Reasons for Decision: 19 March 2024

________________________

REASONS FOR DECISION

________________________

Application

1. The Company has sought the Court’s sanction under section 673 of the Companies Ordinance (Cap. 622) (“Ordinance”) of a scheme of arrangement between the Company and the Scheme Creditors. This I ordered at the hearing on 23 February 2024. The conduct of the meeting does give rise to 2 novel and associated questions concerning whether a meeting consisting of 2 proxy holders, one of whom is the chairperson, constitutes a meeting for the purpose of sections 670 and 674 of the Ordinance. I address them in [25]–[29]. In addition, in [41]–[44] I address an issue which, as far as I am aware, has not previously come before the court, namely, the use of short bar dates to expedite adjudication of certain types of claims.

2. The Scheme’s objective is to restructure the Company’s indebtedness, thus averting a potential liquidation that would affect the entire group. Were the Company to be liquidated, it is estimated that the Scheme Creditors would recover approximately 1.43% of their claims. However, under the proposed Scheme, the estimated recovery rate for the Scheme Creditors significantly increases, ranging between approximately 27.75% to 122.97%.

3. The resolution of the Scheme Meeting was carried by an overwhelming majority in number of the Scheme Creditors present and voting, in person or by proxy (namely, 509 Scheme Creditors voting for the Scheme and 1 Scheme Creditor voting against), with those voting in favour holding approximately 99.12% in value by all Scheme Creditors present and voting at the Scheme Meeting (i.e. not including the abstention votes).

4. In these submissions, unless otherwise defined I shall adopt the abbreviations and terminology employed in the Scheme appended to the Order sanctioning the Scheme.

Background to the Scheme

5. The background of the Company and its need for the Scheme is in brief as follows. On 22 March 2018, the Company was incorporated as an exempted company with limited liability in the Cayman Islands. On 24 August 2018, the Company was registered as a non-Hong Kong company under Part 16 of the Companies Ordinance (Cap. 622). The Company has been listed on the Main Board of The Stock Exchange of Hong Kong Limited with Stock Code 2772 since 2019. The Company is an investment holding company whose operating subsidiaries are in the Mainland and Hong Kong (together, “Group”). The Group is a nationwide real estate enterprise based in the Yangtze River Delta Economic Region and is principally engaged in real estate development in the Mainland.

The Company’s financial difficulties and restructuring efforts

6. Largely due to the onset of the pandemic and dramatic changes in the macro environment in the Mainland property sector since the second half of 2021, the Company has endured a few years of financial difficulties. Consequently, the Group incurred a net loss (attributable to owners of the parent) of approximately RMB1,346.38 million (US$189.63 million) for the year ended 31 December 2022, and had a net profit (attributable to owners of the parent) of approximately RMB18.63 million (US$2.62 million) for the six months ended 30 June 2023.

7. As at 30 June 2023:

(1) the Group had net current assets of approximately RMB10.38 billion (US$1.46 billion);

(2) the Group’s current and non-current interest-bank and other borrowings amounted to RMB11.92 billion (US$1.68 billion) and RMB4.49 billion (US$0.63 billion) respectively.

8. As of 31 December 2022, on a standalone basis:

(1) the Company’s total assets were approximately RMB16.20 billion (US$2.28 billion);

(2) the Company’s total liabilities were approximately RMB13.09 billion (US$1.84 billion);

(3) the Company’s main assets were amounts due from subsidiaries of approximately RMB16 billion (US$2.25 billion);

(4) the Company’s main liabilities were current liabilities relating to senior notes (issued by the Company) of approximately RMB6.52 billion (US$0.92 billion) and amounts due to subsidiaries of approximately RMB4.34 billion (US$0.61 billion).

9. As of 31 December 2023, the Company’s total liabilities were approximately US$1.18 billion in principal.

10. The Company’s offshore indebtedness arises from principally the following:

(1) the Existing Notes which are unsecured, governed by New York law, and guaranteed by some of the Company’s subsidiaries (collectively, “Existing Notes Subsidiary Guarantors”);

(2) the Existing Private Debts which are unsecured, governed by Hong Kong law, and guaranteed by the Existing Notes Subsidiary Guarantors; and

(3) the Other Private Debt which is unsecured and governed by Hong Kong law, and guaranteed by the Existing Notes Subsidiary Guarantors and the Onshore Subsidiary Guarantors.

11. The Company’s financial difficulties caused the Company to default on its offshore borrowings. As a result, the Existing Notes are presently in default, and all amounts that are due and payable remain outstanding.

12. On 21 November 2022, China Construction Bank (Asia) Corporation Limited, in its capacity as trustee for the holders of one of the Existing Notes, presented a winding-up petition against the Company (HCCW 430/2022) (“Petition”). The hearing of the Petition has been adjourned to 4 March 2024.

13. As part of its efforts to avoid a liquidation and restore its status as a solvent going concern, the Company has actively pursued debt restructuring, culminating in the development of the Scheme. The Scheme compromises only the Existing Indebtedness, being the Existing Notes and the Existing Private Debts, representing approximately 97% of the Company’s total indebtedness. The Company intends to manage the remaining Other Private Debt through bilateral negotiations.

Principal features of the Scheme

14. The Scheme will seek to discharge the Existing Indebtedness, being the Existing Notes and the Existing Private Debts outlined above. In return, the Scheme Creditors will be entitled to the following Restructuring Consideration:

(1) for those Scheme Creditors who have acceded to the RSA by the RSA Fee Deadline, the RSA Fee of an amount equal to 0.25% of the aggregate principal amount of Eligible Restricted Debt;

(2) an upfront cash payment equivalent to 1% of the outstanding principal amount of the Existing Indebtedness;

(3) at the election of the Scheme Creditors, a combination of new senior notes (“New Senior Notes”) and new convertible bonds (“New Convertible Bonds”) (collectively, “New Instruments”) in an aggregate amount equal to 99% of the outstanding principal amount of the Existing Indebtedness as of the Record Time, plus all accrued and unpaid interest on such Existing Indebtedness up to the Reference Date (the aggregate amount is the “Selection Consideration Calculated Amount”). The Scheme Creditors may elect any proportion of the New Senior Notes and the New Convertible Bonds to be received as their respective Restructuring Consideration; and

(4) additional New Senior Notes equal to 6.0% of the principal amount of the New Senior Notes to be issued by the Company.

Principles governing the sanction of a scheme

15. In considering whether to sanction a scheme, the Court applies well-established principles, which were recently restated in Re China Singyes Solar Technologies Holdings Ltd[1]. The Court will consider in particular the following:

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

(2) 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;

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

(4) 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;

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

(6) 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

(7) 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.

Should the Court exercise its discretion to sanction the Scheme?

16. As in Singyes, the Scheme represents a legitimate effort at debt restructuring for a company facing financial distress. Additionally, the Scheme provides for certain ancillary discharge of claims against the Released Person, comprising mainly:

(1) claims against third parties (notably the Existing Notes Subsidiary Guarantors) in connection with the Scheme Claims; and

(2) claims against third parties concerning the preparation, negotiation, sanction or implementation of the Scheme, the Restructuring Documents and/or the RSA.

17. The discharge of third-party guarantors is uncontroversial: Re Sunac China Holdings Ltd[2]; Re Unity Group Holdings International Ltd[3]. Likewise, the ancillary discharge in favour of third parties concerning the Company’s restructuring steps is also permissible: Re Sunac China Holdings Ltd[4].

18. In...

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