Sino-Ocean Group Holding Limited, Re

In a restructuring plan involving dissenting creditor classes, the court must identify a particular and realistically achievable relevant alternative. A vague possibility of a better plan is insufficient.

An assenting class may be used as a cramming class, including where a parallel foreign scheme is required, provided the class is genuinely affected and the plan has a meaningful impact on it. Votes may be discounted or disregarded where a special interest adverse to the class was the predominant cause of support.

When exercising the sanction discretion, the court may approve a departure from pari passu sharing of restructuring benefits where there is a good reason or proper basis. The possible preservation of a state-owned-entity advantage, supported by valuation evidence, may justify shareholders retaining substantial equity.

The Plan Company sought sanction of a restructuring plan under Part 26A of the Companies Act 2006. The plan formed part of a cross-jurisdictional reorganisation and was accompanied by a Hong Kong scheme dealing with Hong Kong-law debt.

The plan was approved by the statutory majorities in Classes A and C but not in Classes B and D. Long Corridor opposed sanction, challenging the identification of the relevant alternative, the use of Classes A and C as cramming classes, the inclusion of votes associated with a shareholder affiliate, and the omission of shareholders as a separate class.

The central questions were whether the cross-class cram-down conditions were satisfied and whether the court should exercise its discretion to sanction a plan which left existing shareholders with substantial equity.

1. Relevant alternative. The relevant alternative under section 901G(4) of the Companies Act 2006 must be a particular alternative which has a realistic prospect of implementation. A vague suggestion that negotiations might produce a better plan is insufficient. On the evidence, insolvent liquidation was overwhelmingly the most likely outcome.
2. Condition A. The evidence established that each class of creditor would be substantially better off under the Plan than in the relevant alternative. Condition A was therefore satisfied.
3. Condition B and cramming classes. The inclusion of Class A was neither artificial nor abusive. The creditors were parties to an arrangement affecting their rights. Voting on the Plan constituted submission to the English jurisdiction for the purposes of the exception to the Gibbs rule. The parallel Hong Kong Scheme did not prevent Class A from being a bona fide assenting class. Following Re Houst and Re Cine-UK Ltd, an assenting class may facilitate a cram-down where it is adversely affected by the company’s insolvency and substantially impaired by the plan.
4. Special-interest voting. The court applied the principles in Re Lehman Brothers International (Europe). It asked whether a subgroup had an adverse special interest, whether that interest was the predominant cause of its support, and whether the votes were material to the majority. The evidence did not establish that China Life Franklin’s affiliate relationship caused its vote. Its votes were not discounted or disregarded, and Condition B was satisfied.
5. Shareholders. Re Hurricane Energy was confined to its context, where shareholders were deprived of the opportunity to veto a non-pre-emptive share issue. Here shareholders had approved the issue of the MCBs and the resulting dilution at an extraordinary general meeting. Their rights were therefore not affected by the Plan in the relevant statutory sense, and no shareholder class was required.
6. Sanction discretion. Under AGPS Bondco, the court must examine horizontal comparability and the allocation of value generated above the relevant alternative. Pari passu sharing is the usual reference point, but departure is permissible where there is a good reason or proper basis. That inquiry is not confined to gifting or new-money justifications.
7. The evidence that maintaining minimum 15% holdings for the two state-owned shareholders would preserve an SOE/POE spread and increase the value of the Plan Consideration supplied a proper basis for the disproportionate retention of shareholder value. The two-year shareholder undertakings and the Plan Company’s undertaking to use reasonable endeavours to enforce them satisfactorily addressed the principal concern. The Plan was sanctioned, subject to amendment of the order to include that undertaking.