Howse Williams ("HW") represents a Cayman-incorporated entity listed in Hong Kong in obtaining sanction from the Hong Kong court for a scheme of arrangement involving novel points of law. A special feature of this scheme is that it involves the scheme company assuming liabilities of its subsidiaries and discharging subsidiaries' debts, so that the creditors of those subsidiaries also benefit from and be subject to the scheme.
The judgment was handed down by the Honourable Mr. Justice Harris on 11 November 2022 and confirms that while a deed of contribution may make the effect of the scheme easier to understand, it is not necessary. This brings the position in Hong Kong in line with other Asian jurisdictions.
The Company is a Cayman-incorporated entity listed in Hong Kong and has subsidiaries in Hong Kong, Mainland China, Malaysia and the BVI. The Group’s key businesses consist of the provision of leasing services of energy saving systems, consultancy service, and trading of energy saving products.
The Company's main indebtedness are governed by Hong Kong law and arises from loans as well as guarantees for loans obtained by affiliated entities. According to the Company's latest audited accounts, the Company is at least cash-flow insolvent, and the Company would likely have gone into liquidation without this scheme.
Both cash and equity options were offered to each creditor under the scheme.
Under the cash option, creditors would receive an initial cash payment of 5% of the principal and up to 95% over the course of 30 months and the interest on the outstanding principal would be 2.5% per annum.
Alternatively, under the equity option, scheme creditors would be entitled to receive new shares at a premium of 25% over their average closing price in the last five consecutive trading days before the scheme’s effective date.
The creditors' estimated recovery of a successful restructuring is 100% of the principal under the cash option. If the Company went into liquidation, the creditors' estimated recovery would drop to approximately 51%.
Creditors holding 99.4% of the claims voted in favour of the scheme.
A Deed of Contribution is an instrument that allows a company to become joint obligors with the party that originally borrowed the sum. This instrument is often used in England to allow English companies to take on debt for their European-incorporated Special Purpose Vehicles.
On the issue of third party releases, the Hong Kong court confirms that entering into a deed of contribution is not necessary and prefers the more pragmatic approach adopted by the Singapore Court of Appeal in the case of Pathfinder Strategic Credit v Empire Capital Resources. This "straightforward trail" has also found support in the UK and this position arises out of the understanding that a claim can be pursued against a parent company regardless of whether or not there is a deed of contribution.
In considering the international effectiveness of the scheme, the Hong Kong court is of the view that there is no need for the scheme to be effective in every jurisdiction worldwide, but that the scheme should be effective in the key jurisdictions in which the company operates or has assets. The Hong Kong court referred to authorities from the English court and concluded that where governing law of the debt affected by the scheme is Hong Kong law, the scheme can generally be expected to be internationally effective.
As the global economy is slowing, clarity on restructuring procedures is growing increasingly important.
Although, the Hong Kong court acknowledges the potential need for a deed of contribution in certain circumstances, it considers that it is not an essential requirement to give effect to a scheme of arrangement.
In terms of international effectiveness, even where there is no parallel scheme or recognition application in other jurisdictions, where claims are governed by Hong Kong law, a scheme sanctioned by the Hong Kong court is generally expected to be internationally effective.
A copy of the decision is available here.
The HW team comprises partner Janie Wong, together with Elaine Ng, Hugo Tam, Hilary Chan, Hannah Tsang and Joseph Ong. We advise on restructuring, insolvency and special situations practice providing clients including investors, boards and shareholders of distressed corporate debtors, insolvency office holders, financial institutions, hedge funds, private equity funds and official and ad hoc committees, financial restructuring legal solutions. We are a cross-departmental practice that draws on the expertise of our corporate / M&A, dispute resolution, insolvency and banking practices to provide seamless service to our clients covering the Hong Kong aspects of cross border restructuring situations.
Howse Williams is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.
Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; trusts and wealth preservation; wills, probate and estate administration; property and building management; banking; fraud; distressed debt; financial services/corporate regulatory and compliance.
As an independent law firm, we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.
Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice. Please contact [email protected] if you have any questions about the article.