From Hong Kong to England and back, Sino Ocean's voyage - plain sailing or choppy waters?
The courts in England and Hong Kong have given the green light for Sino-Ocean Group Holding Limited (Sino-Ocean or the Plan Company) to convene creditor meetings for the inter-conditional, proposed restructuring of its unsecured offshore debt in England & Wales and Hong Kong. As part of the English restructuring plan process, the creditor meetings will be convened to allow creditors to vote in four classes on the proposals. In Hong Kong, there is only one class of creditor who will vote on the proposed restructuring. This is no doubt a success for the Plan Company who can now sail towards the next port, but is a successful restructuring on the horizon? It seems there may be some choppy waters yet to come. At the convening hearing, an ad hoc bondholder group challenged the fairness of the plan and the composition of the classes and reserved the right to make further arguments at the sanction stage (including in relation to the relevant alternative). As such, this case continues to be hotly contested and controversial.
Creditor meetings are due to take place on 22 November 2024 for both the English and Hong Kong restructurings. Provided these are successful, sanction hearings have been scheduled for week commencing 13 January 2025 in England and on 24 January 2025 in Hong Kong.
Background
Sino-Ocean is a major property developer incorporated in Hong Kong with 40.83% of its shares listed on the Hong Kong Stock Exchange. Its key shareholders include China Life Insurance (29.5%) and Dajia Life Insurance (29.58%) who are both Chinese government owned entities. Whilst the Plan Company has a very large portfolio and operations on a tremendous scale, most of its assets are located in the People's Republic of China (PRC) meaning the state-backed support is vital. In addition, the Plan Company is a parent to a number of subsidiaries globally, including Sino-Ocean Land (Hong Kong) Limited (HK Co) as part of its group (the Group). However, like many of its peers in the Chinese property market, Sino-Ocean has faced financial troubles for several years.
To resolve these financial difficulties, Sino-Ocean and HK Co have resorted to a holistic restructuring involving parallel schemes in both Hong Kong and England & Wales to restructure part of the Group's unsecured offshore debts totalling USD5.6 billion. These efforts come with the hope of restoring the Group back to financial health by deleveraging and staving off liquidation proceedings from various financial creditors. The most pressing of which is a twice adjourned winding-up hearing in respect of a petition by the Bank of New York Mellon in Hong Kong for an undisputed debt of USD13 million.
The out-of-scope and in-scope offshore debts
Sino-Ocean has a significant amount of debt in its capital structure. To simplify its capital position, the debt can be divided into two categories, namely:
- Debt totalling approximately USD6 billion which forms the basis of the restructurings (In-Scope Debt); and
- Debt totalling approximately USD500 million which is not to be compromised by the proposed restructurings (Out-Of-Scope Debt).
The In-Scope Debt consists of English law governed notes and perpetual securities and Hong Kong law governed loans.
Whilst in the debt documents themselves the Plan Company is described as a guarantor of the various debts, Sino-Ocean has since signed deeds of contribution to assume the position as principal debtor for the In-Scope Debts. This makes the Plan Company the focus of the proposed restructuring and is a common technique employed in England and Wales (and other jurisdictions) to achieve third party releases1 and to obviate the need for multiple plan companies.
The English Restructuring Plan
The Mechanism
In devising its restructuring proposal through the English court system, Sino-Ocean has access to the restructuring plan, a powerful tool implemented through Part 26A of the Companies Act 2006 (the English RP). This legal framework enables a company to restructure its debt with the consent of one class of creditors, even if the other classes do not vote in favour of the plan. This can be achieved by a cross-class cram down where:
- At least one class of creditors, who would receive a payment, or a have a genuine economic interest in the company, vote in favour;
- The dissenting creditors, would not be any worse off under the plan that they would have been in the event of whatever the court considers would be most likely to occur to the company should the plan be rejected (described as the relevant alternative); and
- The court is prepared to sanction the plan.
Classes of creditors
During the convening hearing on the 18 October 2024, the court approved the Plan Company's division of its creditors in relation to the In-Scope Debt. This is summarised in the table below:
|
Class |
In-Scope Debt |
|---|---|
|
A |
|
|
B |
|
|
C |
|
|
D |
|
To approve an English restructuring plan, the proposal must be approved by 75% in value of the creditors in each class who vote, subject to the cross-class cramdown mechanic.
There is no numerosity requirement in Part 26A restructuring plans unlike the English or Hong Kong scheme of arrangement.
The Sino-Ocean Plan
Through the English RP, Sino-Ocean has proposed to release all outstanding principal and interest amounts owing in respect of the In-Scope Debt. In consideration for that release, creditors will receive a new package of debt instruments and convertible securities at the same face value as the In-Scope Debts (the English RP Consideration). However, allocations per creditor class will differ.
The English RP Consideration can be categorised as twofold:
- New Debt Claims: USD2.2 billion of the In-Scope Debts will be (New Debt Claims) as either new loans (New Loans) and/or new notes (New Notes); and
- MCBs and New Perps: the balance of the In-Scope Debts will be reinstated as new mandatory convertible bonds (New MCBs) and new perpetual securities (New Perps).
These will be allocated amongst the creditor classes as:
|
Class |
English RP Consideration entitlements |
|---|---|
|
A |
|
|
B |
|
|
C |
|
|
D |
|
The English RP will result in a significant dilution of the equity interests held by the existing shareholders. However, the key shareholders are state-owned enterprises in PRC. In its skeleton arguments for the convening hearing, the Plan Company highlights it is a "substantial economic advantage for a real estate business operating in PRC to have major shareholders which are substantial financial institutions and are state-owned enterprises." Without this, "the blunt reality is that a company solely owned by offshore banks and hedge funds would not be likely to succeed in the PRC."
It is Sino-Ocean's position that the relevant alternative to the English RP is an insolvent liquidation in which should the English RP fail the creditors across each class would be materially worse off.
Challenges and Opposition
As is common practice, the Plan Company proposed a restructuring support agreement (RSA) in July 2024, whereby all classes of creditors were invited to accede to the RSA. The percentage of accessions by value to the RSA were as follows (as of 18 October 2024) in respect of the class divisions:
- Class A: 86.00%
- Class B: 19.07%
- Class C: 12.06%
- Class D: 17.97%
This is key in showing the value that Class A has to the Plan Company and the initial opposition from other creditors in the structure.
Whilst not specifically dealt with prior to or at the convening hearing stage, an ad hoc group of bondholder creditors in Classes B, C and D (the AH Group), who will likely be crammed down by the English RP, have been vocal in opposing it on grounds of class composition, jurisdiction and its overall fairness. It is expected that if the English RP sanction hearing goes ahead, it will be held across two days to accommodate the need to adduce and hear expert evidence on these issues.
Through various avenues, the AH Group have set out their opposition to the English RP. Their complaints include that:
- The restructuring terms are unfair and prejudicial to creditors;
- The proposal lacks financial contribution from shareholders and visibility on underlying financial information and so have claimed that they have been denied key information such as liquidation analysis;
- Limited opportunity to consider evidence and materials provided by the Plan Company;
- Sino-Ocean's use of the cross-class cramdown has been used to "artificially" introduce Hong Kong governed debt documents (those being in the Class A category) into the arena despite insufficient jurisdiction;
- There is "no nexus" for Class A creditors to be included in the English RP; and
- Even after the English RP has been implemented, the shareholders will keep over 50% of Sino-Ocean's shares without injecting new monies despite promises to cover future events of default.
It is understood that the AH Group is planning to present a 'fairer' restructuring plan at the sanction hearing as the relevant alternative. In the meantime, it has urged creditors to vote against the proposal. In the AH Group's skeleton arguments for the convening hearing, Long Corridor Asset Management Limited (representing the AH Group) raised that it has "serious concerns as the merits and fairness of the [English RP]".
The Hong Kong Scheme of Arrangement
To ensure that the compromise of the Class A debt has international effect, the Plan Company has also proposed a scheme of arrangement in Hong Kong (Hong Kong SOA) pursuant to Part 13 of the Companies Ordinance (Cap 622), in parallel to its efforts in the English courts. In light of the Rule in Gibbs2, in order for the English RP to be recognized in Hong Kong and to ensure that the English RP is enforceable against those creditors governed by Hong Kong law. Therefore, the two restructuring tools are inter-conditional upon one another for effect.
Under the Hong Kong SOA, Class A creditors will have their debt compromised in the same way as under the English RP. This proposal is less hotly contested when compared with the English RP because as of 10 September 2024, holders of over 75% of the Class A debt have acceded to the RSA (as above), suggestive that the Class A creditors will vote in favour and pass the statutory threshold of 75% in value (gross value of debt and 50% in number). It does not concern Classes B, C or D where the dissent lies under the English RP.
Sanction Hearings
Provided the Hong Kong SOA and the English RP are approved by the requisite majority at the creditor's meetings, the Plan Company will make an application to the courts in both jurisdictions to sanction the proposals. During the English RP hearing, the court will assess:
- Statutory requirements;
- Fair representation of classes;
- Whether the plan is a fair one which a creditor could reasonably approve; and
- Whether there is any blot on the plan.
This is where the AH Group will take to the floor to submit their arguments in defence of the Plan Company's relevant alternative and present their so-called 'fairer' plan.
It remains to be seen whether the AH Group's arguments will convince an English judge to reject the plan and/or exercise its discretion to use the cross class cramdown powers, but it is certainly one to watch over the coming months as momentum from both sides builds. If Sino-Ocean is successful in obtaining a sanctioned inter-conditional, parallel restructuring in England & Wales and Hong Kong, it may charter a new course for other distressed Chinese developers looking to fix their balance sheets where there is a lack of consensus amongst the classes of creditors.
1More recently, pursuant to the case Re Unity Group Holdings International Limited [2022] HKCFI 3419, the courts of Hong Kong have deviated from English law and sided with the Singaporean courts in relation to release of debts of third-party obligors guaranteed by the scheme company. The court held there was no requirement for a deed of contribution.
2The Rule in Gibbs is an English common law principle established in the case of Anthony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux [1890] 25 QBD 399. It held that a debt governed by English law cannot be discharged or compromised by a foreign insolvency proceeding unless the discharge is under the law applicable to the contract. This means that if a contract specifies it is governed by English law, any attempt to discharge the debt through foreign insolvency proceedings will not be recognized in England unless the creditor has participated in those proceedings or otherwise submitted to them.
