Freeman Fintech Corporation Ltd

• Jurisdiction: Cayman Islands
• Judge: Segal, J.
• Judgment Date: 04 February 2021
• Court: Grand Court (Cayman Islands)

In the Matter of Freeman Fintech Corporation Limited

(Segal, J.)

GRAND CT.

Companies — arrangements and reconstructions — confirmation by court — court sanctioned scheme of arrangement between company and unsecured creditors pursuant to Companies Act (2021 Revision), s.86(2) even though one unsecured creditor not bound by scheme because his claim governed by Macau law not Cayman law — scheme likely to be substantially effective — no indication Macau creditor intended to take action to enforce his claim and claim small

Held, ordering as follows:

(1) The function of the court at a sanction hearing of a scheme of arrangement under the Companies Act was well known. The court must be satisfied that the provisions of the Act (and the order convening the scheme meeting of creditors) had been complied with. The court must be satisfied that the class of creditors the subject of the court meeting was fairly represented by those who attended the meeting, and that the statutory majority were acting bona fide and not coercing the minority in order to promote interests adverse to those of the class they purported to represent. The court must be satisfied that an intelligent and honest person, a member of the class concerned and acting in respect of his own interest, might reasonably approve the scheme. There must be no “blot” on (i.e. defect in) the scheme. There must be no other reason which would preclude the court from exercising its discretion to sanction the scheme. One such reason was the principle that the court must be satisfied that the scheme would achieve a substantial effect and that it was not acting in vain (paras. 16–17).

(2) The Cayman scheme clearly fell within s.86 of the Companies Act. It was an arrangement between the company and a class of its creditors. The requirements of the convening order had been complied with and the scheme meeting appeared to have been properly conducted. The statutory majorities were also achieved. In relation to minority protection, it appeared that the class of scheme creditors who were the subject of the Cayman scheme meeting was fairly represented by those who attended the meeting and there was no evidence to suggest that the statutory majority was acting other than bona fide, or to suggest that they were coercing the minority in order to promote interests adverse to those of the class. The scheme was obviously one that an intelligent and honest person, a member of the class concerned and acting in respect of his own interest, might reasonably approve. The evidence indicated that there were no defects which could constitute a blot on the scheme (paras. 18–21).

(3) With regard to the Macau creditor, the court adopted the following approach. (a) The court needed to take into account all relevant circumstances when deciding whether to exercise its discretion to sanction the scheme. (b) The court needed to be provided with evidence as to the circumstances and in particular the realistic risks arising from and associated with the creditor not being bound by the scheme or the sanction order. There should be evidence as to the nature and extent of the risks associated with having a creditor, who was owed a not insubstantial sum, left outside and not bound by the Cayman scheme. The court required credible evidence to the effect that it would not be acting in vain. (c) The court needed to consider whether on the evidence it was appropriate to sanction the scheme despite and having regard to the risks of enforcement action by creditors who were not bound and were likely to be able to take action in other jurisdictions. This assessment would be made in light of the location of the company's assets and the impact of any enforcement action (including any winding up proceedings in other jurisdictions) on the implementation of the scheme and company in the future (in so far as that might impact the recovery and rights of creditors and others under the scheme). In appropriate cases, the fact that significant claims might not be bound by the scheme might not prevent the court sanctioning the scheme where there were clear and real benefits to be derived from the scheme and which were unlikely to be disturbed by hostile action following sanction. If the scheme was likely to be effective to a substantial extent and provide parties with the benefits they anticipated to a substantial or material extent, the court would be likely to sanction the scheme despite some creditors not being bound and the risk of enforcement action by them. But the court would wish carefully to consider the risks in each case. It would be relevant that the creditor(s) in question had indicated support for the scheme and an intention not to take action, or that there was evidence of foreign law that the courts in other relevant jurisdictions were unlikely to act inconsistently with the scheme. (d) The court needed to consider the issue of fairness in this context. If those who were bound by the scheme had accepted a haircut or other variation or discharge of their rights and claims, it might be unfair to sanction the scheme and hold them to the terms of the scheme if there was a serious risk that other creditors would be able to enforce their pre-scheme claims in full or to a substantial extent (or subsequently negotiate a payment or recovery above that received by scheme creditors under the scheme). It might be relevant to consider the extent to which creditors were made aware of the risks in the explanatory statement before voting (para. 31).

(4) In the present case, it was appropriate to sanction the Cayman scheme. The court accepted the company's submissions. This was not a case in which the creditor concerned had indicated a willingness to support the Cayman scheme or given an indication that he would take no action to enforce his claim, nor was there evidence as to the extent to which the company could prevent such enforcement or the likely impact of a successful enforcement action on the company. However, the court accepted that in view of the Macau creditor's silence and the absence of any indication that he intended to take any action, there was a real possibility that no action would be taken; that even if action was taken, the company might be able to take some steps with a view at least to delaying or avoiding enforcement action and that even if enforcement action were successful, the amounts involved were sufficiently small to avoid interfering with the implementation of and to undermine the benefits obtained by scheme creditors under the Cayman scheme. It was also right to give considerable weight to the judgment of Harris, J. and to follow the decision he had made in relation to the Hong Kong scheme (para. 32).

Cases cited:

(1) Anthony Gibbs & Sons v. La Société Industrielle et Commerciale des Metaux(1890), 25 Q.B.D. 399, considered.

(2) China Lumena New Materials Corp., In re, [2020] HKCFI 338, considered.

(3) Lehman Brothers Intl. (Europe) (No. 10), In re, [2018] EWHC 1980 (Ch); [2019] BCC 115; [2019] Bus. L.R. 1012, considered.

(4) New Zealand Loan & Mercantile Agency Co. Ltd. v. Morrison, [1898] A.C. 349, referred to.

(5) PT Garuda Indonesia, In re, 2001 WL 1171948; on appeal, [2001] EWCA Civ 1969, considered.

(6) Sompo Japan Ins. Inc., Re, [2007] EWHC 146 (Ch), considered.

(7) TDG plc, In re, [2008] EWHC 2334 (Ch); [2009] 1 BCLC 445, considered.

(8) Van Gansewinkel Groep BV, Re, [2015] EWHC 2151 (Ch); [2015] Bus. L.R. 1046, considered.

(9) Winsway Enterprises Holdings Ltd., Re, [2017] 1 HKLRD 1, considered.

The court was asked to sanction a scheme of arrangement.

The company sought the court's sanction of a proposed scheme of arrangement between the company and its unsecured creditors, pursuant to s.86 of the Companies Act (2021 Revision). The company was an investment holding company incorporated in the Cayman Islands. It was part of a group of companies engaged in the provision of financial services to customers in Hong Kong and the People's Republic of China. The company was registered in Hong Kong as a non-Hong Kong company and its shares had been listed on the Hong Kong Stock Exchange. In 2019, a winding up petition was presented against the company in Hong Kong on the grounds inter alia that the company was insolvent. Joint provisional liquidators were appointed by the Hong Kong court in 2020. The company, acting though the JPLs, introduced a scheme of arrangement in Hong Kong and the Cayman Islands. The majority of the company's debts were governed by Hong Kong law. Under the proposed scheme of arrangement, unsecured creditors would likely receive a return of 8.7%–11.4%, whereas if the company were to go into insolvent liquidation the return would be 2.7%.

At the Cayman scheme meeting, five scheme creditors attended the meeting by proxy and voted unanimously in favour of the scheme. No scheme creditor abstained or voted against the scheme. The total value of the claims of the creditors voting at the meeting was some HK$3bn. It appeared that the amount owed to those creditors was approximately 96% of the company's total estimated unsecured debt.

The JPLs were aware of one creditor whose claim against the company of some HK$48m. (amounting to approximately 1%–2% of the company's total debt) was governed by Macau law. The Macau creditor had been given notice of the Cayman scheme meeting and copies of the scheme documents but had not contacted the JPLs nor sought to participate in or attend the Cayman scheme meeting. The company accepted that although the Macau creditor was to be treated in this jurisdiction as bound by the Cayman scheme, as he had not submitted to the jurisdiction of this court and as the debt owed to him was not governed by Cayman law, there was a serious risk that the Cayman scheme and the sanction order could not be made effective and enforced against him in China or other jurisdictions. The same issue arose with respect to the Hong Kong scheme. The company submitted...