HCMP1695/2023

HCMP1695/2023

A A HCMP 1695/2023 and HCMP 1696/2023 B (HEARD TOGETHER) B [2025] HKCFI 310 C C HCMP 1695/2023 D IN THE HIGH COURT OF THE D HONG KONG SPECIAL ADMINISTRATIVE REGION E E COURT OF FIRST INSTANCE F MISCELLANEOUS PROCEEDINGS NO 1695 OF 2023 F ____________________ G G IN THE MATTER OF Add Hero H Holdings Limited H and I I IN THE MATTER OF section 670 J of the Companies Ordinance, J Chapter 622 of the Laws of Hong K Kong K ____________________ L L AND HCMP 1696/2023 M IN THE HIGH COURT OF THE M HONG KONG SPECIAL ADMINISTRATIVE REGION N N COURT OF FIRST INSTANCE O MISCELLANEOUS PROCEEDINGS NO 1696 OF 2023 O ____________________ P P IN THE MATTER OF China Q Q Aoyuan Group Limited （中國 R 奧園集團股份有限公司） R and S S IN THE MATTER OF section 670 of the Companies Ordinance, T Chapter 622 of the Laws of Hong T Kong U U V V  - 2 - A A ____________________ B B (HEARD TOGETHER) C C Before: Hon Harris J in Court D Date of Hearing: 9 January 2024 D Date of Decision: 11 January 2024 E E Date of Reasons for Decision: 13 January 2025 F ________________________＿________ F G REASO N S F OR D E CI SI ON G _________＿_______________________ H H Introduction I I 1. China Aoyuan Group Limited (“Holdings”) and Add Hero J Holdings Limited (“Hero”) seek the Court’s sanction under section 673 of J the Companies Ordinance, Cap. 622 (“Ordinance”), of two schemes of K K arrangement (“Scheme” or “Schemes” as the context requires) between L each of them and the groups of creditors I describe later in these reasons1. L The purpose of the Schemes is to restructure debt in excess of US$6 billion M M owed by Holdings and its principal subsidiary Hero, to avoid the N liquidation of the business Group of which Holdings is the listed holding N company and allow the Group to continue its business as a major property O O developer principally in the Mainland. The Holdings’ Scheme was P approved by Scheme Creditors holding 79.11% in value of Holdings’ P Scheme debt at a Scheme meeting held on 28 November 2023 pursuant to Q Q an order made on 31 October 2023 convening a meeting of Scheme R Creditors to consider and vote on the Scheme. In the case of Hero’s R Scheme, Scheme Creditors holding 88.31% in value of the Scheme debt S S approved the Scheme at a meeting also held on 28 November 2023 T T 1 I shall refer to Holdings and Hero collectively as the “Companies”. The Companies were U represented before me by William Wong SC and Look Chan Ho, and Ping An, a creditor in U HCMP 1696/2023 by Rachel Lam SC and Jasmine Cheung. V V  - 3 - A A pursuant to an order made on 31 October 2023. Hero’s petition is B B unopposed. Holdings’ petition is opposed by China Ping An Insurance C Overseas (Holdings) Limited (“Ping An”). C D D 2. Holdings also sought the sanction of a parallel scheme in the E Cayman Islands in which it is incorporated. The petition in the E Cayman Islands was unopposed and heard by Mr Justice Doyle on F F 7 December 2023, who sanctioned the petition on the same day. I have G been provided with a transcript of an ex tempore judgment that he gave2. G Hero similarly sought sanction of a parallel scheme in the British Virgin H H Islands (“BVI”) in which it is incorporated. The Hero petition was also I unopposed and heard by Madam Justice Mangatal on 8 December 2023 I and judgment entered sanctioning the Hero’s Scheme on J J 13 December 2023. K K 3. As is well-known the Mainland property market has been L L subject to a significant correction and a large number of the Mainland’s M M major property groups have consequently experienced severe financial N difficulties. The highest profile is China Evergrande Group 3 , whose N holding company, listed in Hong Kong, was wound up in Hong Kong by O O my colleague Linda Chan J on 29 January 2024, its attempts to introduce P a scheme to restructure its debt having failed. One other Mainland P property company has successfully sought the Hong Kong Court’s Q Q approval of a scheme; Sunac China Holdings Ltd4, which I sanctioned on R R S S 2 I have also been provided with a copy of Holdings and Hero’s skeleton arguments filed in the T Cayman and BVI proceedings, which have been of assistance in preparing this judgment. T 3 [2024] HKCFI 363. 4 [2023] HKCFI 2850. Linda Chan J approved a scheme introduced by E-House (China) Enterprise U Holdings Limited on 23 November 2023, which provides real estate agency and associated services: U [2023] HKCFI 3117, [2023] HKEC 4491. V V  - 4 - A A 5 October 2023. I sanctioned the Holdings’ Scheme and the Hero’s B B Scheme on 11 January 2024. C C 4. The present Petitions give rise to important issues, which will D D probably have significance for the restructuring of other Mainland property E groups, which will come before the Hong Kong Court as part of the E resolution of the challenges developers face, in particular, issues relating F F to the constitution of the classes of creditors required to approve the G Schemes: see [63]–[77]. As I mentioned in [1] the Hero’s Scheme was G unopposed and most of this decision deals with the Holdings’ Scheme. H H The circumstances in which the Hero’s Scheme has been introduced is the I same as the Holdings’ Scheme. I explain the Hero’s Scheme to the extent I that it differs materially from the Holdings’ Scheme. J J K The Companies K L 5. Holdings was incorporated as an exempted company with L limited liability under the laws of the Cayman Islands on 6 March 2007. It M M is registered as a non-Hong Kong company in Hong Kong with registration N number 18322. The shares of the Holdings were listed on the main board N of The Stock Exchange of Hong Kong Limited (“HKSE”) (Stock Code: O O 3883) on 9 October 2007. Trading of the shares on the HKSE were P P suspended on 1 April 2022 as a result of delayed financial results. Q Holdings subsequently fulfilled the conditions required for the resumption Q of trading, which occurred on 25 September 2023. The authorised share R R capital of Holdings is HK$1 billion divided into 100 billion ordinary S shares of a nominal or par value of HK$0.01 each, of which 2.966 billion S have been issued and are fully paid up, or credited as fully paid up, with T T the rest remaining unissued (“Shares”). Approximately 56.01% of the U Shares are beneficially held by Guo Zi Wen, the Chairman of Holdings or U V V  - 5 - A A his family and the remaining 43.99% are held by other shareholders, B B including the general public. C C 6. Holdings is the ultimate holding company of the China D D Aoyuan Group (“Group”), which comprises Holdings and its directly or E indirectly owned subsidiaries in the BVI, Australia, Canada, Hong Kong, E and the Mainland. The Group focuses on the development and sale of F F residential properties and commercial properties. The Group’s projects G comprise various types of developments, including residential apartments, G commercial apartments, low-density residentials, retail shops and others. H H I 7. The Group focuses on the Guangdong-HongKong-Macao I Greater Bay Area, and covers four other major regions, including Southern J J China, the core region of Central and Western China, Eastern China, and K Bohai Rim. The Group is significal in urban redevelopment in the Greater K Bay Area. The Group also has property development and investment L L projects in Canada and Hong Kong, and holds a 24.68% stake in Aoyuan M M Healthy Life Group Co Ltd (“Healthy Life”), which is a property N management services and commercial operational services provider in N China. O O 8. The following diagram summarises the Group’s structure. P P Q Q R R S S T T U U V V  - 6 - A A 9. The Schemes are part of Holdings Plan to restructure and B B compromise its liabilities and those of its subsidiaries incorporated outside C of China (“China Aoyuan Offshore Group”). Certain Scheme Creditors, C in addition to their claims against Holdings, also have separate structurally D D superior claims against members of the Group that are incorporated in E China (“China Aoyuan Onshore Group”). It would not be possible for E Holdings to include the compromise of those onshore claims as part of the F F Restructuring without risking a significant impact on the onshore G operations of the Group. In particular, any attempt to compromise the G H onshore claims may trigger enforcement actions being taken by other H creditors in the Mainland against the China Aoyuan Onshore Group which I I would be value-destructive for all stakeholders of the Group. Holdings J therefore intends to address the claims against such members of the China J Aoyuan Onshore Group through bilateral negotiations and/or restructuring K K processes in the Mainland, taking into account the value of any Scheme L Consideration Entitlement received by such Scheme Creditors pursuant to L the Schemes. Holdings believes that the compromise of the liabilities of M M the China Aoyuan Offshore Group will allow the Group as a whole to N comply with its post-restructuring obligations and to trade on a going- N concern basis. O O P The Group’s existing debt P Q 10. The Group has incurred substantial debt to finance its Q day-to-day operations and investments. The Group’s debts include the R R “ICA Debt” and “Non-ICA Debt”, which together I shall call the S “Existing Debt”. The Existing Debt is proposed to be subject to the S Holdings’ Schemes and the ICA Debt (and one instrument of Non-ICA T T Debt) is proposed to be subject to the Hero’s Schemes. The total U outstanding principal of the Existing Debt is approximately U V V  - 7 - A A US$6.25 billion and represents approximately 84% of the Holdings’ total B B debt. C C The ICA Debt D D 11. The ICA Debt is comprised of: E E (1) 12 publicly traded US dollar denominated senior notes F F governed by New York law and with an aggregate outstanding G principal amount of approximately US$3.44 billion G (“Existing Public Notes”); and H H (2) three syndicated loans governed by Hong Kong law and with I an aggregate outstanding principal amount of approximately I US$597 million (“Existing Syndicated Facilities”). J J 12. Holdings is the primary obligor of the ICA Debt and the K K outstanding principal is approximately US$4.03 billion. The ICA Debt is L L secured, with the benefit of collateral granted under an intercreditor M agreement originally dated 23 November 2012, entered into by, among M others, Holdings and amongst others, certain subsidiary guarantor pledgers N N (“ICA”). O O 13. The collateral provided under the ICA consists of guarantees P P granted by certain direct and indirect subsidiaries of Holdings (including Q Hero) in favour of the holders of the Existing Public Notes (“Existing Q Public Notes Guarantors”) and the Existing Syndicated Facilities R R (“Existing Syndicated Facilities Guarantors”) in respect of all of the S obligations of the Holdings to pay the principal, premium (if any), and S interest under the ICA Debt. Additionally, substantially all of the ICA T T Debt is secured by a first priority lien over the capital stock of all the U U V V  - 8 - A A Existing Public Notes Guarantors and Existing Syndicated Facilities B B Guarantors. C C The Non-ICA Debt D D 14. The Non-ICA Debt is not secured by the ICA collateral. E E Holdings is the borrower or guarantor under the Non-ICA Debt and the F outstanding principal is approximately US$2.22 billion. The Non-ICA F Debt consists of: G G (1) Four bilateral facilities provided by certain lenders to H H Holdings which benefit from a standby letter of credit I (“SBLC”). The relevant existing lenders have enforced the I SBLCs. Accordingly, the Scheme will only compromise the J residual (unsecured) indebtedness owing to those lenders J (“Existing Bilateral Facilities (SBLC)”). The total K K outstanding principal amount under the Existing Bilateral L Facilities (SBLC) is approximately US$157 million and they L are governed by Hong Kong law. M M (2) Six offshore financing arrangements that were issued or N guaranteed by Holdings and are unsecured liabilities of N Holdings (“Existing Other Offshore Financings”). The O O total outstanding principal amount of the Existing Other P Offshore Financings is US$438 million and they are P governed by Hong Kong law. Q Q (3) Four private bonds and/or private notes issued by certain R companies outside the Group and guaranteed by Holdings R (“Existing Private Notes”) The Existing Private Notes S S unsecured, the total outstanding principal is approximately US$650 million and they are governed by Hong Kong law. T T (4) 18 onshore financing arrangements with China-incorporated U U entities in respect of which Holdings has provided Chinese or V V  - 9 - A A B Hong Kong law governed guarantees (“Existing Onshore B Facilities”). The total outstanding principal under the C Existing Onshore Facilities is US$414 million and they are C governed by Chinese law with the benefit of certain Chinese D D or Hong Kong law governed guarantees. E (5) Five private loans issued by various entities outside the Group E in respect of which the Holdings has provided guarantees F F (“Existing Private Loans”). The total outstanding principal G of the Existing Private Loans is approximately G US$456 million and they are variously governed by Hong H H Kong and English law. I (6) the US$100 million term loan facilities agreement dated I 31 December 2020, entered into between, among others, J J Holdings as borrower, Aoyuan Group Company Limited K (“Aoyuan Group Co”) as onshore guarantor and Noble K Prestige (Cayman) Limited (“Noble Prestige”) as lender, L (“USD100m Noble Prestige Facility”). The USD100m L Noble Prestige Facility is governed by Hong Kong law. M M As indicated above, the debt instruments constituting the Non-ICA Debt N are governed by the laws of Hong Kong, England, or the Mainland. N O O 15. The Non-ICA Debt constitutes unsecured liabilities of P Holdings. However, certain debt instruments under the Non-ICA Debt P have the benefit of guarantees or security provided by certain direct and Q Q indirect subsidiaries of the Holdings and entities outside of the Group. R R Other debt S S 16. As well as the ICA and Non-ICA Debt, the Group has the T T following debts which are subject to the Holdings and Hero’s Schemes: U U V V  - 10 - A A B (1) Guarantees provided by Holdings in respect of certain B offshore project financings. These have the benefit of project C assets located in Canada and Hong Kong, and Holdings C understands that based on the most recent valuations of these D D assets, the lenders would be able to receive substantial E recoveries. Holdings took the view that such lenders would E agree to participate in the Restructuring. F F (2) Various onshore bonds and loans (other than the Existing G Debt) guaranteed by Holdings (“Onshore Bank and Other G Borrowings”). The Onshore Bank and Other Borrowings H H consist of project financing in respect of projects near to completion and/or with secured financings where the value of I I the underlying security is sufficient to cover the outstanding J liabilities. Holdings is at various stages of engagement with J the relevant lenders and these liabilities are not included in K K the Schemes. L (3) Trade and bills payables, other payables, consideration L payables for acquisition of subsidiaries and other taxes M M payables will not be compromised, which is typical for N restructurings, since Holdings requires their continued N support to maintain its operations on a going concern basis. O O (4) Intercompany payables. P P 17. The following tables summarise the Group’s debts in US$ as Q Q at 30 June 2023: R R (1) The Existing Debt that is to be subject to Holdings and Hero’s S Schemes: S Debt Outstanding principal amount T Existing Public Notes 3,438,000,000 T Existing Syndicated Facilities 596,583,220 U Total ICA Debt 4,034,583,220 U V V  - 11 - A A Existing Bilateral Facilities (SBLC) 157,162,627 B Existing Other Offshore Financings 438,143,997 B Existing Private Notes 650,000,000 C Existing Onshore Facilities 413,772,058 C Existing Private Loans 456,257,600 USD100m Noble Prestige Facility 100,000,000 D Total Non-ICA Debt 2,215,336,282 D E Total debt subject to the Schemes 6,249,919,502 E F (2) The remaining debt which will not be subject to Holdings and F Hero’s Schemes: G G Debt Outstanding principal amount H Offshore project financing 270,835,684 H Onshore Bank and Other Borrowings 266,354,383 Debt Outstanding amount I Trade and other payables 627,543,565 I Intercompany payables 50,231,381 J Total debt excluded from the Schemes 1,214,965,013 J K K The Group’s financial difficulties L 18. The Group, like many others in the Mainland real estate sector, L has been severely and negatively affected by the impact of the COVID-19 M M pandemic, and the downturn in the sector and capital markets since mid- N N 2021. In this regard: O (1) The Group has found it very difficult to raise onshore O financing because of reduced bank lending for the real estate P P sector. Offshore capital markets have reacted adversely to the Q economic downturn in the Mainland, reduced bank lending Q for mortgage finance for buyers, as well as buyers’ concerns R R about future income, property price movements, and the S ability of developers to complete projects. As a result, the S offshore bond market, on which the Group relies heavily for T refinancing and growth capital, is effectively closed to T privately-owned Mainland real estate companies. U U V V  - 12 - A A B (2) Sales for residential property in the Mainland has B significantly slowed and prices have reduced. As a result, the C Group has seen a decrease in revenue in 2023 compared with C the corresponding period in 2021, materially and adversely D D impacting the Group’s ability to generate cash to service its E debts. E F F 19. The confluence of the above factors has had two principal G effects. First, it has resulted in a significant deterioration of the Group’s G financial position, with the Group’s total revenue decreasing from H H approximately RMB32.5 billion (US$4.5 billion) for the six-month period I ended 30 June 2021 to approximately RMB10.9 billion (US$ 1.5 billion) I for the six month period ended 30 June 2023; secondly it has affected the J J Group’s ability to sustain its existing capital structure. K K Events of default and enforcement action L L 20. In an announcement on the HKSE dated 19 January 2022, M M Holdings announced that it would not make payments of principal and N interest on certain of the Existing Public Notes and other material offshore N indebtedness. This was to ensure that all of its creditors are treated fairly O O and for the Group to preserve as much liquidity as possible. P P 21. As a result of this, creditors have taken steps to enforce their Q Q debts including serving statutory demands on Holdings (which remain R outstanding) and commencing proceedings in Hong Kong against R Holdings and certain subsidiaries. Further, Noble Prestige obtained an S S arbitral award rendered by the Shanghai International Economic and Trade T Commission against Aoyuan Group Co, which is a member of the China T Aoyuan Onshore Group, in connection with the guarantee provided by that U U company in respect of the USD100m Noble Prestige Facility. V V  - 13 - A A 22. Except for the Noble Prestige arbitral award, none of the other B B proceedings have resulted in a judgment or award being entered against C any members of the Group. C D D Financial position E E 23. As at 30 June 2023, Holdings’ non-current assets amounted F to approximately RMB735,947 (US$101,850) and Holdings’ current F assets amounted to approximately RMB11,736,643,689 G G (US$1.624 billion). The vast majority of these current assets H (RMB11,725,377,589 (US$1.623 billion)) are intercompany receivables, H i.e. amounts owing to Holdings from other subsidiaries in the Group. I I J 24. Holdings’ equity interest in its direct subsidiaries is valued at J zero because the security granted by Holdings over the shares of Hero (the K K intermediate holding company of the Group that holds substantially all of L the Group’s onshore and offshore subsidiaries) has become enforceable L and because the Group has ceased to be the controlling shareholder of M M Healthy Life following the disposal of 29.9% of the issued capital of N Healthy Life on 17 July 2023. N O O 25. As at 30 June 2023, Holdings’ main liabilities were current P liabilities relating to borrowings and its total indebtedness amounts to P approximately US$7.464 billion. Q Q R 26. As at 30 June 2023, the Group’s non-current assets on a R consolidated basis amounted to approximately RMB24,866.6 million S S (US$3.441 billion) and the Group’s current assets on a consolidated basis T amounted to approximately RMB196,954.3 million (US$27.257 billion). T U U V V  - 14 - A A 27. As at 30 June 2023, the Group’s key assets are primarily the B B following: C C (1) Properties for sale of approximately RMB137,601.6 million D (US$19.0 billion) which mainly comprised completed D properties and properties under development. E E (2) Trade and other receivables of approximately F RMB30,642.6 million (US$4.2 billion), which mainly F comprised other receivables, including the receivables from G G disposal of equity interests, payments on behalf of customers, H temporary payments made for potential property projects, a H deposit paid to an independent third party for a short-term I borrowing, a receivable from refund of the deposit for land I auction and other temporary payments. J J (3) Investment properties of approximately RMB12,509.3 K million (US$1.7 billion). K L (4) Amounts due from joint ventures of approximately L RMB11,752.6 million (US$1.6 billion). M M (5) Bank balances and cash of approximately RMB3,374 million N (US$467 million). N (6) Restricted bank deposits of approximately O O RMB3,563 million (US$493 million), which served as P security deposits and mortgage guarantees or with restrictions P imposed by judicial freeze and creditors. Q Q R 28. As at 30 June 2023, the Group’s non-current liabilities on a R consolidated basis amounted to approximately RMB8,883 million S S (US$1.229 billion) and the Group’s current liabilities on a consolidated T basis amounted to approximately RMB233,470 million T (US$32.311 billion). U U V V  - 15 - A A The proposed Restructuring B B 29. The Group has been involved in extensive negotiations with C C its major offshore creditors with the aim of implementing a comprehensive D financial restructuring for the benefit of all stakeholders, including the D Scheme Creditors. The negotiations and discussions have been with E E certain significant beneficial holders or lenders of record of the Existing F Debt (both the ICA Debt and Non-ICA Debt), including an ad hoc group F comprising of certain of the holders of the Existing Public Notes or the G G investment managers or investment advisers to such holders (“Ad Hoc H Group”) and a steering/coordination committee of lenders holding the H Existing Syndicated Facilities (“CoCom”). Given the ratio of the ICA I I Debt to Non-ICA Debt (approximately 2:1 or a split of 64.5% to 35.5% of J J the total Existing Debt), Holdings took the view that a consensual K restructuring would likely require the support of creditors holding ICA K Debt and creditors holding Non-ICA Debt (as either group could present a L L “blocking vote” in any scheme of arrangement proposed by Holdings) and M accordingly negotiated with both significant beneficial holders or lenders M of record of the Existing Debt (both the ICA Debt and Non-ICA Debt). N N O 30. On 24 March 2023, following discussions with the major O offshore creditors, Holdings entered into a standstill agreement with the P P Ad Hoc Group. Holdings entered into standstill agreements with other Q offshore creditors on substantially the same terms (together with the Q standstill agreement referred to above, the “Standstill Agreements”). By R R 12 June 2023, more than 1,880 offshore creditors, representing S approximately 64% of the total outstanding principal amount of the S Existing Debt had entered into Standstill Agreements with Holdings. T T U U V V  - 16 - A A 31. On 10 July 2023, Holdings entered into the restructuring B B support agreement (“RSA”) with the Ad Hoc Group. C By 22 September 2023, over 1,100 holders of Existing Debt had executed C or acceded to the RSA, representing 55% by value of the outstanding D D principal amount of the Existing Debt, in particular: E E (1) over 72% of the aggregate outstanding principal of the ICA F Debt; and F (2) over 22% of the aggregate outstanding principal of the Non- G G ICA Debt. H H 32. The RSA provides for the Restructuring of the Existing Debt I I and the obligations of Holdings and Hero. In broad terms, the J Restructuring involves the following four schemes of arrangement. Two J parallel and inter-conditional schemes of arrangement in respect of K K Holdings, namely, the Holdings’ Scheme in Hong Kong and its Scheme in L the Cayman Islands. Two parallel and inter-conditional schemes of L arrangement in respect of Hero, namely, the Hero’s Scheme in Hong Kong M M and its Scheme in the BVI. Scheme Creditors who have executed or N N acceded to the RSA have undertaken to vote in favour of the proposed O Scheme to effect the Restructuring. O P 33. The primary purpose of Holdings’ Schemes and Hero’s P Q Schemes is to achieve an effective release, discharge and/or compromise Q of the Existing Debt against the Group. Specifically: R R (1) the obligations of Hero and its offshore subsidiaries in respect S of the ICA Debt and the USD100m Noble Prestige Facility S will be compromised pursuant to the Hero’s Schemes; and T T (2) the obligations of Holdings and its offshore subsidiaries in U respect of the ICA Debt and Non-ICA Debt will be U V V  - 17 - A A B compromised pursuant to Holdings’ Schemes, to the extent B their obligations were not compromised pursuant to the C Hero’s Schemes. In particular: C D (a) the ICA Debt will be fully discharged (to the extent that D such obligations were not compromised under the E Hero’s Schemes) and the debt instruments cancelled; E F (b) the residual (unsecured) indebtedness of the Existing F Bilateral Facilities (SBLC) after the enforcement of the G relevant SBLCs will be fully discharged and the debt G instruments cancelled; H H (c) the Existing Onshore Facilities will be fully discharged, I I except for any claims against the onshore China- incorporated obligors, which will be preserved; J J (d) the USD100m Noble Prestige Facility will be fully K K discharged except for liabilities of Aoyuan Group Co (part of the China Aoyuan Onshore Group) which will L L be preserved; and M M (e) Holdings’ unsecured guarantee obligations under the N Existing Private Notes and Existing Private Loans will N be fully discharged. However, liabilities under those O debts owed by the China Aoyuan Onshore Group or O entities outside the China Aoyuan Group will be P P preserved. Q Q The Holdings’ Scheme R R 34. In broad terms, the Holdings’ Scheme involves each Scheme S S Creditor fully releasing Holdings and its offshore subsidiaries from their T obligations and liabilities under the Existing Debt in consideration for T proportionate entitlements in a set of new (or transferred) securities, U U namely new notes, convertible bonds, and perpetual securities issued by V V  - 18 - A A Holdings, as well as new shares of Holdings and transferred shares B B currently beneficially owned by Mr Guo. C C 35. As well as the new securities issued by Holdings under the D D Holdings’ Schemes, Hero will distribute additional notes and cash E consideration under the Hero’s Schemes. E F F 36. In addition: G G (1) each Scheme Creditor who executed or acceded to the RSA H by a certain time and voted in favour of the Schemes will be H entitled to receive a payment of cash and new notes (“RSA I I Fee”); J (2) certain Scheme Creditors (the Ad Hoc group and certain J members of the CoCom) who were involved in negotiating K K the Restructuring will receive a work fee to compensate those L creditors for the associated work, time, and risks (“Work L Fee”); and M M (3) the professional fees and expenses associated with the N Restructuring of financial and legal advisers to the Company N and certain Scheme Creditors (including the Ad Hoc Group) O will be paid by the Company (“Adviser Fees”). O P P The Holdings’ Scheme Debt and Holdings’ Scheme Creditors Q Q 37. As I have explained, the debt that is subject to the Holdings’ R Scheme is the Existing Debt. The Scheme separates the Existing Debt into R loans and notes as follows: S S (1) The Existing Notes Debt is comprised of the debt under the T T Existing Public Notes and the Existing Private Notes, U U V V  - 19 - A A B excluding Holdings’ Scheme Excluded Liabilities (“Existing B Notes Debt”). C C (2) The Existing Loans Debt is comprised of the debt under the D various loan agreements, excluding Holdings’ Scheme D Excluded Liabilities, as follows (“Existing Notes Debt”): E E (a) the Existing Syndicated Facilities; F (b) the Existing Bilateral Facilities (SBLC); F G (c) the Existing Other Offshore Financings; G (d) the Existing Onshore Facilities; H H (e) the Existing Private Loans; and I I (f) the USD100m Noble Prestige Facility. J J 38. Holdings’ Scheme Excluded Liabilities are the claims of the K K Scheme Creditors (whether principal, guarantee and/or security) against L Hero, the Existing Public Notes Guarantors, the Existing Syndicated L Facilities Guarantors, any member of the China Aoyuan Onshore Group M M and other entities (which are not part of the China Aoyuan Group). These N will not be subject to the arrangement and compromise effected by the N Holdings’ Schemes. Scheme Creditors are the persons holding a beneficial O O interest as principal in the Existing Debt. P P The operation of the Holdings’ Scheme Q Q 39. The Holdings’ Scheme in Hong Kong and the Cayman are R R inter-conditional and upon the Scheme Effective Date, the Company will S execute the restructuring documents by the Company on its own behalf S and on behalf of the Scheme Creditors. The Scheme appoints the Holdings T T as agent and attorney on behalf of each of the Scheme Creditors to enter U into a number of contractual documents, including deeds of release, to give U V V  - 20 - A A effect to the compromise and arrangement under the Scheme. This is a B B commonly used means of implementing a scheme of arrangement: see C Re ColourOz Investment 2 LLC5, following Re Premier Oil plc6. C D D 40. The compromises envisaged by the Scheme will take effect E on the “Restructuring Effective Date”, which is subject to the E “Restructuring Conditions” having been satisfied or waived. The F F conditions include, among other things: G G (1) both the Hero’s Schemes having been sanctioned and the H orders filed at the respective registries (this results in the H Restructuring being conditional on the Hero’s Schemes also I I being sanctioned); J (2) Hero having obtained approval in principle for the listing of J the Hero Notes on the Singapore Stock Exchange; K K (3) Holdings having paid the Adviser Fees, Work Fees and RSA L Fees; L M (4) Holdings having obtained approval in principle for the listing M of the new notes, convertible bonds, and perpetual securities N on the Singapore Stock Exchange; and N O (5) Holdings having obtained the requisite shareholder approval O for the issuance of new share capital. P P 41. If the Restructuring Effective Date has not occurred on or Q Q before the long-stop date, the terms of the Scheme will lapse and the R compromises and arrangements provided for by the Scheme will have no R S effect. S T T U 5 [2020] BCC 926 (Ch), [74]-[75] (Snowden J). U 6 [2020] CSOH 39, [218]-[230] (Lady Wolffe). V V  - 21 - A A 42. On the Restructuring Effective Date, Holdings will procure B B that the steps set out in the Scheme occur in sequence to provide to each C Scheme Creditor a Scheme Consideration Entitlement in each new (or C transferred) security, calculated according to each Scheme Creditor’s D D proportionate holding of Existing Debt. On the Restructuring Effective E Date, conditional on completion of each of the Restructuring Steps, the E Scheme Creditors will release and waive its Scheme Claims against the F F Group. G G The Holdings’ Scheme Consideration Entitlements H H 43. Each Scheme Creditor is to receive a Scheme Consideration I I Entitlement calculated by multiplying each Scheme Creditor’s J proportionate holding of the Existing Debt by the principal amount of the J new financing instruments. The Scheme Consideration Entitlements K K include the following new securities: L L (1) the new 5.5% secured notes due 2031 in the principal amount M of US$500 million to be issued by Holdings on the M Restructuring Effective Date pursuant to the Aoyuan New N N Notes Indenture; O (2) the new zero coupon mandatory convertible bonds due 2028 O in the principal amount of US$143 million to be issued by P P Holdings on the Restructuring Effective Date pursuant to the Q Aoyuan MCB Trust Deed; Q (3) the new perpetual securities in the principal amount of R R US$1.6 billion to be issued by Holdings on the Restructuring S Effective Date pursuant to the Aoyuan Perpetuals Fiscal S Agency Agreement (as defined in the Scheme); T T (4) the new 1 billion shares to be issued by Holdings on the U Restructuring Effective Date; and U V V  - 22 - A A B (5) the 400 million Aoyuan Shares, which are beneficially owned B by Mr Guo, which are to be transferred. C C The Explanatory Statement summarises the terms of the new finance D D documents pursuant to which the new securities are issued. E E Determination and adjudication of Scheme Claims F F 44. The Scheme establishes a conventional mechanism for the G G determination and adjudication of Scheme Claims. The Scheme appoints H the “Scheme Administrators” and, in the event a Scheme Creditor disputes H the Scheme Administrators’ determination of its Scheme Claim, provides I I for the appointment of an experienced lawyer or accountant to act as J independent “Adjudicator”. Holdings is not required to postpone the J Restructuring Effective Date in the event that any Disputed Scheme Claim K K has not been determined by the Adjudicator on or before the Restructuring L Effective Date. L M M The Fees N N 45. As I have explained, each Scheme Creditor who executed or O acceded to the RSA by a specified deadline (termed the “RSA Fee O Deadline”) and voted in favour of the Schemes will be entitled to receive P P the RSA Fee. Q Q 46. The RSA Fee will be paid as a combination of cash and R R Aoyuan New Notes: S S (1) the cash element will be 0.25% of the aggregate amount of T existing loans and notes debt held by the relevant creditor by T the Scheme Record Date and notified to Holdings; and U U V V  - 23 - A A B (2) a proportionate amount of US$100 million of Aoyuan New B Notes set aside for the payment of the RSA Fees (i.e. the C US$100 million is to be distributed proportionately among C the recipients of the RSA Fee according to their debt holdings). D D E 47. The Work Fee is to be paid by Holdings to the Ad Hoc group E and certain members of the CoCom. The Work Fee represents commercial F F compensation for the time and effort expended by the Ad Hoc Group and G members of the CoCom to formulate and negotiate the Restructuring. It G also compensates the Ad Hoc Group for restricting themselves from H H trading at various points during the negotiations because they were in I receipt of material non-public information. The Work Fee represents less I than 0.31% of the aggregate outstanding principal amount of the Existing J J Debt. K K 48. The Adviser Fees are to be paid by Holdings to the financial L L and legal advisers to Holdings, the financial and legal advisers to the Ad M Hoc Group, the financial and legal advisers to the CoCom, and the legal M advisers to the Existing Public Notes administrative parties. The Adviser N N Fees are payments of costs necessarily incurred by the relevant Scheme O Creditors in undertaking the role that is typical for a transaction of this kind. O The total amount of the Adviser Fees and Work Fees represents less than P P 0.85% of the aggregate outstanding principal amount of the Existing Debt. Q Q The Likely Alternative to The Scheme R R 49. In the event that the Restructuring is unsuccessful, Holdings S S considers that the likely alternative is that Holdings and the Group would T be placed into insolvent liquidation proceedings. Holdings has engaged T Kroll to produce the Liquidation Analysis, which is appended to the U U V V  - 24 - A A Explanatory Statement. The Liquidation Analysis assumes that: (a) B B Holdings and its offshore subsidiaries were placed into liquidation on C 31 December 2022 and ceased trading and operations upon liquidation; (b) C no material realisations would be available from the Company’s onshore D D subsidiaries (so the Liquidation Analysis focuses on the offshore E subsidiaries); (c) all assets would be sold or realised on a liquidation basis; E and (d) creditors would enforce against all secured assets associated with F F their debts and claim the remaining balances. G G 50. In terms of recoveries to Scheme Creditors: H H (1) In a Liquidation scenario, the Liquidation Analysis indicates I I that, on the basis of the relevant assumptions, in the event of J the insolvent liquidation of Holdings and the Group, the J Scheme Creditors are expected to have a total recovery rate K K of approximately 3.7% to 4.2%. L (2) If the Group continues to operate as a going concern as a L result of the Restructuring, the estimated return is 36.1% to M M each Scheme Creditor based on its Scheme Consideration N Entitlement or Blocked Scheme Consideration Entitlement N (as applicable). O O The Hero’s Scheme P P 51. As I have mentioned in [33] the Hero’s Scheme involves each Q Q Scheme Creditor fully releasing Hero and certain offshore subsidiaries R from their obligations and liabilities under the ICA Debt and USD100m R Noble Prestige Facility in consideration for proportionate entitlements in: S S (1) the “Hero Notes” in the principal amount of US$1.8 billion; T T and U U V V  - 25 - A A B (2) the “Cash Consideration” (essentially the amount of cash on B hand in certain Group company bank accounts after deducting C all professional fees incurred in respect of the Restructuring); C and D D (3) The additional benefits I have described in [36]. E E 52. The debt that is subject to the Hero’s Scheme is the ICA Debt F F and the USD100m Noble Prestige Facility. Scheme Creditors are the G persons holding a beneficial interest as principal in that Debt. G H H 53. The Hero’s Scheme separates the Debt into loans and notes I as follows: I J (1) The Existing Public Notes Debt is comprised of the debt J under the Existing Public Notes, excluding the Hero’s K K Scheme Excluded Liabilities. L (2) The Existing Loans Debt is comprised of the debt under the L various loan agreements, excluding the Hero’s Scheme M M Excluded Liabilities, as follows: N (a) the Existing Syndicate Facilities; and N O (b) the USD 100m Noble Prestige Facility. O P P 54. The Hero’s Scheme Excluded Liabilities are the liabilities Q owed by Holdings to the Scheme Creditors in relation to the Existing Debt Q and by the Group under the USD100m Noble Prestige Facility. R R S 55. Each Scheme Creditor is to receive a Scheme consideration S Entitlement calculated by multiplying each Scheme Creditor’s T T proportionate holding of the Debt by the principal amount of the new U financing instruments. U V V  - 26 - A A 56. The Hero Notes are to be issued on the Restructuring B B Effective Date in three tranches. C C (1) Tranche A: 7.5% senior secured notes due 2029 in the D principal amount of US$650 million; D (2) Tranche B: 8.0% senior secured notes due 2030 in the E E principal amount of US$500 million; and F F (3) Tranche C: 8.8% senior secured notes due 2031 in the principal amount of US$650 million. G G H 57. Each Scheme Creditor will be entitled to a proportionate H amounts of each tranche. The Cash Consideration will be the aggregate I I balance of moneys held in six designated accounts as at the Restructuring J Effective Date after deducting all professional fees incurred in respect of J the Restructuring, as notified by PwC (in its capacity as a monitoring K K accountant) to the Ad Hoc Group and the CoCom three business days L L before the Restructuring Effective Date. The Hero’s Scheme operates in M materially the same way as the Holdings’ Scheme. M N The principles by which the court determines a scheme N O 58. In considering whether to sanction a scheme, the Court O applies well-established principles, which I summarised in Re Sunac P P 7 China Holdings Ltd . They are as follows: Q Q (1) whether the scheme is for a permissible purpose; R R (2) whether the necessary statutory majorities have been obtained; S (3) whether creditors who were called on to vote as a single class S had sufficiently similar legal rights such that they could T T U U 7 [2023] 5 HKLRD 765, [17]. V V  - 27 - A A B consult together with a view to their common interest at a B single meeting; C C (4) whether the meeting was duly convened in accordance with D the Court’s directions; D (5) whether creditors have been given sufficient information E E about the scheme to enable them to make an informed F decision on whether or not to support it; F (6) whether the Court is satisfied in the exercise of its discretion G G that an intelligent and honest man acting in accordance with H his interests as a member of the class within which he voted H might reasonably approve the scheme; and I I (7) in an international case, whether there is sufficient connection J between the scheme and Hong Kong, and whether the scheme J is effective in other relevant jurisdictions. K K L I will address each of these, although only (2) and (4) are controversial. L M Was the meeting duly convened in accordance with the Court’s M directions? N N rd 59. I am satisfied having read the 3 affirmation of Chen Zhi Bin, O O a director of Holdings, that the order that I made on 31 October 2023 P convening a Scheme Meeting of each of Holdings and Hero has been P complied with. The Notice of the Scheme Meeting, the Explanatory Q Q Statement and Scheme have been circulated and published as directed. R R Statutory Majorities S S 60. Section 670(1)(a) and (b) of the Ordinance provides that for T T the purposes of section 673(1)8 the creditors, or class of creditors, of a U U 8 Creditors or a class of creditors with whom a compromise is proposed agree to it. V V  - 28 - A A company are taken to have agreed to a compromise constituting a scheme B B of arrangement if a majority in number representing at least 75% in value C of the class of creditors present and voting in person or by proxy at a C scheme meeting vote in favour of it. D D E 61. The Scheme Meeting was chaired, as directed by the E convening order, by Mr Edward Middleton of Alvarez & Marsal Asia F F Limited, who has reported to the Court on the conduct of the meeting, G which took place without controversy. The detailed results of the Scheme G Meeting are set by Mr Middleton in his report. They are as follows: H H VOTE FOR VOTE AGAINST CATEGORY NUMBER OF NUMBER OF NUMBER NUMBER OF NUMBER OF NUMBER I I SCHEME VOTES BY OF SCHEME VOTES BY VALUE OF VOTES CREDITORS VALUE VOTES CREDITORS BY % BY % J TOTAL 1,212 $4,495,325,439 68.43% 56 $1,214,165,518 18.48% J APPOINTING CHAIRPERSON AS PROXY K TOTAL 2 $564,568,561 8.59% 3 $104,975,894 1.60% K APPOINTING OTHER AS PROXY L TOTAL VOTING 2 $137,103,408 2.09% 2 $53,477,290 0.81% L IN PERSON TOTAL 1,216 $5,196,997,408 79.11% 61 $1,372,618,702 20.89% M M N 62. As is apparent from the table the required statutory majorities N were obtained. O O P The test for determining classes P Q 63. I summarise the test for determining classes in Re Sunac Q China Holdings Ltd9 at [20]–[22]: R R “20. In considering whether creditors are properly classified, S the test is whether creditors who are called on to vote as a single S class have sufficiently similar legal rights that they could consult together with a view to their common interest at a single T meeting. The relevant principles may be summarised thus: T U U 9 [2023] HKCFI 2850; [2023] 5 HKLRD 765. V V  - 29 - A A (1) The overarching question is whether the pre and B post-scheme rights of those proposed to be B included in a single class are so dissimilar as to make it impossible for them to consult with a C C view to their common interest. If that is the case, separate meetings must be summoned. D D (2) The second principle is that it is the rights of creditors, not their separate commercial or other E interests, which determine whether they form a E single class or separate classes. Conflicting F interests will normally only ever arise at the F sanction stage as a question for consideration. G (3) The third principle is that the court should take a G broad approach to the composition of classes, so as to avoid giving unjustified veto rights to a H H minority group of creditors, such that the test for classes becomes an instrument of oppression by I a minority. The court should be careful to avoid I unnecessary proliferation of classes because by ordering separate meetings the court might give J a veto to a minority group. J (4) The fourth principle is that the court has to K K consider, on the one hand, the rights of the creditors in the absence of the scheme and, on the L other hand, any new rights to which the creditors L become entitled under the scheme. If, having carried out that exercise, there is a material M M difference between the rights of the different groups of creditors, they may, but not necessarily N will, constitute different classes. Whether they N do so depends on a judgment as to whether such a difference makes it impossible for the different O groups to consult together with a view to their O common interest. P P (5) In applying the above test, the starting point is to identify the appropriate comparator: that is, what Q would be the alternative if the scheme does not Q proceed. R See Re China Oil Gangran Energy Group R Holdings Ltd10; Re Nasmyth Group Ltd11. S S 21. As regards the identification of the appropriate comparator, the established practice is as follows: T T U 10 [2021] HKCFI 1592; [2021] HKCLC 911 at [15]–[16]. U 11 [2023] EWHC 696 (Ch) at [28]–[29] (Leech J). V V  - 30 - A A ‘In the context of a scheme of arrangement the Court B must identify the comparator so that it can properly B consider both class composition and also whether it produces a result for all scheme creditors which is better C C than or, at least no worse than, the result which would be achieved in the absence of the scheme’ (Re Lamo D Holding BV [2023] EWHC 1558 (Ch) at [76] (Leech J)). D ‘In identifying the relevant alternative, the directors of E the Company, being advised by their professional E advisers, are normally in the best position to identify F what will happen if a Scheme or Plan fails’ (Re Fitness F First Clubs Ltd [2023] EWHC 1699 (Ch) at [63] (Michael Green J)). G G 22. In brief, in assessing the Scheme Creditors’ rights, the Court considers what are often referred to as ‘rights in’ and H H ‘rights out’: I ‘[T]he court needs to consider: (i) The rights of the Plan I Creditors in the absence of the Plan, sometimes called the rights in; and (ii) Any new rights to which the Plan J Creditors become entitled under the Plan or rights out. J If there is a material difference between the rights of the K K different groups under (i) or (ii), they may, but not necessarily will, constitute different classes’ (Re L Yunneng Wind Power Co Ltd [2023] EWHC 2111 (Ch) L at [40] (Michael Green J)).” M M 64. Lord Millett NPJ explains in [20] of UDL Argos Engineering N N & Heavy Industries Co Ltd & others12 that “….. creditors with different O and potentially conflicting interests arising from circumstances O unconnected with their interests as members of the class are not precluded P P from attending and voting at a meeting of the class. But while their Q presence does not invalidate the result of the meeting, it may lead the court Q to decline to sanction the Scheme.” The court asks first, whether or not R R the rights to be varied are sufficiently similar to allow creditors to vote in S one class and, secondly, if the question is controversial, whether S notwithstanding that the court takes the view that the creditors are properly T T treated as one falling into one class (or possibly two if there are multiple U U 12 (2001) 4 HKCFAR 35. V V  - 31 - A A classes) does a sub-set of the creditors have an additional interest, which B B calls into question whether in supporting a scheme they were motivated by C the same considerations as other creditors. C D D 65. Before turning to consider the characteristics of an additional E or conflicting interest that may render a vote unrepresentative, I will E address Ms Lam’s argument that the deliberate inter-locking and inter- F F conditional nature of the two Schemes means that the Scheme Creditors’ G rights under the two Schemes as a whole need to be considered when G determining whether or not the class had been properly constituted. H H Central to Ms Lam’s argument is the decision of Snowden J in Re The I Baltic Exchange Limited13. The scheme in Baltic Exchange was a transfer I takeover scheme the object of which was to enable SGX Baltic J J Investments PTE Ltd to acquire all of the issued shares of The Baltic K K Exchange Limited, which was a private company with one class of L shareholders and a single class of shareholders was convened to consider L the scheme. The particular matter that concerned the constitution of the M M class, which lead to those parts of Showden J’s judgment on which N Ms Lam relies are explained in [13]–[14] of the judgment: N O “13. The third matter to which Mr. Horan drew my attention O is one which, however, I would wish to comment on in a little more detail. It is a particular feature of the Baltic P Exchange that it has made use - throughout its recent P history at least - of what are called “panellists” who produce or contribute to the freight market indices Q Q known as the “Baltic Indices”. The indices rely on panelists giving a daily judgement on the routes that they R have been asked to assess. Until now, the panellists have R been content to do so voluntarily without any formal contractual arrangements with the Company. They have S also been in receipt of free access to certain data to S enable them to perform their role. T T U U 13 [2016] EWHC 3391. V V  - 32 - A A 14. The bidding company, an indirect subsidiary of the B Singapore Exchange, wishes that this panellist B arrangement be put on to a more formal commercial footing as part of the acquisition process. Accordingly, C C contracts have been entered into between a wholly- owned subsidiary of the Company and the panellists to D deal with the provision by them of this information. D Under those arrangements, which are conditional upon the Scheme being sanctioned and the acquisition taken E E effect, the subsidiary of the Company has promised to procure free membership of the Baltic Exchange for the F panellists (which I am told is worth £6,875 each per year) F and continued free access to the data (which is worth about £458 each per year). Mr. Horan has also told me G that one of the terms of the takeover will be that the level G of fees for membership of the Baltic Exchange will be H frozen for a total of five years for all members.” H I 66. Some of the panellists were shareholders in The Baltic I Exchange Limited. The issue was, therefore, whether or not the additional J J contractual rights made the views of those shareholders unrepresentative K of the class of shareholders generally. Ms Lam argued that Snowden J K accepted that these additional rights that were not derived from the scheme, L L but from another contractual arrangement, should be taken into account in M determining whether the class had been properly constituted. She relied M on [15]–[18]: N N “15. These new contractual arrangements, which are O O conditional upon the sanction and effectiveness of the Scheme are matters, which should be looked at by a P court in considering the class and jurisdictional P questions. I say that because in a number of cases the court has made it clear that it is not confined to looking Q at the Scheme document in the narrow sense. Where a Q scheme is part of, or accompanied by, other R arrangements that confer rights or benefits upon some or R all of the members or creditors who are to be bound by the scheme, the class question must be answered by S reference to all those arrangements taken as a whole. S 16. I cite by way of example what Mr. Justice David T T Richards said in Re Telewest Communications (No.1) [2005] 1 BCC 752 at para.54, where, having referred to U certain voting arrangements, he said: U V V  - 33 - A A ‘A serious issue would arise if in consideration of its B agreement to vote in favour of the scheme, or B collaterally to it, the bondholder received benefits not available to the other bondholders. In effect, the result C C would be unequal treatment under the scheme and the bondholder could not, I think, be included in the class.’ D D 17. I returned to this question in the case of Re Stemcor Trade Finance Limited [2016] BCC 194 at paras.17 and E 18, where I said, at para.18: E ‘I would first say that in deciding the question it is F F necessary for me not just simply to look at the scheme as a narrow and limited document, I think it is right to G look at the scheme in the context of the restructuring G as a whole including the rights to be conferred in the other various other restructuring documents which are H H envisaged to be entered into pursuant to the terms of the scheme. If authority were needed for that I proposition, apart from common sense, I think it could I be found in the decision of Mr. Justice David Richards in Re Uniq Plc [2012] BCLC 783 at para.24.” J J 18. In this particular case, therefore, I have to ask the question, as a matter of judgment, whether the ability of K K the panellists to obtain contractual rights giving them free membership of the Baltic Exchange for the duration L of the panellist agreement and continued free access to L the certain data distribution is such as to require them to be put into a separate class from other members of the M M Company.” N N 67. Ms Lam also took me to Snowden J’s judgment in Re Sunbird O Business Services Limited14 in which the same approach is explained in O [23]: P P “23. Finally, and relevantly for the instant case, modern Q authorities have emphasised that, in assessing how Q creditor classes should be constituted for the purposes of a scheme, the Court should not adopt a narrow approach R R and look at a scheme in isolation. The scheme should be looked at in the context of the restructuring as a whole, S including, in particular, any rights conferred in other S agreements that are provided for under the terms of the scheme, or which are conditional upon it: see e.g. per T T David Richards J in Re Telewest Communications plc [2004] BCC 342 at paragraph [54]; my own U U 14 [2020] EWHC 2860 (Ch). V V  - 34 - A A observations to that effect in Re Baltic Exchange Ltd B [2016] EWHC 3391 at [17], citing Re Stemcor Trade B Finance Ltd [2016] BCC 194 at [17]-[18]; and the recent discussion of this approach by Falk J in Re Codere C C Finance 2 (UK) Limited [2020] EWHC 2441 (Ch) at [49] et seq..” D D 68. Snowden J refers in the passage that I have quoted to [49] of E E Falk J’s judgment in Re Codere Finance 2 (UK) Limited : 15 F F “49. However, the fundamental question is whether the Scheme should be regarded, on a true analysis, as a G G number of linked arrangements rather than a single arrangement (per Chadwick LJ in Re Hawk). So I need H to ask myself what is the ‘arrangement’, and whether H there is more than one. The focus of Bowen LJ’s test is on the ability of persons to ‘consult together’ with a view I to their ‘common interest’. The focus is on the nature of I the arrangement and the decision-making process in J respect of it. As a matter of commercial reality, AHC J members will have taken the decision to support the Scheme by reference to the whole package of rights to K which they were entitled pursuant to the Lock-up K Agreement, including the level of conditionality (if any) L attached to each element of that package. If the ‘package’ L of rights offered and agreed to by some creditors for releasing or varying their existing rights is different to M the package available to others, then that might in M principle be thought properly relevant to class composition, and not only to the question of the court’s N N exercise of discretion at the sanction stage.” O O 69. In September 2020 Falk J heard an application for an order by P Codere Finance 2 (UK) Limited for a meeting of a single class of creditors P for the purpose of considering and approving a scheme of arrangement. Q Q The scheme creditors were the ultimate holders of two series of notes R issued by the scheme company and another group company; their parent R being listed on the Madrid stock exchange. The notes were issued in S S registered global form and traded through Euroclear and Clearstream. The T liabilities under the notes and several other liabilities of other group T U U 15 [2020] EWHC 2441. V V  - 35 - A A companies including €85 million super senior notes due on B B 30 September 2023 issued on 29 July 2020 (“interim notes”) benefited C from substantially the same guarantee and security package granted by a C number of group companies. Falk J accepted that the most likely D D alternative to restructuring, and thus the comparator for purposes of E assessing class composition, was some form of formal insolvency. During E the negotiation of the group’s debt restructuring several creditors of the F F group, including a small proportion of those holding debt arising under the G notes, signed a lock-up agreement with several group debtors. The lock- G H up agreement and associated term sheets provided the following: H “26. … I I i) an initial issue discount of 3% on the Interim Notes; J J ii) a coupon on the Interim Notes which is 2% higher than the coupon on the New Notes, for the period K from issue to the point that the New Notes are K issued (12.75% as opposed to 10.75%); L iii) a ‘backstop’ fee of 2.5% of the entire €250 million L of NSSNs; M M iv) a ‘work fee’ payable to AHC members of 1% of the principal amount of the Existing Notes (totalling N around €7.6 million), to be paid on issue of the N Interim Notes; O v) the payment by the Group of the AHC’s financial O and legal advisers’ fees (anticipated to amount to P approximately €6.75 million); and P vi) consent fees, comprising a pro rata share of 0.5% of Q the principal amount of the Existing Notes to be Q paid to noteholders who acceded to the lock-up by 20 July (an ‘early bird’ fee)16 and a further 0.5% of R R the principal amount of the Existing Notes to be paid to noteholders who acceded by a later date S (that later date subsequently being altered to the S business day prior to the sanction hearing). Noteholders who qualify for the early bird fee also T T receive the second consent fee.” U U 16 23 July under the revised Lock-up Agreement. V V  - 36 - A A 70. At the hearing to convene a meeting one creditor, Kyma, B B argued that scheme creditors should vote as two classes with a group C (referred to in the judgment as the AHC members) voting in a separate C class to other scheme creditors. Kyma argued that the AHC members had D D negotiated a special package of benefits for themselves, which I have E described in the previous paragraph, including the lock-up agreement. E Falk J described the fundamental question before him as whether the F F Scheme should be regarded as a number of linked arrangements rather than G a single arrangement and then explained the relevant test in [49], which I G H have quoted above. It is clear from [49] and [52]–[54] that Falk J took the H view that the additional rights including the lock-up agreement negotiated I I by the AHC members were rights to which the court should have regard J when determining class composition. Although they were not rights J conferred expressly by the scheme they were rights arising as part of the K K restructuring of which the scheme formed part rather than genuinely L independent of the scheme. However, Falk J concluded that the interim L notes should not be regarded as new rights which the scheme confers. He M M took the view that on a proper analysis they were issued in exchange for N the funds advanced for them by the relevant AHC members rather than N disguised consideration for the variation of rights under the scheme. Falk J O O took the opposite view in respect of the work fee, which he considered was P clearly linked to the AHC members holding of the existing notes and was P close to a form of disguised consideration for support for the scheme. Q Q Falk J concluded that the differences, however, were not sufficiently R substantial to prevent the scheme creditors consulting and voting together R as one class. S S T T U U V V  - 37 - A A 71. In Re Hawk Insurance Co Ltd Chadwick LJ 17 , referring to B B Bown LJ in Sovereign Life, talks of the rights being sufficiently similar C that a scheme can be treated as one arrangement; and if the rights are not, C as being part of a number of linked arrangements; the test for determining D D which it is being whether the rights of the creditors are so dissimilar as to E make it impossible for them to consult together in their common interest. E Zacaroli J refers to Chadwick LJ’s decision in In the matter of Dundee F F 18 Pikco Limited when explaining that in a scheme with more than one class G the fact that certain creditors in each class hold debt in the other class is G H not regarded as splitting the class of creditors, and that such a scheme is H viewed as a series of linked compromises or arrangements. Zacoroli J I I explains that in his opinion the better view is that in such a scheme there J is no difference in the rights, but a difference in the interests of the relevant J creditors and, as is well established, a difference in interests does not split K K the class, although it may be a matter relevant at the sanction hearing when L the court comes to consider the issue of a scheme’s fairness. This, argues L Holdings, is the correct view to take of the compromise sought to be M M achieved by the Holdings and Hero’s Schemes. N N 72. The issues raised by Ping An are these. Are the only rights to O O which the court has regard in determining the constitution of a class of P creditors the rights compromised and new rights granted under the terms P of the scheme? Alternatively, if as a consequence of a restructuring of the Q Q company the subject of a scheme, or an associated company in the case of R a group restructuring of which a scheme forms part, a scheme creditor R acquires other rights or has other existing rights compromised should S S T T U 17 [2001] EWCA Civ 241, [2001] 2 BCLC 480, [16]. U 18 [2020] EWHC 89 (Ch). V V  - 38 - A A regard be given to these modifications of a creditor’s rights in determining B B the class composition? C C 73. In [27(3)] of UDL19 Lord Millett says that “the test is based D D on similarity or dissimilarity of legal rights against the company….”. He E goes on in [27(4)]: “The question is whether the rights which are to be E released or varied under the Scheme or the new rights which the Scheme F F gives in their place are so different that the Scheme must be treated as a G compromise or arrangement with more than one class”. This language G clearly suggests that it is only the rights compromised by the scheme or H H granted by it that are relevant to the question of class composition. The I reason for not straying beyond the confines of the rights effected by the I scheme had been addressed in the previous paragraph. The first identified J J by Lord Millett is the impracticality in many cases of constituting classes K K by reference to distinctions other than those arising from the terms of the L scheme itself. Lord Millett is referring specifically to interests, but the L same consideration applies to rights with which a scheme is not concerned M M as illustrated by complications considered in Codere Finance. This is not N to say that other rights or interests are not relevant. They will be relevant N at the stage described by Lord Millett in [27(6)]; the discretionary stage at O O which the court considers whether the result of the meeting fairly reflected P the views of creditors. At that stage the court may discount or disregard P votes of creditors who had such other interests or rights that their support Q Q for the scheme cannot be regarded as fairly representative of the class; what R for convenience I shall refer to in the remainder of this judgment as a R “special interest”. S S T T U U 19 Supra. V V  - 39 - A A 74. In my view the approach taken by the English courts in Baltic B B Exchange, Re Sunbird Business Services and Codere Finance, which I C accept do support Ping An’s argument that regard should be had to rights C altered outside the scheme, as part of the broader restructuring of which D D the scheme forms part, is not consistent with the Court of Final Appeal’s E decision in UDL and, consequently, the law in Hong Kong. It seems to me E that those decisions do not sit comfortably with those that I have referred F F to in [71] such as Dundee Pikco, but it is not for the Hong Kong to G reconcile them. I would add one qualification. G H H 20 75. In [131]–[132] of his judgment in Re Noble Group Limited I Snowden J accepts as a general proposition that payments made by a I company to some scheme creditors independently of a proposed scheme J J and its “associated restructuring agreements”, which are not dependent on K K the scheme coming into effect are not relevant in determining the L composition of a class. Pausing here, it would appear by “associated L restructuring agreements” Snowden J has in mind agreements, which may M M or may not form part of a scheme, for example, a consent fee rather than N an agreement, but which viewed commercially might be said to be N associated with the restructuring of which the scheme forms part as, for O O example, in the case of a group restructuring such as that before me now, P which involves two independent schemes (in the sense that the sanction P and implementation of one is not a condition of the other) of two associated Q Q businesses. This being the case Snowden J is accepting as a general R proposition that it is the rights altered by the scheme before the court which R determines class composition, which is an uncontroversial. He then refers S S to Richards J’s (as the then was) judgment in Telewest Communications T T U U 20 [2019] BCC 349. V V  - 40 - A A Plc 21 in which it is suggested that a class might be fractured if in B B consideration of a creditor’s agreement to vote in favour of a scheme a C creditor receives benefits not available to other creditors. Snowden J C describes such a payment as disguised consideration. I agree that a right D D to payment granted to some scheme creditors in return for voting for a E scheme, can properly be viewed as a relevant right when determining a E class. This is because it forms part of the arrangement the company wishes F F to enter with its creditors, albeit only some of them, and should be included G in the scheme; not, to use Snowden J’s language, disguised and omitted G H from the scheme put before creditors for consideration and resolution and H the court for sanction. If it is included in the scheme and it is material this I I might, depending on the size and the significance of the payment, justify J those creditors who the company have agreed to pay, voting in a separate J class. K K L Special Interest L 76. The circumstances in which an additional benefit available to M M some members of a class, but not others, renders a vote unrepresentative N N was considered by Hildyard J in [89]–[90] of his judgment in Re Lehman O Brothers International (Europe) (in administration)22: O “89. I agree with counsel for the Administrators that the mere P P fact that the majority creditors have a special interest for supporting the scheme does not, without more, entail Q that the class was not ‘fairly represented’. As appears Q from Plowman J’s formulation of the guiding principles in In re National Bank Ltd [1966] 1 WLR 819 (see para R 65 above), the concern is whether the relevant creditors R have a special interest which is adverse to, or clashes S with, the interests of the class as a whole. A special S interest which merely provides an additional reason for supporting the scheme (without clashing or conflicting T T 21 [2004] BCC 342, [52]. I note that an agreement to pay a small consent fee to a creditor is generally U unobjectionable if it was available to all creditors, see Sunac Supra [25(3)]. U 22 [2018] EWHC 1980 (Ch), [2019] Bus LR 1012. V V  - 41 - A A with the interests of the class as a whole) does not B undermine the representative nature of the vote. This is B well established in the authorities both before and after National Bank Ltd. Thus, for example: C C (1) In In re Alabama, New Orleans, Texas and D Pacific Junction Railway Co [1891] 1 Ch 213, D 238–239, Lindley LJ said: ‘what the court has to do is to see, first of all, that the provisions of that E statute have been complied with; and, secondly, E that the majority has been acting bona fide. The F court also has to see that the minority is not being F overridden by a majority having interests of its own clashing with those of the minority whom G they seek to coerce. Further than that, the court G has to look at the scheme and see whether it is one as to which persons acting honestly, and H H viewing the scheme laid before them in the interests of those whom they represent, take a I view which can be reasonably taken by business I men. The court must look at the scheme, and see whether the Act has been complied with, whether J J the majority are acting bona fide, and whether they are coercing the minority in order to K promote interests adverse to those of the class K whom they purport to represent; and then see whether the scheme is a reasonable one or L whether there is any reasonable objection to it, or L such an objection to it as that any reasonable man M might say that he could not approve of it.’ M (2) In In re Dee Valley Group plc [2018] Ch 55, para N 42, Sir Geoffrey Vos C said: ‘The meeting or N meetings are called to establish whether or not the court's discretion to sanction a scheme can, O O as a matter of jurisdiction, be invoked. It is, however, most important in my judgement to P consider what the court is doing once it embarks P on exercising that discretion. It is then deciding, amongst other things, first whether the statutory Q pre-requisites have been fulfilled, and secondly Q whether the class attending the meeting the court R called was fairly represented by those attending R the meeting, whether the statutory majority were acting bona fide and not coercing the minority in S order to promote interests adverse to those of the S class they purport to represent. It is quite clear from that exercise that the court is indeed T T concerned with those matters in sanctioning a scheme. The clue as to what members are U supposed to be doing in voting at the court’s U V V  - 42 - A A class meeting is also, I think, to be found in that B second well established formulation. The B members are supposed to be fairly representing their class, and acting bona fide, and not coercing C C a minority in order to promote interests adverse to the class they purport to represent … D D ‘The test itself is, as I have said, made clear by the exercise that the court undertakes at the E sanction stage. That points clearly to the need for E the class members at the court meeting to be F voting in the interests of the class and not to F promote interests adverse to the class they purport to represent …’ G G (3) I said much the same in In re APCOA Parking Holdings Gmbh (No 2) [2015] Bus LR 374 , para H H 130: ‘if an allegation is made that a creditor had improper regard to interests other than those of I the class to which he belonged, it is necessary for I there to be a “but for” link between the collateral interest and the decision to vote in the way that J he did. The person challenging the relevant vote J must therefore show that an intelligent and K honest member of the class without those K collateral interests could not have voted in the way that he did. It is not sufficient simply to L show that the collateral interest is an additional L reason for voting in the manner in which he would otherwise have voted.’ M M (4) The same view has recently been taken by the N Grand Court of the Cayman Islands in In re N Ocean Rig UDW Inc ((unreported) 18 September 2017, Grand Ct of the Cayman Islands) with the O benefit of full adversarial argument, including O the citation of all relevant English and Australian P authorities. P 90. Further, and particularly as to (b) in para 89 above, I Q agree also with counsel for the Administrators that the Q bare existence of an adverse interest is not enough to impugn a creditor’s vote as being unrepresentative of the R R class. There must be a strong and direct causative link between the creditor’s decision to support the scheme S and the creditor’s adverse interest such that it is the S adverse interest which drives the creditor’s voting decision. In the absence of such a link, there is simply T no sufficient reason to treat the creditor’s vote any T differently from those of the rest of the class.” U U V V  - 43 - A A 77. I agree that a proportion of Scheme Creditors of Holdings had B B the benefit of guarantees granted by Hero and were able to vote in both the C Holdings and Hero’s Schemes on the basis of the full value of their claims C and receive Scheme Consideration in both sets of Schemes and this is a D D special interest (which I note was acknowledged by Holdings in the E application for sanction of the Holding’s Scheme before Doyle J in the E Cayman Islands), because it is an additional reason for the over-lapping F F Scheme Creditors to vote in favour of the Holdings’ Scheme. However, it G does not seem to me that it has been demonstrated by Ping An that it G H undermines the representative nature of the vote by the majority at the H Holdings’ Scheme Meeting. To do so Ping An would have to prove that I I the additional benefits obtained by the over-lapping creditors from the J approval of the Hero’s Scheme were, or were likely to have been, a J material reason for voting for the Holdings’ Scheme. Ping An has adduced K K no evidence which suggests that this was the case; in fact, Ms Lam did not L in argument goes so far as to suggest it was the case. The absence of any L evidence or argument that identifies a credible reason for thinking that the M M over-lapping creditors decision to approve the Holdings’ Scheme was N motivated by the benefit to be obtained by approval of Hero’s Scheme is N consistent with my decision in respect of the constitution of the class. In O O practice what might, in my view, reasonably be assumed is that some of P the over-lapping creditors considered the two Schemes together, i.e. as a P package, but this does not of itself mean that their approach to the decision Q Q to support the Holdings’ Scheme was influenced by factors that made their R deliberations unrepresentative of those of other Holdings’ Scheme R Creditors. As I have demonstrated an additional interest does not fracture S S a class. Neither does it mean that the deliberations are to be assumed to be T unrepresentative. The latter has to be proved. T U U V V  - 44 - A A Adequacy of the Explanatory Statement B B 78. An unusual feature of the Holdings’ Scheme Petition was that C C there was cross-examination of both one of the Liquidators of Holdings D (Patrick Cowley) and an expert on behalf of Ping An (Matt Ng, who is also D an accountant dealing mainly with insolvency matters). As far as I am E E aware this is the first time that this has taken place in a scheme in F Hong Kong; although there have been occasions on which individual F creditors or members (in the case of a privatisation) have addressed the G G court23. Oral evidence was required because it was contended by Ping An H that there were material mistakes or insufficiency of information in the H Explanatory Statement. I I J 79. Ping An makes two complaints. First, that the assessment of J the recovery rate of 36.1% under the Schemes contained in Kroll’s Report K K does not present a fair picture, because it uses an outdated share price and L does not adequately consider the payment terms of the instruments and L Holdings’ ability to generate sufficient cash flow to pay the sums due on M M them. Secondly, no cashflow forecast has been provided in Holdings’ N N Explanatory Statement to enable the Scheme Creditors to assess the true O value of the Scheme consideration. O P P 80. As I explain in [23] of Re Century Sun International Ltd24 a Q company is under a duty to include in the explanatory statement all the Q information necessary for creditors to assess whether the scheme is in their R R best interests or not. The extent of the information required will depend S S T T 23 See, for example, PCCW [2009] HKEC 553 (CFI), [2009] HKEC 738 (CA), which was an attempted privatisation; National Arts Entertainment and Culture Group [2020] HKCFI 275, [2020] HKEC U 278, which was a creditors scheme. U 24 [2021] HKCLC 1477. V V  - 45 - A A on the facts of the case. Generally, a company will be required to provide B B specific information to support its predicted outcomes. C C 81. There are two components to the first complaint. The first D D concerns the share price used to assess the recovery rate. Holdings used a E November 2023 price. Mr Ng suggests that this should have been E discounted. His reason for so contending is that “in theory” the Scheme F F would put downward pressure on the share price, in addition to having a G dilution effect (which Mr Ng calculates would be 25.22%), because a G significant proportion of creditors would be likely to sell their shares. H H Mr Cowley explained that he had taken the view that determining the value I of the shares if the Scheme was to be implemented was largely speculative, I but the Liquidators considered it reasonable to assume that if the Scheme J J was approved it was likely to have a positive effect on the share price. K K Mr Cowley points in his report to the Sunac Scheme (which I have referred L to previously25, which was sanctioned in November 2023) seeing a 38.9% L increase in its share price the day after it resumed trading as illustrating M M what he considers to be the most likely impact of the approval of the N Scheme. I think that it is a reasonable assumption that the share price will N recover if the Scheme is approved, and, of course, it can never be more O O than an assumption. One difficulty with Mr Ng’s approach is that it does P not consider why the share price was HK$0.18 on 15 November 2023. P Without some understanding of what resulted in the price being at that Q Q level five weeks after the application was issued for an order convening a R meeting of Scheme Creditors it seems to me that not only is Mr Ng’s R calculation very much theoretical as he himself acknowledges, but S S probably it ignores factors operating in the market, which result in the T shares trading at HK$0.18. I do not accept that the assumed value of the T U U 25 Supra. V V  - 46 - A A share price is likely to be misleading and calls into question the reliability B B of the valuation to extent that justifies rejecting the adequacy of the C financial information included in the Explanatory Statement. C D D 82. The second complaint is that no cash flow forecast has been E provided and Ping An argues that something similar to the cash flow E forecast and report, which tested the report and pointed out reasons for F F caution, which was included in the explanatory statement in Re Kaisa G Group Holdings Ltd 26 , was necessary and that its absence renders the G information provided to Scheme Creditors materially inadequate. In cross- H H examination Mr Cowley explained that the cash flow forecasts had I changed during the discussions with creditors; the most material change I being the reduction of the debt figure from US$2.9 billion to J J US$1.8 billion. Mr Ng had used the initial higher figure and his criticism K K that the cash flow did not support the scheduled debt repayments fell away L once this was factored in, which I did not understand Mr Ng to dispute L when he was cross-examined. I accept that generally in a restructuring, M M which involves materially delaying repayment of the debt, a cash flow N analysis is desirable in order to demonstrate that the schedule is likely to N be met. The analysis should also identify matters that might reasonably be O O expected to adversely affect the accuracy of the analysis. P P 83. In practice, it will commonly be possible for an opposing Q Q creditor to identify matters that can plausibly be argued have not been dealt R with adequately in an explanatory document, because by its nature a R scheme requires the justification of a commercial decision, which involves S S more than scrutinising numbers; it requires a degree of judgment about the T credibility of the restructuring and what it purports to offer creditors in T U U 26 [2017] 1 HKLRD 18. V V  - 47 - A A contrast to what return can reasonably be expected if the company is put B B into compulsory liquidation. What is required is an explanatory statement, C which allows creditors to make this assessment. The creditors are likely C to vary in terms of commercial and financial sophistication and the effort D D they are likely to put into understanding the information with which they E are presented. The explanatory statement has to achieve at least two things. E Provide sophisticated creditors with enough information to assess the F F scheme and perhaps identify further information they consider is necessary G to decide whether or not to support it, but be intelligible to the average G H creditor. It seems to me that the Explanatory Statement achieves these H aims. I I Discretionary considerations J J 84. Ping An argued that even if I decided in Holdings’ favour the K K issues I have addressed in earlier sections of these reasons, I should decline L to sanction the Holdings’ Scheme, because it is not one that an “intelligent L and honest man”, acting in accordance with his interests as a Holdings’ M M creditor might reasonably approve. N N 85. The Court is normally slow to differ from the majority of O O creditors’ views, as it normally acts on the basis that businessmen are much P P better judges of what is in their commercial interest than the Court 27 . Q Whether a compromise of the sort contained in the Holdings’ Scheme is Q financially preferable to a compulsory winding up is a matter of R R commercial judgment. Opinions may differ on which course is likely to S be most beneficial, but as the language in which the “intelligent and honest S man” test is framed indicates the Court will only override the views of the T T majority if their view seems sufficiently odd that it suggests it was arrived U U 27 Re Allied Properties (HK) Ltd [2020] HKCA 973; [2020] HKCLC 1549, [37]. V V  - 48 - A A at as a consequence of either a failure properly to assess the terms of the B B compromise or considerations other than its merits. It is rare for the Court C to interfere on this ground and I am only aware of one case in Hong Kong C in which a judge considered this to be a ground (although only one amongst D D others) for declining to sanction a scheme; a privatisation for which the E judge considered the offer price was too low28. The company’s share price E in subsequent years illustrates the danger of the Court straying into the area F F of commercial judgment. G G 86. In practice an argument that the compromise is so unattractive H H it is not one a hypothetical intelligent and reasonable creditor would I approve is likely to be unnecessary, because if it is satisfied it is likely to I be because either creditors have not had the scheme properly explained to J J them (in which case it is likely that the explanatory statement will have K K been shown to be defective and sanction refused for that reason) or there L is evidence to suggest that a statutory majority was only obtained because L creditors with some collateral reason for supporting the scheme did so in M M which case it is likely that they would have had a special interest and their N votes discounted. These are more straightforward issues to determine than N the commercial merits of a scheme. I have addressed earlier the complaints O O about the Explanatory Statement and the special interest arguments in the P present case. P Q Q 87. Ping An argued that the weight that is normally given to the R majority creditors’ views should be discounted where inadequate R information has been provided and referred me to [22] of S S Mr Justice Snowden’s judgment in Re Ophir Energy plc29 as authority for T the proposition. What Mr Justice Snowden says is this: “…if the members T U 28 Re PCCW Ltd CACV 85/2009, [2009] HKEC 738, [162]–[165]. U 29 [2019] EWHC 1278, [22]. V V  - 49 - A A or creditors have been provided with materially inaccurate, incomplete or B B otherwise inadequate information, the Court will most likely not be able to C place any reliance upon, or give effect to, an affirmative vote at the Court C meeting.” I do not read this as supporting, as Ping An argued, that the D D greater the Court’s concerns about the adequacy of the information E provided in the explanatory statement the less weight it will give to the E majority view; in other words there is a kind of sliding scale with the Court F F being readier to review the commercial judgment of the majority (it being G in the context of this issue that the proposition is advanced by Ping An) if G H the Court considers the information provided does not satisfy the criteria I H explained in the previous section of this judgment. I disagree. It seems to I I me that either the Court takes the view that inadequate or misleading J information has been provided, in which case it should decline to sanction J the scheme for that reason, or it accepts that sufficient and accurate K K information has been provided and the resolution of the majority of L creditors should be taken at face value, namely, in their commercial L judgment the compromise offered is preferable to the alternative, which M M will normally be a compulsory winding up. If the Court is satisfied that N the class or classes were properly constituted and adequate information N was provided normally the question of whether or not the “intelligent and O O honest” creditor criteria is satisfied will be moot, but if it is controversial P it is to be answered by the Court considering whether on the basis of the P evidence before it approving the scheme was a rationale commercial one Q Q even if opinions could reasonably differ over it. Ping An’s argument elides R the “intelligent and honest man” test with the tests I have referred to in R [86]. Questions of commercial judgment, the proper constitution of a class S S and the adequacy of information engage different considerations, and it is T unhelpful to elide them. T U U V V  - 50 - A A 88. Ping An question the assessment of the majority of Scheme B B Creditors of the merits on the grounds that the recovery rate under the C Scheme (0.75%) is lower than Holdings’ assessed recovery rate in an C insolvent liquidation (3.7 to 4.2%) and Kroll suggest in their report that the D D latter may be an underestimation. Also, the cash payment is delayed so E long, 8 years, that it does not offer an obvious advantage over an insolvent E liquidation. It does not seem to me that these differences are such as to F F support the conclusion that a decision to support the Scheme was irrational G and calls into question the integrity of the support. G H H Blot or defect in the Schemes I I 89. As Ping An correctly submitted the court will assess whether J or not there is, what is commonly referred to in the authorities, as a “blot” J on the scheme. However, Ping An mischaracterised what constitutes a blot. K K Ping An argued that it is something considered at the discretion stage of L the Court’s deliberation and that, in the present case “In assessing this, the L Court is invited to take into account the artificiality of the structure M M adopted and the manner in which this structure overrides the legitimate N N interests of creditors: see Re Gategroup Guarantee Ltd [2021] BCC 549 O at [12] – [13].” 30 Paragraphs 12 to 13 of Zacoroli J’s decision in O Gategroup says nothing relevant to what constitutes a blot on a scheme P P generally or on facts relevant to the present matter. A blot refers to a Q fundamental flaw in a scheme that could impede its effective operation: Q see China Bozza Development Holdings Ltd31 and Re AVEVA Group Plc. R R It is not an independent category of consideration at the discretionary stage S S T T U 30 Ping An’s skeleton argument [60]. U 31 [2023] HKCFI 1620; [2023] HKCLC 469, [29]. V V  - 51 - A A of the approval process. That having been said I will deal with the B B substance of the objection. C C 90. Ping An argues that the Schemes appear to have been D D designed for the sole purpose of using Overlapping Creditor votes to reach E the requisite statutory majorities to bind Non-Overlapping Creditors, in the E absence of a mechanism in Hong Kong for cross-class or cross-creditor F F group cramdown. This argument is premised on the assumption that the G restructuring of the Existing Debt and the ICA Debt could have been G structured to release the Overlapping Creditor’s claims against Hero as H H 32 well. This is said to have been possible as it is established that a I guarantor may introduce a scheme of arrangement, which compromises I not only the company’s liabilities but also the debts owed by the principal J J obligors, who are members of the same business group. Commonly the K K principal obligor will be a subsidiary of the guarantor, which has provided L a parent/holding company guarantee. The release of the principal obligor L is necessary to avoid creditors undermining the restructuring of the holding M M company’s liabilities. N N 91. It may have been possible to compromise the relevant part of O O the Non-ICA Debt using the structure suggested by Ping An, but Ping An’s P submission simply invites the Court to assess whether there was a better or P more appropriate way of restructuring that debt. This is not, however, the Q Q function of the Court and the criticism advanced by Ping An is certainly R not what in my view can properly be characterised as a blot on the Holdings’ R Scheme. S S T T U U 32 Re Unity Group Holdings International Ltd [2022] HKCLC 1293, [13]–[17]. V V  - 52 - A A 92. Ping An’s second criticism under this heading is that the ICA B B Debt is being compromised under the Holdings’ Scheme only to the extent C it is not compromised under the Hero’s Scheme, the Schemes having been C structured such that the Overlapping Creditors have been able to prove for D D the entirety of their debt in both Schemes. The consequence of this is that E the Overlapping Creditors have been given an unnecessary and artificial E right to vote in both Schemes, which functionally gives them a greater say F F in the outcome of the voting by Scheme Creditors. This is simply a G different way of presenting the objection based on the constitution of the G H class and the alleged presence of a special interest. If the class was H properly constituted and the interests of the Overlapping Creditors are not I I properly viewed as a special interest justifying assessing the level of J creditor support without regard to their votes, the criticism advanced by J Ping An cannot sensibly be viewed as a blot on the Holdings’ Scheme. K K L 93. The third and final objection under this heading is that the L Overlapping Creditors were only allowed to submit one account holder M M letter or proxy form in respect of both Schemes, with the result that they N had to vote the same way for each of the Schemes. Although, from a N presentational perspective it might have been better to have required O O separate documentation for each Scheme there is no evidence to suggest P that it made any difference or that one would have expected an P Overlapping Creditor to have voted differently for each Scheme. It does Q Q not of itself mean that that in making their decision Overlapping Creditors R were influenced by considerations likely to lead to a conclusion as to the R attraction of either Scheme different to that of other members of the S S relevant class. T T 94. It seems to me clear that there was no blot on the Holdings’ U U Scheme. V V  - 53 - A A Lack of Utility B B 95. Ping An’s final objection to the Scheme is that it lacks utility. C C It argues as follows. The Court will not sanction a scheme, which to D achieve its intended commercial effect must be recognised in other D jurisdictions in order for it to prevent enforcement in them, which would E E undermine the scheme 33 . Approximately US$270 million of Holdings’ F debt is governed by English law. As the Courts of England and Wales still F apply the Rule in Gibbs34 the Holdings’ Scheme will not be recognised as G G compromising that debt. This is relevant, because of the English law H governed debt, US$120 million and US$150 million is owed to King H World Facilities, which voted against the Schemes. I accept that if I I Holdings or Hero had substantial assets in England, against which that debt J J could be enforced this might call into question the viability and thus the K utility of the Schemes. That is not, however, the case. The Companies do K not operate or own assets in England and any English judgment would not L L be enforceable in Hong Kong or in the Cayman Islands and the British M Virgin Islands. It is not necessary for Holdings to demonstrate that the M Scheme will be effective in every jurisdiction, whose laws govern part of N N the debt to be compromised35. What is necessary is that it is demonstrated O that the Scheme will be effective in the jurisdictions in which it needs to O be effective to achieve its intended purpose. It seems to me clear that the P P Schemes will be. Q Q R R S S T 33 Re Hong Kong Airlines Ltd [2022] HKCFI 3792, [30]. T 34 Gibbs (Anthony) & Sons v Societe Industrielle et Commerciale des Metaux (1890) 25 QBD 399 (CA). U 35 Re Sunac China Holdings Ltd [2023] HKCFI 2850, [34]; Re Lamo Holdings BV [2023] EWHC U 1558 (Ch), [130]. V V  - 54 - A A Conclusion B B 96. For these reasons I sanctioned the Schemes. C C D D (Jonathan Harris) E E Judge of the Court of First Instance High Court F F Mr William Wong SC and Mr Look Chan Ho, instructed by Linklaters, for G G the Company in both actions H Ms Rachel Lam SC and Ms Jasmine Cheung, instructed by Ashurst Hong H Kong, for the Opposing Creditor, China Ping An Insurance Overseas I (Holdings) Limited (in HCMP 1696/2023) I J Attendance of Weil, Gotshal & Manges, for the Supporting Creditor, J MDR Limited in both actions, was excused K K L L M M N N O O P P Q Q R R S S T T U U V V