Section 86 of the Companies Act (2023 Revision) and E-House (China) Enterprise Holdings Ltd
| Jurisdiction | Cayman Islands |
| Judge | Mr Justice Segal |
| Judgment Date | 02 April 2024 |
| Docket Number | CAUSE NO: FSD 220 OF 2023 (NSJ) |
| Court | Grand Court (Cayman Islands) |
and
The Hon. Mr Justice Segal
CAUSE NO: FSD 220 OF 2023 (NSJ)
IN THE GRAND COURT OF THE CAYMAN ISLANDS
FINANCIAL SERVICES DIVISION
Scheme of arrangement — scheme already sanctioned — post-sanction conditions to implementation incapable of satisfaction – Company had the right to waive the satisfaction of relevant condition but had decided to allow the scheme to lapse — a sanctioned scheme in respect of the Company in 2022 had also not been implemented — application by Company for permission to send out a notice to Scheme Creditors confirming that the scheme would lapse and would not be implemented.
Mr Nick Herrod and Ms Allegra Crawford of Maples and Calder (Cayman) LLP appeared on behalf of the Company
E-House (China) Enterprise Holdings Limited (the Company) is a Cayman incorporated company whose shares have been listed on the main board of the Stock Exchange of Hong Kong (the SEHK). The Company acts as the holding company for a large group of entities (the Group) involved in real estate agency services, real estate data and consulting services and real estate brokerage network services in the People's Republic of China.
The Company's main offshore short term financing obligations are:
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(a). principal debt of US$598,200,00 arising under two sets of New York law governed note obligations (the 2022 Notes — $298,200,000 due April 2022- and 2023 Notes – US$300,000,000 due June 2023) (the Old Notes), and
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(b). principal debt of HK$1,031,900,000 arising under a convertible note governed by Hong Kong law (the Convertible Note) held by Alibaba.com Hong Kong Limited (the CB Holder).
The Company has been the subject of two recent schemes of arrangement which have been sanctioned by this Court under section 86 of the Companies Act (2023 Revision) (with a parallel scheme in the High Court of the Hong Kong Special Administrative Region, Court of First Instance for the second scheme). The first scheme (the 2022 Scheme) was sanctioned by this Court on 9 November 2022 (the 2022 Sanction Order). The second scheme (the 2023 Scheme) was sanctioned by this Court on 24 November 2023 (the 2023 Sanction Order).
The background to the 2022 Scheme is set out in my judgment dated 17 November 2022 which explained the background to the 2022 Scheme and my reasons for making the 2022 Sanction Order. As explained in this judgment, the 2022 Scheme was an amend and extend scheme whereby the Old Notes were to be exchanged for new notes with different maturity dates and interest rates.
The 2022 Scheme was advanced in order to address the Company's obligations in respect of the Old Notes (and only the Old Notes). That was because the CB Holder was initially supportive of the 2022 Scheme and granted a waiver of the default under the Convertible Note until 15 December 2022 in order to enable the 2022 Scheme to be advanced.
The 2022 Sanction Order was filed with the Registrar on 9 November 2022 and the 2022 Scheme became effective on that day, being the Scheme Effective Date. While the 2022 Scheme became effective and therefore binding on the Company and Scheme Creditors on the Scheme Effective Date, implementation of the restructuring to which the 2022 Scheme gave effect was subject to the satisfaction of certain other conditions (the Restructuring Conditions). The terms of the 2022 Scheme provided that the 2022 Scheme would only become effective if and when the Company gave notice to Scheme Creditors that the Restructuring Conditions had been satisfied and that this notice had to be given before the Longstop Date, otherwise the terms of and obligations on the parties under or pursuant to the 2022 Scheme would lapse. I dealt with the impact of these conditions on the sanction decision at [121] of my judgment.
The Restructuring Conditions included the making of an order by the United States Bankruptcy Court for the South District of New York for the recognition of the 2022 Scheme under Chapter 15 of the US Bankruptcy Code. The Bankruptcy Court made that order on 15 November 2022.
The Longstop Date for the 2022 Scheme was extended until 14 December 2022. By that date there were no Restructuring Conditions which could not have been satisfied. However, despite this, the Company concluded that the risks of implementing the 2022 Scheme were greater than the risks of not implementing the 2022 Scheme and that it would therefore not be in the best interests of the Scheme Creditors and other stakeholders in the Company to proceed with the 2022 Scheme. The reasons for this were explained by Mr Cheng Li-Lan ( Mr Cheng) in his First Affirmation at [61]–[67]. He said this:
“61. … This was because of:
61.1 further deterioration of the PRC property market in the fourth quarter of 2022, resulting in the Company having an insufficient cash balance to pay the cash portion of the Scheme Consideration (explained further at paragraph 62 below); and
61.2 the Company's imminent default under the CB resulting in the CB Holder and an associated company of the CB Holder seeking a more comprehensive restructuring plan than that set out in the 2022 Scheme. By this time, it became apparent that the Company was unable to make the required payments under the CB, and it would therefore be necessary to restructure the CB as well as the Old Notes. This led the Company to conclude that the 2022 Scheme would not constitute a sufficient restructuring of its liabilities in order to render it viable going forwards.
62. At the time of the 2022 Scheme, the Company expected to fund the payments required under the 2022 Scheme with (i) cash flow generated from its ongoing business, (ii) recovery and collection of impaired trade receivables, and (iii) existing offshore cash balances. However, due to the further deterioration of the PRC property in the fourth quarter of 2022 the Company was not able to collect its outstanding trade-related receivables, which was not previously anticipated.
63. Based on statistics from the National Bureau of Statistics of the PRC, during the fourth quarter of 2022, national sales of residential property decreased by 28.02%, resulting in a decrease of 29.91% total gross floor area delivered. This general deterioration of the PRC property market affected the Group's revenue and cash flow as the Group is dependent primarily on PRC property developers paying the fees for its services, and PRC property developers were unable to pay these fees due to the downturn and their own liquidity issues. A majority of the Group's clients are privately owned property developers and, due to property developers facing serious liquidity issues as a result of the macro-economic conditions referred to earlier in this paragraph, the Group was only able to collect approximately 10% of the expected trade receivables during the fourth quarter of 2022. The substantial decrease in cash flow also resulted in the Group having to reallocate its cash resources to ensure that the Group's various lines of businesses were able to continue operations. For example, in response to the deterioration of the PRC property market, the Company underwent staff reductions, which resulted in the Company having to make severance payments and so the reduction in headcount did not result in any immediate financial savings for the Company and instead made further demands on its cash resources. Further, such further deterioration of the Group's operating conditions and cash reallocation caused banks in the PRC to place restrictions on the Group's cash balances onshore, which in turn constrained the Group's ability to remit cash offshore. As a result, the Company had an insufficient cash balance to pay the cash portion of the consideration under the 2022 Scheme.
64. In addition, the Company had agreed to cause TM Home to provide a limited recourse subsidiary guarantee within six months after the original issue date of certain new notes to be issued as part of the 2022 Scheme. However, such limited recourse subsidiary guarantee required, among other things, the approval from other shareholders of TM Home, including Alibaba Investment Limited (the “ TM Home Minority Shareholder”), which is an affiliate of the CB Holder. The Company had been in discussions with the TM Home Minority Shareholder and the CB Holder regarding such matters and the Company's ongoing obligations under the CB throughout the process of the 2022 Scheme. By the fourth quarter of 2022, the deterioration in the financial condition of the Scheme Company described above resulted in the Company being unable to service its ongoing debt obligations under the CB. Due to the imminent default of the Company under the Convertible Note, the TM Home Minority Shareholder and the CB Holder began discussions with the Scheme Company on seeking a more comprehensive restructuring solution that would take into account the rights of the CB Holder rather than focusing on whether or not the TM Home Minority Shareholder would approve the limited recourse subsidiary guarantee and whether any further extension of the waiver in relation to the Scheme Company's default under the CB would be provided by the CB Holder beyond 14 December 2022.
65. While the Group continued to explore solutions, for the reasons outlined above, the Group concluded that it was not feasible to consummate the 2022 Scheme and the proposed restructuring. Therefore the Company did not deliver to the Information Agent notice of the restructuring effective date, which was a condition precedent under clause 6.1(d) of the 2022 Scheme, and so the restructuring effective date did not occur. As the restructuring effective date did not occur before the Longstop Date (14 December 2022), the 2022 Scheme accordingly lapsed under clause 4.2 of the 2022 Scheme...
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