The English High Court has sanctioned the Sino-Ocean Holdings restructuring plan in the face of strong opposition from Long Corridor Asset Management, which held c.1.5% of the plan liabilities.  

The plan is the first cram-across of pari passu creditors, by a class consisting of non-English law governed debt subject to an overseas scheme, and the first time the Court has considered issues of class manipulation in depth in a restructuring plan context.

The plan saw the Hong Kong incorporated and HKSE listed company compromise USD6bn of unsecured debt out of a total USD6.5bn debt stack, in exchange for USD2.2bn new debt, with the balance of the plan liabilities reinstated as new mandatory convertible bonds (“MCBs”) or perpetual securities. 

Treatment of shareholders

The company’s main shareholders, two Chinese state-owned entities (“SOE Shareholders”), retained c. 30% of the equity interests between them, with the minority shareholders’ interests reduced to c20.7%.  Under the plan, creditors would hold 49.3% of the equity.  Long Corridor’s chief commercial objection to the plan was that this was too generous to shareholders, who were not putting in new money. The company argued that maintaining minimum holdings for the SOE Shareholders of 15% each provided various benefits to the company, resulting in a higher valuation of the plan consideration for creditors than under any alternative plan.

Classes

Creditors were split into four classes (Classes A to D) for voting purposes, based on their rights against the group companies in the relevant alternative of liquidation.  The Class A debt was governed by Hong Kong law, and due to the rule in Gibbs, was subject to an interconditional parallel Hong Kong scheme of arrangement.  The debt in Classes B to D was governed by English law. Only Classes A and C voted in favour of the plan.

Long Corridor’s challenge

Long Corridor argued:

• the relevant alternative was a plan in which the creditors received a greater share of the equity;
• the inclusion of Class A as a cramming class, when it was to be restructured in a parallel Hong Kong scheme of arrangement, was unnecessary and bad forum shopping;
• Class C included an affiliate of an SOE Shareholder, and their vote should be discounted: without it there wasn’t a sufficient majority to make Class C an assenting class;
• the court had no jurisdiction to sanction the plan in any event as, following Hurricane, the shareholders should have voted at a plan meeting as they were affected by the plan as a result of a dilution of their equity; and
• the plan was unfair as it disproportionately distributed the benefits of the restructuring to the shareholders.

In his judgment, Mr Justice Thompsell made the following key findings:

Relevant Alternative

• The definition of “relevant alternative” requires a particular alternative to be identified.  Unless a putative alternative plan is specified in detail it is impossible for the Court to judge the effect on creditors of that plan.
• A relevant alternative must be something where there is at least some prospect of implementing the alternative, and on the evidence there was no prospect that the plan company could hang on to do anything other than go into liquidation.

The inclusion of Class A as a separate cramming class

• The plan had a substantial effect on the Class A creditors. They were party to an “arrangement” and entitled to be included and vote on the plan.  They had a genuine economic interest in the plan company in the event of the relevant alternative, supported the plan and the Hong Kong scheme, and had submitted to the jurisdiction of the English Courts in voting for the plan, which would be recognised by Hong Kong law.
• Following Houst, there is nothing inherently abusive in the inclusion of an assenting class within a plan, even where this had the effect of facilitating a cross-class cram down, if the plan has a meaningful impact on the assenting class. 
• There was no whiff of impermissible forum-shopping by including the Class A creditors in the plan.  Considering the entirety of the reorganisation, the arrangements affected all classes, and the use of foreign schemes or plans to assist with the effectiveness of an English scheme or plan is commonplace: see Hong Kong Airlines, where an English plan was proposed in parallel with a Hong Kong scheme of arrangement to compromise the Hong Kong and PRC law debt.
• An unusual feature of this plan was that pari passu ranking debt was not offered the same plan consideration and formed separate classes but there were good reasons for the differentiation: the company was trying to give creditors a similar multiple of the returns they would obtain in the relevant alternative. 

Discounting the SOE Shareholder affiliate from the Class C vote

• There was no reason for the Court to discount or disregard the votes of the SOE Shareholder affiliate creditor.  On the evidence, the creditor, a regulated investment manager, exercised its discretion in accordance with what it considered to be the best interests of its client, and acted in accordance with its conflict of interest policies. Any motivation to assist the affiliate SOE Shareholder was an additional rather than the predominant reason for it approving the plan. It was rational to allow the SOE Shareholders to retain at least 15% equity each as this increased the value of the plan consideration, and even if the plan was unfair, it was better than the alternative of liquidation.

Should the shareholder class have voted?

• The shareholders consented to the dilution of their shares by a shareholder resolution, and therefore it wasn’t necessary to convene a separate shareholders’ meeting to vote on the plan.  The plan itself did not disapply the ordinary rights of the shareholders under the company’s articles and the Hong Kong Companies Ordinance without shareholder consent, which distinguished this case from Hurricane.

Treatment of creditor groups in the plan

• The departure in pari passu treatment of the creditor groups was justified as it produced a fair distribution of the benefits of the restructuring.  The different treatment of the creditor groups was explained by their having different rights against other companies in the group and so would be anticipated to receive different recoveries.  The company had tried to ensure that each class of creditor obtained a similar multiple of those recoveries in their share of the plan consideration. 

Treatment of the shareholders

• The justification for treating the shareholders substantially better than they would do in the relevant alternative (and disproportionately so in relation to the creditors) was the positive impact on the value of the plan consideration of the SOE Shareholders maintaining minimum holdings of 15% each compared to any alternative plan which involved issuing more shares or convertible instruments to creditors. Following Adler, this was a good reason or proper basis for departing from a division of the benefits of a restructuring plan that is strictly proportionate to how the different classes of creditor and shareholder would fare in the relevant alternative.

• Comfort was given to Long Corridor via undertakings from the company to prevent the possibility of an increase in share price before conversions of the MCBs and thereby retention by them of an even greater percentage of the equity, and by the SOE Shareholders to retain their existing shareholdings for two years after the restructuring effective date.

Was a better or fairer plan available?

• When considering whether the plan involves a fair distribution of the benefits of the restructuring the Court is entitled to ask whether a better or fairer plan is available. On the evidence before the Court there was no plan which could have been put forward which would provide a better return to creditors by giving them substantially more equity.

The Hong Kong scheme of arrangement is expected to be sanctioned on 19 February 2025.