Scheme of arrangement – liquidation – scheme proposed expeditious distribution of large surplus and avoided litigation over legal issues – determining classes of creditors: in insolvency commonality of interest in beneficial result of scheme considerably important – material difference in rights not necessarily sufficient to divide creditors into separate classes if sufficient commonality
Cs were three Hong Kong companies that were part of the Lehman Brothers group which had filed for bankruptcy. Cs’ joint liquidators (“Ls”) had realised substantial assets, provision had been made for all proved and admitted claims, and there was a very substantial surplus. While interim post-liquidation interest (“PLI”) had been paid, there were legal issues and so uncertainty as to the entitlement to PLI before it could be paid in full. If these uncertainties were litigated, there would be expense and delay before creditors received the balance of their entitlement. There were also non-provable claims. Ls proposed schemes of arrangement for each of Cs (the “Schemes”) under s. 673 of the Companies Ordinance (Cap. 622) (the “CO”) intended to bring the liquidation to an end and expedite payment. The schemes provided that all obligations in respect of scheme claims would be released in exchange for the right to receive distributions of the scheme assets: provable claims would be paid; PLI claims would be determined by a defined methodology; and non-provable claims would be recognised but subject to a 50 percent discount for litigation risk. The schemes were approved at single class meetings of creditors for each C by the statutory majority under s. 674 of the CO. The Court’s sanction was now sought.
Held, sanctioning the Schemes, that:
- In the insolvency context it was legitimate to have regard to the creditors’ common interest in establishing a workable scheme as an alternative to litigation when considering whether it was necessary to divide creditors into separate classes for voting purposes. When considering in this context whether the rights to be released or varied were sufficiently dissimilar that they could not sensibly be expected to consult together, it was thus necessary to consider not only what was to be replaced, and with what, but also why the compromise embodied in the scheme was proposed. Consequently, even a material difference in rights was not necessarily sufficient to require creditors to be divided into separate classes if, notwithstanding differences in existing rights, there was sufficient commonality of interest in the commercial purpose and substance of the proposed compromise that they could deliberate on a scheme as one class.
- Here, the single class of scheme creditors was properly constituted. The facts of this case were relatively extreme. For that reason, it served to emphasise the considerable importance that the Court attached to the commonality of interest in the beneficial result of schemes when determining classes. The scheme creditors had a common interest in avoiding the expense and delay of litigation to resolve the technical legal issues that arose as a result of there being a sizeable surplus in each liquidation. Each scheme creditor was in the same position. They were being asked to give up a right of uncertain value in return for the certainty, cost effectiveness, and expedition provided by the schemes.
- While the Schemes dealt with sophisticated matters, in accordance with s. 671(3) of the CO, the explanatory statements set out the effect of the arrangement and compromise under the Schemes and the explanatory statements were sufficient to enable scheme creditors to make an informed judgment as to how to vote at the scheme class meeting.
- The Schemes were such that an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.