China Agrotech Holdings Ltd ((in Liquidation))

• Jurisdiction: Cayman Islands
• Judge: (Segal, J.)
• Judgment Date: 22 July 2019
• Court: Grand Court (Cayman Islands)
• Date: 22 July 2019

IN THE MATTER OF CHINA AGROTECH HOLDINGS LIMITED (in liquidation)

(Segal, J.)

Grand Court, Financial Services Division (Cayman Islands)

Companies — reduction of share capital — confirmation by court — requirements for confirmation: (i) shareholders treated equitably; (ii) purpose and effect of capital reduction properly explained to shareholders; (iii) creditors’ interests unaffected or properly safeguarded; (iv) capital reduction for discernible purpose and proper understanding of commercial rationale; and (v) special resolution reducing capital validly passed

Companies — arrangements and reconstructions — confirmation by court — court can make conditional order sanctioning scheme of arrangement, e.g. if parallel scheme process overseas

Held, ordering as follows:

(1) The requirements for confirmation of a capital reduction were (a) the resolution reducing capital must be a validly passed special resolution; (b) the shareholders (or different classes of shareholders) must be treated equitably; (c) the proposals must have been properly explained to the shareholders so that they could make an informed decision; (d) the interests of creditors must be unaffected or properly safeguarded, so that the proposals did not operate to their detriment; and (e) the reduction must be proposed for a discernible purpose (paras. 15–16).

(2) The court was satisfied that the requirements for confirmation of the capital reduction were satisfied in the present case and it was appropriate to confirm the reduction of capital. The evidence demonstrated that (a) the special resolution required by s.14 of the Companies Law had been duly passed; (b) all shareholders had been treated uniformly and equitably in relation to the capital reduction; (c) the circular sent to shareholders properly explained that part of the post-liquidation restructuring and capital reorganization relating to, and the terms and impact of, the capital reduction; (d) the discernible purpose of the capital reduction was clear in that it was a necessary step in the capital reorganization and was required to permit the critical capital raising process to proceed; and (e) the interests of the company’s creditors were clearly protected and the position of creditors improved by the post-liquidation restructuring of which the capital reduction was a part. Perfect Gate complained that the capital reorganization was unfair to existing shareholders because it effected too large a dilution of their interest in the equity but this was notan effect of the capital reduction with which the court was primarily concerned. Perfect Gate’s complaint arose not from the capital reduction but from the decision to increase the company’s share capital, enter into the subscription agreements and undertake the capital raising exercise on the terms agreed by the liquidators. Perfect Gate had not shown that there was a proper ground to challenge those decisions. Even if it was appropriate for the court to have regard to the treatment of shareholders under transactions closely connected with the capital reduction, the court was not satisfied that there was evidence of any relevant unfairness that would justify a refusal to confirm the capital reduction. The approach to the dilution of the existing shareholders appeared to be a reasonable one in the circumstances. Furthermore, Perfect Gate’s failure to oppose the confirmation of the capital reduction meant that any issues arising out of its opposition to the summons were to be given considerably reduced weight. The validity of the special resolution passed at the EGM was a particularly important factor on the application to confirm the capital reduction as it was a precondition to the court’s jurisdiction to confirm. The court should therefore be cautious about confirming the capital reduction while doubts as to the validity of the resolution existed. It had been open to Perfect Gate to notify the court that it intended to appeal the judgment confirming that the special resolution had been validly passed before the hearing or to seek a stay of the judgment or an adjournment to give it time to decide whether to lodge an appeal. It had taken none of those steps and remained silent. The judgment was therefore effective and determined that the special resolution was valid. It would be wrong in these circumstances and in view of the need for the confirmation order to be made urgently to permit the post-liquidation restructuring to proceed to delay making the confirmation order to see whether Perfect Gate wished to appeal the judgment (paras. 18–20).

(3) The court was satisfied that the terms of the convening order and the applicable statutory provisions had been complied with. The court was also satisfied that matters relating to the voting issue had been complied with. The scheme had comfortably obtained the necessary statutory majorities in favour and a significant number of creditors had attended the scheme meeting. The scheme creditors attending the meeting appeared to have been fairly representative of the class and the court had no reason to believe that the majority were acting in bad faith or that they were seeking to promote interests adverse to those of the class. The court was also satisfied that an intelligent and honest creditor of the company could reasonably consider the scheme to be in his best interests. The court was not required to be satisfied that the scheme was the only fair scheme or even the best scheme available. The scheme offered creditors a better return (albeit a modest return) than would probably be available if the liquidators were required to realise the company’s assets and continue the liquidation. The court was not aware of any blot on the scheme. The sanction order should not, however, become effective unless and until the Hong Kong court sanctioned the Hong Kong scheme.It was important for the court to retain control over the scheme process, in particular the time at which its scheme became effective. It would not be acceptable and in the interests of scheme creditors if the court were to sanction unconditionally the Cayman scheme and then there were to be a delay in the Hong Kong court’s decision on the application to sanction the Hong Kong scheme. There was no risk of the Cayman scheme being implemented if the Hong Kong scheme were not sanctioned but there were other risks to be managed. The sanction of the Hong Kong scheme was a condition to implementation of the Cayman scheme and the application for sanction was subject to opposition, the precise grounds of which were unclear. There was a sufficient degree of uncertainty both as to the outcome and the timing of the Hong Kong court’s decision to require caution. Therefore the court decided that the sanction order should not be sealed until the Hong Kong court had decided to sanction the Hong Kong scheme and that this court should retain the ability to make further orders if that did not happen within the near future (paras. 34–35).

Cases cited:

(1)Fiberweb plc, Re, [2013] EWHC 4653 (Ch), considered.

(2)Lombard Medical Technologies plc, Re, [2014] EWHC 2457 (Ch); [2015] 1 BCLC 656, applied.

(3)Man Group plc, In re, [2019] EWHC 1392 (Ch), applied.

(4)Santiago Pipelines Co., In re, 2012 (2) CILR 343, applied.

(5)SPhinX Group, In re, 2014 (2) CILR 152, applied.

(6)Telewest Comms. plc (No. 1), Re, [2004] EWCA Civ 728; [2005] 1 BCLC 752; [2005] BCC 29, applied.

Legislation construed:

Companies Law (2018 Revision), s.14: The relevant terms of this section are set out at para. 13.

s.15(1): “Where a company has passed a resolution for reducing share capital, it may apply by petition to the Court for an order confirming the reduction.”

s.16(1): The relevant terms of this sub-section are set out at para. 14.

s.86(2): “If a majority in number representing seventy-five per cent in value of the creditors or class of creditors, or members or class of members, as the case may be, present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors or the class of creditors, or on the members or class of members, as the case may be, and also on the company or, where a company is in the course of being wound up, on the liquidator and contributories of the company.”

Companies Act 2006 (c.46), s.899:

“A compromise or arrangement sanctioned by the court is binding . . .”

A company sought an order confirming a capital reduction and an order sanctioning a scheme of arrangement.

Liquidators had been appointed in Hong Kong for the company, which was incorporated in the Cayman Islands and had its shares listed on the Hong Kong Stock Exchange. As part of a post-liquidation restructuring of the company, the liquidators had negotiated a series of agreements and arrangements that, if implemented, would result in the company being able to continue as a going concern and result in the termination of the winding-up proceedings. The company and the liquidators had promoted schemes of arrangement with the company’s creditors in the Cayman Islands and in Hong Kong.

The restructuring would involve the company acquiring the shares in another company, obtaining an injection of new capital in return for the issue of new shares to the capital providers and discharging the claims of all creditors by a part payment of the sums owed to them. The restructuring involved a number of steps. The company would reduce the nominal value of its shares (to eliminate accumulated losses and permit the issue of new shares), which required a special resolution and approval of the court; increase its authorized share capital, which required shareholder approval; enter into subscription agreements with the new capital providers; arrange a public offer of further shares; issue new shares to the capital providers and those who participated in the public offer; and promote a scheme...