Big waves in restructuring: Sino Ocean plan sanctioned in England and Hong Kong
Despite some choppy waters and strong currents, Sino-Ocean Group Holding Limited (Sino-Ocean or the Plan Company) has successfully had its restructuring sanctioned in both England & Wales and Hong Kong. The English court sanctioned the plan on 3 February 2025 despite it being rejected by two of the four classes of offshore creditors. Unfortunately for the challenging creditors, led by Long Corridor Asset Management Limited (Long Corridor), the various arguments of class manipulation and unfairness found little favour with the judge. In a short judgment, Mr Justice Thompsell sanctioned the plan with one minor amendment1 and was unpersuaded by Long Corridor's arguments.
A victory for the Plan Company which was able to consummate a restructuring plan against the wishes of certain dissenting creditors where the majority shareholders managed to retain a little over 30% of the equity. Some commentators will argue this is exactly what the cross-class cramdown powers were created for: circumventing recalcitrant creditors and paving the way for a swift court-sanctioned resolution to deliver a restructuring that couldn't have otherwise been agreed consensually or through the existing documentation. They will point out that no creditor is any worse off than they would have been in the liquidation that the Plan Company asserted was inevitable if the plan was not approved. The Company's business survives, and jobs are preserved, so all is fair. Others might decry a Hong Kong company using Hong Kong law debt in English proceedings to cram down in the money creditors holding English law debts as objectionable.
One thing is certain from this decision: the English restructuring regime contains powerful and flexible tools, and the toolbox is largely available for foreign debtors2, whether it is a Luxembourg company with German law debt3 or a distressed Chinese property developer. What is fascinating in this case is the creative application of the Rule in Gibbs. Often this common law principle has been used as a shield to prevent English debts from being compromised by foreign insolvency proceedings, now we see it being used as a sword by foreign companies in English proceedings against creditors holding English law governed debts.
The High Court of Hong Kong approved the scheme on 19 February 2025, enabling the dual, inter-conditional restructuring to move a step closer to becoming effective. Long Corridor withdrew its application to object to the scheme on the eve of the sanction hearing and so the scheme went unopposed.
Background
As discussed in our last update, Sino-Ocean (like many over-leveraged Chinese property developers) has been facing harrowing headwinds of poor property sales, low market sentiment and severe liquidity constraints and proposed a dual inter-conditional restructuring of its offshore 'in-scope' debt so as to avoid liquidation. The restructuring involved the use of an English law restructuring plan pursuant to Part 26A of the Companies Act 2006 (the English RP). In addition, to ensure its Hong Kong law debt was effectively compromised, a Hong Kong scheme of arrangement pursuant to Part 13 of the Companies Ordinance (Cap 622) (HK Scheme) was used in parallel. These two tools aim to meet the Plan Company's objective of restructuring approximately USD6 billion of offshore debt by converting the debt into USD2.2 billion of new debt instruments, as well as mandatory convertible bonds and perpetual securities.
Under the restructuring the Plan Company's creditors were divided into four classes of unsecured debt; one class (Class A) governed by the laws of Hong Kong and the other three classes (Classes B-D) governed by English law. It is only Class A which was within scope of the HK Scheme. The classification of creditors into these different classes was approved at the convening hearings in both jurisdictions at the end of 2024.
The purpose of the four classes reflects, among other things, the different rights that Sino-Ocean proposed to offer each class of creditor (even though each class represented unsecured claims and Classes A to C rank pari passu in the liquidation of the Plan Company). In doing this analysis, the Plan Company maintained that the relevant alternative was insolvent liquidation, which Sino-Ocean believed would "trigger severe distress worldwide" across its wider group.
Plan meetings were held at the end of 2024 and the English RP was approved by over 75% in value of those voting in each of Class A and C. However, the English RP was not approved by the requisite statutory majority for Classes B or D. Therefore, at the UK sanction hearing, Sino-Ocean, pursuant to section 901F of the Companies Act 2006, sought an order from the court to exercise its discretion to sanction the English RP notwithstanding the dissent of one or more of the classes of creditors using its powerful, cross-class cram down powers.
Act I: the English RP
Cross-class cram down
For the English court to approve and sanction a restructuring plan where one or more classes dissent, Conditions A and B must be met. In simple terms, these are as follows:
- Condition A: none of the members of the dissenting class would be any worse off than the relevant alternative; and
- Condition B: at least one class of 'in the money' creditors or members have voted in favour.
Both these conditions were disputed by Long Corridor, which itself holds only c.1.5% of the total liabilities being compromised under the plan4, over the course of the three-day sanction hearing. Most notably, the challenges brought by Long Corridor against Conditions A and B covered the following:
Relevant Alternative and Creditor Impact
The hearing opened with a discussion about the relevant alternative and whether an alternative plan could have been more beneficial to creditors. Long Corridor presented a so-called "Alternative Plan" to insolvent liquidation on 1 December 2024. The Plan Company and its main supporter, the coordination committee of bank creditors (CoCom) described this as a "last ditch attempt" by Long Corridor at the "eleventh hour".
The Plan Company expressed in its submissions that even if the English RP fails, Sino-Ocean has insufficient liquidity to commence a new restructuring process and there is no realistic possibility of implementing any other restructuring. The CoCom suggested they would not be prepared to re-open negotiations for the Alternative Plan due to the additional time, costs and execution risks which would follow. Moreover, any alternative plan involving diluting the shareholders of Sino-Ocean would not be provided consensually.
The court agreed that the English RP fairly allocated value among the creditor classes of the Plan Company and considered that insolvent liquidation was most likely to occur. As such it sided with the Plan Company and in doing so, Condition A was met as it was agreed that the creditors were substantially better off under the English RP than liquidation, which the court held was "overwhelmingly the most likely outcome".
In handing down this assessment, the judge also held that unless a putative alternative plan is specified in detail, it is impossible for the court to judge its effect on the creditors, suggesting that dissenting classes should produce a timely, detailed alternative for consideration by the courts. Clearly this is very difficult to achieve in any restructuring when the dissenting creditors are in the minority, faced with information asymmetry and the company has had a significant head start in getting assenting creditors to support their plan. This underscores the importance for creditors to be proactive and seek early engagement with the company and other creditors where it becomes evident that a restructuring is inevitable,
Gerrymandering and Class Composition
The English RP also faced opposition from Long Corridor in respect of the inclusion of the Class A debt, which is governed by Hong Kong law, as an "artificial proliferation" to engineer a consenting class to cram-down the other classes. In setting the tone for the court's point of view, the judge noted that "there is nothing artificial, no whiff of impermissible forum-shopping in the constitution of the Class A creditors as a class".
Long Corridor argued that because Class A debt was governed by Hong Kong law, it cannot be effectively compromised under the English RP and that whether an obligation has been discharged is governed by its proper law so that a compromise of Hong Kong law debt under English law will not be effective outside its jurisdiction. As per the Rule in Gibbs5, a compromise of the Class A debt will be effective in Hong Kong and elsewhere due to the HK Scheme which was sanctioned by the Hong Kong court on 19 February 2025. Long Corridor argued that these "features" of the Class A debt meant that its inclusion as a separate class in the English RP was unnecessary as it was being dealt with separately by the HK Scheme.
However, the court dismissed this objection, finding the inclusion was justified and the gerrymandering claim was "misconceived". The judge reminded Long Corridor that the Class A creditors were "creditors" who are party to an "arrangement" with the Plan Company and their rights were being affected by the English RP. The judge adopted the test applied in Houst6 as to whether the assenting class of creditors were (i) adversely affected by the Plan Company's insolvency; and (ii) substantially impaired by the plan. In assessing the position, the judge looked to the wider restructuring efforts of the Group and concluded that the Class A creditors were affected, and their inclusion could not be described as abusive, artificial or unjustified. The judge dismissed Long Corridor's attempts to suggest that there was a lack of reciprocity if the Class A creditors can use their votes to cram down other classes for a restructuring plan they would not be bound by. However, the judge held that the Rule in Gibbs was "not absolute" and the Class A creditors (who had voted on the plan) had submitted to the jurisdiction of the English courts and therefore were voluntarily agreeing to be bound by English law. The necessity of the HK Scheme was to compromise any Class A creditors who did not elect to submit to the jurisdiction of the English courts (essentially those creditors that would make up 13.8% in value of the class).
Shareholder Equity Retention
The English RP allows existing majority shareholders, being primarily state-owned entities (SOE), to retain a significant portion of equity post-restructuring. China Life Insurance Group Co. and Daijia Insurance Group Co held approximately 60% of the shares in Sino-Ocean prior to the implementation of the English RP and afterwards, these entities will continue to hold over 15% each. Long Corridor asserted this was unfair as no additional funds were being injected by them and this was not a case of 'in the money' creditors being free to "gift" the restructuring surplus to the shareholders because the dissenting classes were also 'in the money' and did not so consent. However, the court upheld the Plan Company's decision to take this approach, emphasising the strategic importance of Sino-Ocean remaining a state-owned enterprise to secure favourable financing and other intangible benefits including a more "helpful reception by state organisations, for example in relation to planning matters" which would not be possible if the equity was in private hands. Justice Thompsell stated that "although the plan might appear "unduly generous" to existing shareholders, the retention of most of the equity was justified on the basis of the benefits in the [Plan Company] remaining a Chinese-state-owned enterprise." He agreed this would give Sino-Ocean more favourable terms with the debt markets as well as greater opportunities in the PRC generally than if it were privately owned. The judge favoured the expert evidence of the Plan Company over Long Corridor's expert on this point finding that the evidence of the Plan Company was based on "market perceptions" and chimed with "common sense".
Discounting Votes
Another objection from Long Corridor centred around whether the votes of a creditor affiliated with one of the SOE shareholders should be discounted from the Class C votes as they were adverse to the interests of the class as a whole. If Long Corridor was right the votes obtained in the Class C meeting could not be relied upon as creating an assenting class to engage the cram down powers7. The court found no substantial evidence that the creditor's vote was influenced by considerations which were adverse to the creditor class. The judge dismissed the objections of Long Corridor and held that even if he was wrong and that the decision to approve the plan was made to favour the shareholder, this would have been at best an "additional reason" rather than the "predominant reason" for the vote.
Accordingly, the court held that Condition B was therefore also satisfied leading the court to exercise its discretion to sanction the English RP.
Act 2: the Hong Kong Sanction Hearing
Adjourned until the 19 February 2025 to enable the English RP to be considered and decided upon first, the Hong Kong court has now approved the HK Scheme in an orderly fashion. Long Corridor had initially filed an application to object (despite it not being a Class A creditor), but on the eve of the sanction hearing it withdrew its application. This means Sino-Ocean can move forwards towards implementing its holistic restructuring of its offshore debts.
The first of many, but certainly not the last?
The Sino-Ocean decision may well open the floodgates for similar applications as Sino-Ocean's peers look to adopt a similar playbook. Will this decision be a shot in the arm to stalled restructuring negotiations, especially where both English and Hong Kong law debts are in the capital structures of struggling debtors or other sufficient connections to England exist?
After all, if the last four years have taught us anything, it has shown that distressed Chinese developers like to follow their peers. First it was the out of court liability management exercises seeking short term debt extensions in the hope the property market would soon recover from its malaise. More recently, we have seen some efforts to deal more holistically with balance sheets using Hong Kong schemes of arrangements, the terms of which being similar from one developer to the next. Notwithstanding those efforts, in some cases fatigued stakeholders have already been forced back round the table as those restructurings have proved to be insufficient to address liquidity needs in the face of bullish forecasts for the market's recovery and future property sales. Will using the English courts to deliver more drastic debt restructurings where a consensus can't be reached become the latest trend and will the prospect of being crammed down expedite negotiations?
Regardless of whether others follow suit, this judgment marks the first of many things for the English jurisprudence. The first time a real estate developer based in the PRC or Hong Kong, has availed itself of an English technique to restructure offshore debts8. The first time the English court sanctioned a plan using foreign law debt as the assenting class to cram-down English law creditors. The first time we have seen a "cram-across", namely a restructuring being imposed on dissenting pari passu creditors.
The creative application of this restructuring technique demonstrates the flexibility and utility of the tool as well as the pragmatism and international reach of English restructuring and insolvency law. The decision also highlights how the Rule in Gibbs, so often used as a shield by creditors of English law debts to avoid their claims being compromised in foreign proceedings, can be used as a sword against them.
Against the backdrop of continued distress in the Chinese real estate sector, we expect to see more Hong Kong incorporated property developers that have issued English law governed debt look to the English courts to help them successfully restructure their offshore debts.
1 It was a requirement that the State-owned shareholders should undertake to retain their equity for at least two years and the Plan Company was required to use all reasonable endeavours to ensure they enforced such an undertaking. Long Corridor insisted on 10 years, but the court held that two years was sufficient.
2 Sufficient connection to England is required, but this can be a relatively low bar for a debtor, as has been seen by the authorities, for example an English obligor, English law governed debt, centre of main interests moved to England have all been a "sufficient" nexus.
3 Re Project Lietzenburger Straβe Holdco S.à r.l. [2024] EWHC 468 (Ch).
4 Or USD85.3m across Classes B to D. Despite Long Corridor representing the views of a much larger "Ad Hoc Group", no evidence in support of this assertion was filed as evidence in the proceedings.
5 Anthony Gibbs & Sons v La Societe Industrielle et Commerciale des Metaux (1890) 25 QBD 399.
6 [2022] BCC 1143.
7 If the Affiliate's votes were excluded from the voting, the statutory threshold would not have been met. 63.1% in value of Class C creditors present and voting (excluding the Affiliate's votes) voted in favour of the plan, so it was hard to make the case that the Affiliate's votes were not representative of the class as a whole.
8 This is the second time a Hong Kong company has used Part 26A to restructure its debts, Hong Kong Airlines promoted a dual Hong Kong-English restructuring in 2022 – which marked the first time that parallel English plan and Hong Kong scheme proceedings were successfully used to restructure Hong Kong, Chinese and English law-governed debts.
