RE MOODY TECHNOLOGY HOLDINGS LTD

HCMP 1072/2021

[2024] HKCFI 452

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1072 OF 2021

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D E C I S I O N

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1.  I have before me an unusual application. The Company seeks the modification of the scheme of arrangement sanctioned by me on 28 June 2022[1]. What makes the application unusual is the circumstances in which it has been necessary.

2.  Mr Tang Chung Wah Alan and Mr Kan Lap Kee Terry were appointed in the scheme as the initial scheme administrators. It would appear that they did not understand their function and duties as set out in [31] of the scheme. In particular they seem to have thought that they should in some way monitor the implementation of the commercial transactions which formed part of the restructuring of which the scheme was part rather than simply call for submissions of claims by scheme creditors, determine them and then make the distribution of the scheme consideration which involved an equity for debt swap.

3.  It appears to have come to their attention that an investment which formed part of the proposed restructuring of the debt described in the explanatory statement had not been and might not be completed. This seems to have caused them to think that they should inquire of the Company how the matter was being resolved and that it might in some way interfere with the implementation of the scheme, which given its terms, it did not. In the fullness of time this led to the Company agreeing with the initial scheme administrators and they should be replaced with individuals from Manivest.

4.  Two particular problems arose in relation to the implementation of the scheme as a result of the dispute that arose between the Company and the initial scheme administrators and their replacement. The first was that the initial scheme administrators had calculated the number of scheme shares that needed to be issued by reference to the total value of the claims that had been submitted rather than calculating them after it had been determined what the total value of the admitted claims were. Secondly it appears that during the change of scheme administrator all these shares were allotted to scheme creditors, even though not all the claims had been assessed and admitted.

5.  As a consequence the present application has been made first to change the identity of the scheme administrators, which it is proposed will be Mr Lai Wing Lun and Mr Osman Mohammed Arab and also to make changes which provided in clauses 7A and 8A as they will become, for the new scheme administrators when they have determined all scheme claims to confirm the scheme share entitlements of scheme creditors and, depending on the outcome of that process, to cancel any scheme shares which have already been issued in excess of that to which a scheme creditor is entitled.

6.  The time periods for the assessment of scheme claims necessarily has to be adjusted from the periods specified in the original approved scheme.

7.  As I have said this is an unusual application and counsel have not been able to find any authorities directly on point and I am not aware of the Hong Kong court ever having to deal with a similar situation. That having been said guidance can be found in various authorities as to how the court should assess an application for modification.

8.  In relation to modifications made at the time of the scheme meeting I say this in Re Hong Kong Building and Loan Agency Limited[2].

“9. The decision does not contain much consideration of the way which the court should approach modifications made at a Scheme meeting. Once again, it seems to me to be largely a common sense matter. If the amendments are substantial, then it may be they would jeopardize the ability of the company to obtain sanction of the Scheme. If as in my view is the case in respect of the meeting that take took place on 28 June 2019, they are largely matters of detail which do not impact on a consideration of whether or not the Scheme should be approved, they will not.

10. It seems to me the relevant principal is to be found in decisions such as Re Mongolian Mining Corp [3], which explain that it is necessary for Creditors to be given sufficient information about the Scheme to enable them to make an informed decision whether or not to support it. If modifications are either sufficiently explained prior to a meeting, or if at the meeting they are sufficiently minor that they are not likely to infringe this principal, it seems to me that they would be unobjectionable.”

9.  In relation to the modification of scheme of arrangement, the English court has held the following:

(1)  In Re Aon plc[4], the court sanctioned a scheme of arrangement and confirmed a reduction of capital after examining two modifications to the scheme made after it had been approved by shareholders. The court noted that the scheme was drafted in wide terms to allow modifications where the company and the other party gave consent and the court approved. It was also satisfied that what was contemplated “would not have caused any reasonable shareholder to take a different view in relation to the scheme had it been put before them”[5].

(2)  In Re Equitable Life Assurance Society[6], the court noted that the scheme itself allows for modifications or additions, and for conditions which the court may approve or impose. It found that “[t]he provision is salutary, because there may be some immaterial error or oversight, or change of circumstances, that needs to be corrected or covered. But it would be quite wrong to use the provision so as to foist on a class of creditors something substantially different to what has been approved at the relevant meetings”[7].

10.  It seems to me to be clear that the court can properly modify a scheme after it has been approved if, first, the scheme provides for an application for an amendment to make the court. This is expressly provided for in clause 37.2 of the present scheme. Secondly, if the modifications are minor and not such as it might reasonably be thought would have caused a scheme creditor to have decided to vote against the scheme. The current proposed modifications are plainly intended simply to ensure that the scheme is administered as was originally intended and therefore satisfy this second criteria.

11.  I will, therefore, make an order for the amendments to the scheme of arrangement sought by the Company.

Ms Rachel Lam SC and Ms Tinny Chan, instructed by Eric Chow & Co, for the Company

HCMP 1072/2021

[2022] HKCFI 1992

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1072 OF 2021

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REASONS FOR DECISION

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Introduction

1.  Upon the Company’s application by Originating Summons dated 28 July 2021, on 20 April 2022, this Court ordered that the Company do have leave to convene a meeting of its Scheme Creditors (“Scheme Meeting”)  to consider and approve a proposed scheme of arrangement (“Scheme”).

2.  The Company convened the Scheme Meeting on 8 June 2022. The Scheme was passed by around 99.37% in value and 98.44% in number of the Scheme Creditors present and voting at the Scheme Meeting.

3.  By its Petition dated 20 June 2022, the Company seeks an order, inter alia, that the Scheme proposed to be made between the Company and the Scheme Creditors be sanctioned by this Court.

The Company

4.  The Company was incorporated in the Cayman Islands on 29 April 2013, and later de-registered and continued in Bermuda as an exempted company on 23 May 2019.  It has been listed on the Main Board of the Stock Exchange of Hong Kong (“SEHK”)  since 25 April 2014.

5.  The Company is a China-based investment holding company whose direct or indirect subsidiaries (together with the Company, the “Group”)  are currently principally involved in the sales of shoes, clothes and others good as well as the manufacturing and the sales of fabric and yarns in the People’s Republic of China.

The Financial Status of the Company and the Group

6.  Based on the Company’s Annual Report for the financial year ended 31 December 2020, the Company and the Group are both insolvent:

(1)  The Company had net current liabilities of approximately RMB 533.42 million and net liabilities of approximately RMB 796.24 million, with total assets of approximately RMB 7.137 million and total liabilities of approximately RMB 803.38 million.

(2)  The Group reported net current liabilities and net liabilities of approximately RMB 929.76 million and RMB 959.29 million respectively, with total assets of approximately RMB280.26 million and total liabilities of approximately RMB 1,239.54 million.

(3)  The indebtedness of the Company is largely comprised of the Bonds issued by the Company, which amounted to 97.31% of the Company’s liabilities.  The Company had issued a total of 230 Bonds amounting to approximately RMB 781.70 million in principal, which are unsecured and bearing interest rates at a range of 1.5% to 40% per annum.  These also included bonds issued in the form of three global notes held in a common depositary for the clearing systems.

(4)  The Company also has other payables, which are mostly salaries due and owing to the Company’s former directors. These other payable make up 0.67% of the total liabilities of the Company.

The Company’s Default on the Bonds and Reasons for Decline in Financial Position

7.  As explained above, the indebtedness of the Company is largely comprised of the Bonds, which include three global notes held in a common depositary for clearing systems issued by the former management between 2014 and 2019 for the purposes of funding the construction of factories, developing the Group’s Fabrics Business and other business activities, and meeting the Group’s need for working capital in general.

8.  The Company and the Group had encountered liquidity issues and were unable to repay the Bonds because of, inter alia: (1) changes in the PRC government’s cotton policy which severely affected the domestic demand for the Company’s cotton; (2) failure of the Company’s polyetherimide business introduced in 2016 and briefly run till 2017; (3) various impairment of investments, trade and other receivables and prepayment; and (4) poor liquidity and risk management by the former management of the Company reflected in the issuance of the Bonds.

The Scheme and Returns Comparison

9.  In view of the financial position of the Company and the Group, and having considered the interest of the stakeholders, the Company and its JPLs (which were appointed by the Bermuda Court on 24 October 2019 and recognised by this Court on 24 January 2020)  considered that it would be appropriate to put forward the Scheme to restructure the Company’s debts.

10.  The Scheme is a simple debt-for-equity swap which seeks to compromise the Company’s unsecured liabilities (mostly under the Bonds).  In this regards:

(1)  All unsecured claims (with the exception of claims by other companies within the Group against the Company and Scheme Costs)  and the unsecured claims of Preferential and Secured Creditors are Scheme Claims and will be compromised under the Scheme.

(2)  The unsecured claims against the Company largely comprise of debt liabilities arising from the outstanding Bonds issued by the Company, including the three global Notes issued by the Company.

11.  From the Effective Date, the Scheme Claims are discharged and extant proceedings against the Company will be discontinued.  In return, Scheme Shares will be allotted to the Scheme Creditors with Admitted Claims.  Upon the completion of the Scheme, the Scheme Creditors will hold up to approximately 98.1% of the enlarged share capital of the Company.

12.  As soon as practicable after the Scheme Administrators or the Adjudicator have determined or adjudicated all Scheme Claim(s)  (as the case may be), the Scheme Administrators shall determine the Scheme Shares Entitlement of each Scheme Creditor:

(1)  The Scheme Shares will be allotted and issued to the Scheme Creditors with Admitted Claims in the principal amount equal to 100% of the Admitted Claims in accordance with the terms of the Scheme.

(2)  The Scheme Shares will be issued at the price of HK$0.317 per share, being the average closing price as quoted on the Stock Exchange for the last five consecutive trading days immediately preceding the date of the Notice of the Scheme Meeting.

(3)  The number of Scheme Shares to be allotted and issued to each Scheme Creditors shall be rounded down to nearest integral number of Scheme Shares, and no fractions of Scheme Shares shall be allotted and issued.

13.  As to the returns comparison:

(1)  If the Scheme becomes effective, 98% of the Company and 63% of the Group’s liabilities as at the end of 2020 and 99% of the Company and 64% of the Group’s liabilities as at the end of 2021 will be compromised.

(2)  The Company will return to solvency and the Board will proceed to implement a business plan with the goal of returning the Group as a whole to solvency, by inter alia: (1) conducting further fundraising exercises for the Group, (2) expanding the scale of sales generated by the Group’s shoes and clothes business, (3) expanding the scale of the Group’s elastic webbing segment by acquiring a majority stake in Leader Elastic Limited, and (4) restructuring the loss-making fabrics business of the Group through reinvestment or divestment.

(3)  In return, should the above business plan be successfully implemented, and subject to various qualifications explained in the Explanatory Statement, the estimated value of the Scheme Shares according to the projected net asset value of the Company represents a recovery rate of 10.27% (as at 31 December 2024)  if the Group disposes of its Fabrics Business, or 2.03% (as at 31 December 2025)  or 8.00% (as at 31 December 2026)  if the Group keeps its Fabrics Business.

(4)  If the Scheme is not approved and implemented, the business plan will not be able to proceed further and it is likely that the Company would be placed into insolvent liquidation.  The expected recovery rate to be made available by the Company to the Scheme Creditors in a liquidation is likely to be approximately 0.89%.

This Application

14.  The function of the Court at the hearing of a petition to sanction a scheme is to consider:

(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 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 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.

See Re Da Sen Holdings Group Ltd[1].

Permissible Purpose

15.  It is well established that debt restructuring is a permissible purpose of a scheme of arrangement: see Re Mongolian Mining Corp[2].  This requirement is satisfied in this case.

Class

16.  In considering the issue of class, 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.  As explained in Da Sen[3].

(1)  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.

(2)  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 normally only ever arise at the sanction stage as a question for consideration.

(3)  The third principle is that the court should take a broad approach to the composition of classes, so as to avoid giving unjustified veto rights to a minority group of creditors, such that the test for classes becomes an instrument of oppression by a minority.

(4)  The fourth principle is that the court has to consider, on the one hand, the rights of the creditors in the absence of the scheme and, on the other hand, any new rights to which the creditors become entitled under the scheme.  If, having carried out that exercise, there is a material difference between the rights of the different groups of creditors, they may, but not necessarily will, constitute different classes.  Whether they do so depends on a judgment as to whether such a difference makes it impossible for the different groups to consult together with a view to their common interest.

(5)  In applying the above test, the starting point is to identify the appropriate comparator: that is, what would be the alternative if the scheme does not proceed.

17.  I accept that the Scheme Creditors properly voted in a single class.  The appropriate comparator here is an insolvent liquidation because, absent the Scheme, an insolvent liquidation of the Company would be unavoidable.  The Scheme Claims are the Company’s general unsecured debts.  All Scheme Creditors are given the same option for distribution under the Scheme.

Sufficient Explanation

18.  The principles that govern the sufficiency of the explanatory statement are well established.  The statement should be sufficient to enable the Scheme Creditors to exercise a reasonable judgment as to whether the Scheme is in their interests, and to reach a sensible decision as to its benefits; Scheme Creditors are assumed to be intelligent and can be expected to read the explanatory statement as a whole.  This is particularly so where many of the Scheme Creditors of the Company are sophisticated institutional investors: see Re Winsway Enterprises Holding Ltd[4].

19.  The Explanatory Statement sets out the details in relation to the ongoing restructuring of the Group as well as the circumstances leading up to and the reasons for the Scheme.  There is also a summary of the main features of the Scheme: Letter from the Provisional Liquidators and the Board, Section 2 (Background to and Reasons for the Scheme), Section 3 (The Scheme and the Restructuring)  and Section 12 (The Advantages and Disadvantages of the Scheme).

20.  The Company has explained why it believes it is possible for the Group as a whole to return to a position of solvency after the Scheme for reasons set out in Section 2.6 (Future business plan and forecast)  of the Explanatory Statement and Appendix 9 (Business Forecast)  of the Scheme Document.  The various assumptions made in the business forecast are also fully explained in Appendix 9.

21.  The estimated returns to the Scheme Creditors under the Scheme and in a liquidation scenario are fully explained with a detailed liquidation analysis: see Section 13 of the Explanatory Statement and Appendix 7 of the Scheme.

22.  The risks associated with the Scheme were highlighted and explained in the Risk Factors set out in the Letter from the Provisional Liquidator and Section 5 of the Explanatory Statement.

23.  I am satisfied that there is sufficient information for an honest and intelligent creditor having regard to relevant considerations to make a decision whether or not to support the Scheme.

Statutory Majorities Met

24.  The Court’s directions for convening a meeting of creditors and reporting the result to the Court have been complied with.  The statutory majorities were comfortably satisfied: 99.37% in value and 98.44% in number of the Scheme Creditors present and voting at the Scheme Meeting voting in favour of the Scheme.

Whether the arrangement might be reasonably approved by an intelligent and honest person

25.  The Scheme is clearly one which an intelligent and honest person might approve.  This is borne out by the vote at the Scheme Meeting.  The Court should be slow to differ from the majority view, and should give effect to creditor democracy unless there is something glaringly wrong with the Scheme: see Da Sen[5]; Re National Arts Entertainment and Culture Group Ltd[6].

Transnational Considerations

26.  The Company is an offshore company.  To justify the Court exercising its jurisdiction to sanction a scheme in respect of a foreign company, it is necessary to demonstrate a sufficient connection between the Scheme and Hong Kong.  This requirement is plainly met in this case.  The Company is listed in Hong Kong.

27.  In the present case, the bulk (if not all)  of the Company’s liabilities are governed by Hong Kong law.  As such, the Scheme (if sanctioned by this Court)  will be effective in compromising the debts in question: see e.g. Re Da Yu Financial Holdings Ltd[7]and Re Grand Peace Group Holdings Ltd[8]. It is unnecessary to introduce a parallel scheme in Bermuda.

Decision

28.  For the above reasons I shall sanction the Scheme.

Mr Terrence Tai and Ms Tinny Chan, instructed by Winston & Strawn, for the company