Section 86 of the Companies Act (2023 Revision) and China Aoyuan Group Ltd

• Jurisdiction: Cayman Islands
• Judge: Justice David Doyle
• Judgment Date: 12 December 2023
• Docket Number: CAUSE NO. FSD 284 OF 2023 (DDJ)
• Court: Grand Court (Cayman Islands)

In the Matter of Section 86 of the Companies Act (2023 Revision)

And in the Matter of China Aoyuan Group Limited

Before:

The Hon. Justice David Doyle

CAUSE NO. FSD 284 OF 2023 (DDJ)

IN THE GRAND COURT OF THE CAYMAN ISLANDS

FINANCIAL SERVICES DIVISION

HEADNOTE

Sanction of a scheme pursuant to section 86 of the Companies Act (2023 Revision)

Appearances:

Tom Smith KC, Ben Hobden, Caitlin Murdock and Moesha Ramsay-Howell of Harney Westwood & Riegels for the Company

Introduction

1 I will try and keep this judgment relatively concise, just covering the important material issues, and resisting the temptation to write a book on the relevant law as to inter-conditional schemes and their international effectiveness.

2 China Aoyuan Group Limited (the “Company”) seeks the court's sanction of its proposed scheme of arrangement (the “Scheme”) under section 86 of the Companies Act (2023 Revision) (the “ Companies Act”). The Scheme was approved by 79.11% by value and a majority by number of Scheme Creditors present and voting at the scheme meeting (1216 in favour, 61 against). I presided over the sanction hearing today. I am grateful to Tom Smith KC, Ben Hobden, Caitlin Murdock and Moesha Ramsay-Howell who appear for the Company, for their valuable assistance to the court.

3 Some of the background is specified in my judgment delivered on 31 October 2023 and I do not intend to repeat it all again in this short judgment.

4 The Scheme is being proposed in parallel with an inter-conditional scheme in Hong Kong (the “Hong Kong Scheme”), because some debts being compromised are governed by Hong Kong law. An order was made by the Hong Kong court convening the scheme meeting for the Hong Kong Scheme on 31 October 2023. The sanction hearing for the Hong Kong Scheme is listed for 8 and 9 January 2024.

5 The Scheme is part of a wider restructuring (the “Restructuring”) that aims to reduce the short-term debt burden of the Company and the Group to allow the Group to trade on a going-concern basis. As well as the Scheme and the Hong Kong Scheme, the Restructuring involves two other parallel and inter-conditional schemes in relation to the Company's direct BVI incorporated subsidiary Add Hero Holdings Limited (“Add Hero”), one in Hong Kong (the “Add Hero Hong Kong Scheme”) and the other in the BVI (the “Add Hero BVI Scheme”). The sanction hearing for the Add Hero BVI Scheme is listed for tomorrow 8 December 2023 and on 8 and 9 January 2024 for the Add Hero HK Scheme. The Restracturing is conditional on all four schemes being sanctioned by the relevant courts. I also note from Mr Chen's third affirmation affirmed and filed yesterday, 6 December 2023, that the Company is currently planning to make a Chapter 15 Application (given that the Existing Public Notes are governed by New York law) such that the Hong Kong Scheme (which has substantially the same terms as the Scheme) will be given full force and effect as a matter of New York law.

6 Put simply, the Scheme involves Scheme Creditors fully releasing the Company and certain offshore subsidiaries from their obligations and liabilities under the Company's existing debt in return for new (or newly transferred) securities. Add Hero will also distribute additional notes and cash consideration under the Add Hero Schemes.

7 The evidence before this court indicates that the most likely outcome if the Scheme is not sanctioned is that the Company, and some or all members of the Group, will enter into value-destructive insolvent liquidations in their respective jurisdictions of incorporation. The evidence also indicates that in an insolvent liquidation, it is estimated that the Scheme Creditors would receive between 3.7% to 4.2% on their existing debt, compared to an estimated 36.1% recovery if the Scheme and Restructuring are successful.

Relevant law

8 With that brief introduction I now turn to the relevant law.

9 I have considered section 86 of the Companies Act, Practice Direction No 2 of 2010, GCR Ol r12, and the relevant caselaw, including Re E-House (China) Enterprise Holdings Limited (FSD unreported judgment Segal J 17 November 2022 especially paragraphs 105–106), Parker J in Re Ocean Rig UDW 2017 (2) CILR 495, Smellie CJ in Re SPhinX Group of Companies 2014 (2) CILR 131, Henderson J in Re Euro Bank Corporation 2003 CILR 205 and David Richards J (as he then was) in Re Telewest Communications (No 2) Ltd [2004] EWHC 1466 (Ch) [2005] BCLC 772.

Determinations

10 I now turn to the determinations of the various issues before the court.

11 I am satisfied that the Order I made on 31 October 2023 (the “Convening Order”) has been duly complied with and that the requisite statutory majorities under section 86(2) of the Companies Act were achieved at the Scheme Meeting.

12 I am satisfied that the class of Scheme Creditors was fairly and adequately represented by those who attended the Scheme Meeting and that there is nothing to suggest that the statutory majorities were not acting bona fide or that they were coercing the minority in order to promote interests adverse to those of the class for whom they purported to represent. The Scheme was approved by a wide range of Scheme Creditors. There is nothing to suggest that the majority vote was in any way attributable to any collateral or other interest which might detract from being representative of the class. I note in any event Hildyard J's comments in Re Lehman Brothers [2018] EWHC 1980 (Ch) at paragraphs 89 and 90 and Parker J's comments in Ocean Rig at paragraphs 94 and 122 relying on an earlier English authority Apcoa [2014] EWHC 3849 (Ch) at paragraph 130. In the case presently before the court the Scheme was approved by a majority in both categories,...