Sino-Ocean – restructuring plan with parallel Hong Kong scheme

This restructuring plan entailed a dual inter-conditional restructuring plan and Hong Kong scheme of arrangement by a Hong Kong registered company. The governing law of the debt that was being restructured through the scheme was English and Hong Kong law governed. The parallel Hong Kong scheme was needed as Hong Kong, like England, applied the rule in Gibbs. This is the rule that an English court (or in this case Hong Kong court) will not give effect to a discharge under a foreign insolvency process of an English law (in this case Hong Kong law) governed debt.
 
The English plan broke the creditors, each unsecured, down into four different classes, three classes that ranked pari passu as against the plan company, but which were separated into different classes on the basis of their differing recourse rights against co-obligors and a fourth class that was subordinated. The plan entailed the conversion of some of the debt into new loan notes and new securities in the form of convertible bonds mandatorily (MCBs) converting into shares after 24 months. Existing shareholders were to retain their equity but would be diluted down to 53.8% of the total equity following conversion of the MCBs.

Two of the pari passu classes, one of Hong Kong law governed debt and one of English law governed debt, voted in favour of the plan; the other two classes voted against. At the sanction hearing one creditor appeared to oppose sanction on the following grounds among others:

• The assenting Hong Kong law governed class could not be effectively compromised under the plan given the rule in Gibbs: this class had been wrongly included solely to create a cramming class. 
  • The court however, held that the rule in Gibbs isn't absolute, there being an exception to the rule if the creditor submits to the jurisdiction, and a creditor would so submit if it voted on a plan (whether for or against). The fact that the Hong Kong scheme was being used in order to ensure that the restructuring was effective in relation to the small remainder of the creditors in that class who had not voted on the English plan wasn't any reason for disregarding this class as a cramming class.
• The shareholders should have been included as a class given the dilution of their shares.
  • The court distinguished the earlier decision in In re Hurricane on the basis, inter alia, that in the instant case it wasn't the English plan that would dilute the shareholders, but instead the issuance of the MCBs which the shareholders had already approved at an extraordinary general meeting. 
• The plan was unfair in that it permitted the shareholders to retain too much of their equity.
  • The court agreed with the plan company’s justification for the retention, being that in order to maintain its status as an entity owned by the Chinese state the two state owned shareholders had to retain at least a 15% shareholding each and, if state owned status was maintained, this would unlock benefits that would increase the restructuring surplus.
  • The opposing creditor pointed out that there was nothing in the plan preventing these state shareholders from disposing of their interests. After the sanction hearing these shareholders confirmed their willingness to give undertakings to retain their shares for two years and the court viewed that as sufficient to answer the opposing creditor’s point.

The court went on to sanction the plan.

 In re Sino-Ocean Group Holding Limited [2025] EWHC 205 (Ch), Chancery Division

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