Sino-Ocean Group Holding Limited, Re

The court considered an application to sanction a cross-border restructuring plan under Part 26A of the Companies Act 2006, relying on the court's power under section 901G to approve the Plan despite dissent by some classes. The judge found that the "relevant alternative" was an insolvent liquidation and that Condition A (no member of a dissenting class being worse off than in the relevant alternative) was satisfied on the evidence. Condition B (that at least one class which would receive a payment in the relevant alternative had voted in favour) was also satisfied by the votes of Class A and Class C. The court rejected challenges that Class A was an artificial "cramming class", that votes of an affiliate (China Life Franklin) should be disregarded, and that shareholders had to be convened as a class. The court accepted the Plan Company's valuation evidence that retaining two state-owned enterprise shareholders with minimum stakes (the "SOE/POE spread" rationale) produced materially higher recoveries for creditors. The Plan was sanctioned subject to an amended order securing undertakings (including two-year undertakings from the SOE shareholders) and an undertaking by the Plan Company to use reasonable endeavours to enforce those undertakings.

This is the sanction hearing under Part 26A CA 2006 for a restructuring plan proposed by Sino-Ocean Group Holding Limited (the Plan Company). The Plan is part of a cross-jurisdictional reorganisation with a linked Hong Kong scheme of arrangement and proposes to restructure unsecured financial indebtedness of the group into new debt and convertible/perpetual securities (the Plan Consideration). The Convening Hearing had been decided earlier and meetings of four classes (A–D) were convened; Classes A and C approved the Plan while Classes B and D voted against. Long Corridor Asset Management Limited opposed sanction at this hearing.

Nature of the application: the Plan Company sought court sanction under section 901F CA 2006 and, because Classes B and D dissented, relied on the cross-class cram down power in section 901G.

Issues framed by the court:

• What is the relevant alternative for the purposes of section 901G(4)?
• Whether Condition A (no member of a dissenting class would be worse off than in the relevant alternative) is satisfied.
• Whether Condition B (an assenting class that would receive payment or have a genuine economic interest in the relevant alternative has voted with at least 75% in value) is satisfied, and whether any assenting class is artificially constituted or unfairly influenced by special-interest votes.
• Whether shareholders should have been included as a class because the Plan dilutes equity.
• Whether the court should in its discretion sanction the Plan given the distribution of value (notably shareholders retaining substantial equity) and available alternatives.

Reasoning and findings:

• Relevant alternative: the court accepted the Plan Company's evidence that liquidation was overwhelmingly the most likely outcome if the Plan failed, and rejected Long Corridor's speculative suggestion of another consensual plan lacking a definite form and feasibility.
• Condition A: expert evidence (FTI Consulting) showed each creditor class would receive substantially better returns under the Plan than in liquidation; Condition A satisfied.
• Condition B and class composition: the court held Class A legitimately formed and not an artificial cramming class. Voting by Class A creditors constituted submission to the English jurisdiction and, together with the linked Hong Kong Scheme, meant Class A was an appropriate assenting class. The court examined whether China Life Franklin's votes in Class C were driven by an adverse special interest: evidence showed China Life Franklin voted under a discretionary mandate in the best interests of its client and subject to a conflicts policy, so those votes were not excluded. The court therefore accepted Class C as a valid assenting class.
• Shareholder inclusion: the court distinguished Re Hurricane Energy and held shareholders need not be convened where shareholders have already approved the share-related steps (the EGM approving the MCB issuance) and their rights are not being overridden by the Plan; shareholders were therefore not required to be a class here.
• Exercise of discretion and fairness: the court applied AGPS Bondco guidance on horizontal comparability and allocation of the value preserved by the restructuring. It accepted valuation evidence that maintaining minimum stakes for the two SOE shareholders (thereby preserving an SOE perception and an associated reduction in discount rates, the "SOE/POE spread") materially increased the net present value of the Plan Consideration for creditors. The SOE-related justification was a proper reason to depart from strict pari passu distribution between in-the-money creditors. The court required and received undertakings from the SOE shareholders to retain their stakes for two years and required an undertaking by the Plan Company to use reasonable endeavours to enforce those undertakings.

Result: the court sanctioned the Plan, subject to amendments to the draft order to secure the undertakings described above.

The Plan is sanctioned. The court found that the cross-class cram down conditions in section 901G CA 2006 were satisfied (Condition A: the relevant alternative is liquidation and creditors are better off under the Plan; Condition B: Classes A and C validly form assenting cramming classes). The court exercised its discretion to sanction the Plan because the Plan yields materially better outcomes for creditors than the relevant alternative and because retaining minimum stakes for the SOE shareholders (supported by two-year undertakings and an undertaking from the Plan Company to enforce them) provides a legitimate justification for the distributive outcome that leaves shareholders with substantial equity.