Sino-Ocean’s Contentious Rescue Plan: Court Sides with Survival

The Sino-Ocean restructuring plan is the first to be sanctioned in 2025 – but it starts the year off with a very interesting bang. In a relatively short (and commendably clear) judgment, the Court addresses head on:

• The possibility of the relevant alternative being a different (but yet to be formulated) deal with creditors. 
• Arguments in relation to artificiality in creating an assenting class. 
• The effect of including foreign law governed debt in an English restructuring plan when the jurisdiction of that debt (Hong Kong) applies the rule in Gibbs.
• The possibility of a creditor voting with special interest and their votes being disregarded.
• Whether shareholders whose rights are affected by the restructuring need to be formally put “in the plan”.
• When can differences in treatment of the different classes of creditors inter se be justified?
• Allocation of restructuring surplus: when are shareholders getting “too good a deal”?

Some of the issues raised in Sino-Ocean are relevant to other restructurings in the market and no doubt the profession will return to these points at a later stage, but for now, there is much of interest to digest. 

Background

Sino-Ocean Group Holding Limited is the Hong Kong-incorporated ultimate holding company of a property development group with assets located primarily in the People’s Republic of China. The group, like many, has been grappling with a combination of tightening regulatory oversight, sluggish property demand, and liquidity constraints that have collectively pressured its financial performance.

Around 60% of the company’s shares are held by two shareholders, China Life Insurance Group Co and Dajia Insurance Group Co, both state-owned enterprises in the PRC. Management holds about 2% of shares, while 38% of shares are held by members of the public.

Sino-Ocean proposed a dual inter-conditional English restructuring plan (the English RP) and Hong Kong scheme of arrangement (the Hong Kong Scheme), with the aim of restructuring four classes of unsecured debt: one class of debt being governed by Hong Kong law and the other three being governed by English law (both jurisdictions apply the rule in Gibbs, meaning (absence submission to jurisdiction, discussed below) a Hong Kong law process and an English law process are both required to compromise the respective categories of debt). 

The total liabilities covered by the English RP amount to US$6 billion – to be converted into US$2.2 billion of new debt instruments and mandatory convertible bonds (MCBs), effectively to facilitate a debt for equity swap. Shareholders are to be diluted through the MCBs but would retain at least 53.8% of the equity in Sino-Ocean (with China Life and Dajia each retaining over 15% shareholding). The English RP has been heavily challenged by creditors, primarily Long Corridor Asset Management, which holds US$85.3 million across the company’s Classes B, C and D debt. The court noted that this debt was only 1.5% of the total plan liabilities. Long Corridor asserted that its views were shared by a supporting “Ad Hoc Group” of creditors, but the Court did not take this into consideration, as insufficient evidence was adduced as to this – per the skeleton arguments of Company’s counsel, it appears the identities and holdings of the Ad Hoc Group were not disclosed.  

The classes and creditor meetings

Under the proposed English RP, the four creditor classes were split into:

• Class A: c.US$2.05 billion of syndicated loan agreements governed by Hong Kong law;
• Class B: c.US$1.986 billion of four series of notes governed by English law;
• Class C: c.US$1.293 billion of two series of notes governed by English law; and
• Class D: c.US$652 million of subordinated perpetual securities governed by English law.

Each of the four classes (other than Class D which was subordinated) had an unsecured pari passu claim against the plan company. The classes were composed on the basis of what would achieve a fair return for plan creditors relative to their expected recoveries in the relevant alternative (which varied according to the different obligor packages of the debts). The expected recoveries of each class of creditors was as follows: 

• Class A: 4.7% (low case) to 9.4% (high case);
• Class B: 2.1% (low case) to 4.5% (high case);
• Class C: 0.9% (low case) to 1.8% (high case);
• Class D: 1.3% (low case) to 2.7% (high case);

The value split between the different classes of creditors was therefore calculated as follows: 

• Class A: 60.4% 
• Class B: 27.0% 
• Class C: 7.3% 
• Class D: 5.3% 

Different levels of scheme consideration were offered to each class of creditors in a similar relationship to the return that the class of creditors would expect to obtain in the relevant alternative therefore resulting in the different classes. 

The inter-conditional Hong Kong Scheme only covers the (Hong Kong law governed) Class A loans. Hong Kong does not have a restructuring plan as an available process, but does have schemes of arrangement, so it would not have been possible to replicate a fully parallel process. 

At the creditor meetings for the English RP, the Class A creditors voted unanimously in favour, with Class C creditors also reaching comfortably over the 75% statutory majority. However, the plan was not approved by the Class B and Class D creditors. The Hong Kong Scheme was approved by scheme creditors (i.e. the Class A) through an 86.2% vote on 22 November 2024.

Sanction

On 3 February 2024 the Court sanctioned the English RP, cross class cramming down the Class B and Class D creditors. 

Cross class cram down

The Court may sanction a restructuring plan notwithstanding that it has not been approved by at least 75% by value of those voting from each class of creditor, provided that two conditions are met:

• Condition A: the Court is satisfied that, if the restructuring plan were to be sanctioned, no members of the dissenting class would be any worse off than in the relevant alternative (the ‘no worse off’ test); and
• Condition B: the plan has been approved by at least 75% in value of those voting from at least one class of creditors, who, in the relevant alternative, would receive payment or would have a genuine economic interest in the plan company.

Condition A: this requires the Court to determine, as a reference point, what is the relevant alternative. Sino-Ocean argued that the alternative was an insolvent liquidation. The dissenting creditors argued that stakeholders wouldn’t allow that to happen and that the true alternative would be a different deal. The Court sided with the company concluding that an insolvent liquidation was overwhelmingly the most likely outcome. In relation to arguments raised that, the true alternative is a different (albeit at the time unspecified) plan, the Court put a marker down holding that “[u]nless a putative alternative plan is specified in detail it is impossible for the court to judge the effect on creditors of that plan.”

Having determined that insolvent liquidation was the relevant alternative, the Court concluded that each creditor class under the English RP would be substantially better off under the proposed plan, compared with their respective likely recoveries under a liquidation – so, Condition A was met.

Condition B: Typically, this condition is pretty binary. That was not the case here. The company argued that the condition was satisfied by the assenting votes of the Class A and the Class C creditors. The dissenters challenged both.

Class A – the rule in Gibbs and “artificial” classes 

The dissenting creditors argued the Class A creditors’ as an assenting class should be disregarded because their debt is governed by Hong Kong law. Due to the rule in Gibbs (also applicable in Hong Kong) this meant, they argued, that the Class A debt could only be compromised in Hong Kong – and indeed, it formed the debt relevant to the Hong Kong Scheme. The sole purpose of including Class A, therefore, was to create an artificial cramming class of assenting creditors. 

The Court sided with the company, stating that, in its view “there is nothing artificial, and no whiff of impermissible forum-shopping in the constitution of the Class A creditors as a class of creditor in the Plan.” The Court held that the Gibbs rule was not quite so binary as the dissenting creditors argued and that it provided for exceptions, namely a submission by a creditor to the jurisdiction of the Court (which can occur through a creditor participating in the scheme through voting at the plan/scheme meetings). The Court held that Class A creditors voting on the plan had constituted such submission by them and that those Class A creditors were therefore bound by the English RP. The fact that a HK Scheme was also used to ensure the English RP was effective in relation to a small remainder of Class A creditors that did not participate in the restructuring (and therefore submit to jurisdiction) was not found to be a reason to disregard the class for the purposes of the English RP. 

Class A voting unanimously similarly did not trouble the Court which acknowledged that in practice, where a cross-class cram down is required, a deal is frequently reached with all or a very substantial majority of the members of the assenting class, and that class is included in the plan for the purpose of enabling a cross-class cram down to be sanctioned by the Court: “This does not mean that the inclusion of the assenting class in the plan is artificial or unjustified. If the position were otherwise, then Part 26A would be deprived of its intended purpose.”  

In considering whether it was appropriate to include an assenting class in the plan to facilitate a cross-class cram down, the Court applied adopted the two stage test from Houst, namely whether Class A creditors were (i) “adversely affected by the Company’s insolvency”; and (ii) “substantially impaired under the plan”. If the plan has a meaningful impact on the class, then the inclusion of such an assenting class cannot be described as abusive. In applying this test, the Court found it appropriate to look not just at the English RP but at the entirety of the restructuring (including the English RP and HK Scheme) – and taken as a whole the Class A creditors were very clearly affected by the plan.

Class C – arguments that the votes of a shareholder affiliate should be discounted

The dissenting creditors also argued that Class C creditors’ assenting votes were to be disregarded because Class C included an affiliate of Sino-Ocean’s largest shareholder China Life (a regulated investment firm that held the relevant Class C notes on a discretionary asset management mandate). Without this shareholder affiliate’s vote, the Class C creditors would have rejected the plan. 

The Court again sided with the Company and found the affiliate’s written explanation that it had voted in what it considered the best interests of its client to cast “very substantial doubt on the presumption argued for by Long Corridor that it was voting in the interests of its affiliate China Life.” The Court went on to find that “there is no reason why the court should discount or disregard the votes of China Life Franklin. It seems far more likely that the decision was made entirely with a view to providing the maximum return for its client, rather than favouring its affiliate.”

Shareholders as a voting class 

Other arguments put to the Court revolved around the lack of a shareholder vote. Long Corridor, applying Re Hurricane, argued that the dilution of shareholders meant they had been affected by the English RP and must therefore vote on it. The company’s response argued Re Hurricane should be distinguished for two reasons:

• It was not the English RP that would dilute shareholders but instead the Company’s issuance of MCBs (which the shareholders had already passed a resolution in favour of at an extraordinary general meeting). 
• In Re Hurricane, the Court was asked to compromise shareholders’ pre-emption and other rights granted under the company articles. The English RP made no such request. 

The Court sided with the company. Including shareholders as a voting class was unnecessary and would not have served any purpose other than potentially creating another assenting class to cram down the Classes B and D creditors – something the Court was “quite sure that Long Corridor would have objected [to].” 

When can differences in treatment of the different classes of creditors inter se be justified? 

The Court of Appeal had made clear in Adler that a key issue for the Court in exercising its discretion to impose a plan upon a dissenting class is (i) to identify whether the plan provides for differences in treatment of the different classes of creditors inter se and, (ii) if so, whether those differences can be justified. Here, the Court was satisfied that a departure from equal treatment (given the pari passu claims of Classes A – C as against the Plan Company) was justified because in a liquidation different classes of creditors would have different rights against other companies in the group and so would be anticipated to receive different recoveries (as discussed above). 

Allocation of restructuring surplus: when is a shareholder getting too good a deal?

The challenger sought to argue that only two justifications for shareholders retaining equity had been made out by restructuring plan case law: 

• The “gifting” justification. Namely that the “in the money” creditors are to be regarded as the economic owners of the business, such that it is up to them to determine how to divide up any value or potential future benefits which might be generated following implementation of a plan.
• The “new money” justification. Namely where shareholders are providing some new money for the benefit of the restructuring.

The High Court disagreed that this was an exhaustive list. Indeed, the Court was not limited by these examples but takes a “pragmatic view, focused on the overall interests of creditors”.

The Court accepted that the company would in essence do better if both China Life and Dajia would retain a minimum of 15% shareholding because this would enable it to be considered to be a SOE (state owned entity). This in turn would give the company more favourable terms with the debt markets as well as greater opportunities in general than if it were privately owned. This meant that, on the basis of the evidence adduced by the Company, the net present value of the plan consideration to be received by plan creditors was expected to be higher than the net present value of the consideration they would receive had shareholders been diluted to a very small percentage of the shares. The Court found this was a good reason or proper basis for departing from a division of the benefits of a restructuring plan that is strictly proportionate to how the different classes of creditor and shareholder would fare in the relevant alternative. The Court was therefore, not troubled that China Life and Dajia were keeping equity (with China Life’s diluted stake estimated as being worth US$7.3 million – US$9.1 million) and this demonstrates how the English restructuring plan is not bound by an absolute priority rule. 

Long Corridor also pointed out that, even if China Life and Dajia each retaining more than 15% of the equity in Sino-Ocean provides value to the company, there is nothing in the plan that requires these shareholders to retain their equity. Since the sanction hearing, both shareholders have granted undertakings to Sino-Ocean that they would retain their existing shareholdings for at least two years after the plan implementation. The Court found these undertakings materially addressed the dissenting creditor's concerns (and rejected arguments from Long Corridor that the undertakings should be for at least 10 years). The Court did, however, condition its approval of the plan on Sino-Ocean providing an undertaking to the Court to use all reasonable endeavours to enforce the undertakings granted by China Life and Dajia.

Comment

What does this mean for other PRC/HK developers in the market?

Sino-Ocean is the first developer based in the PRC or Hong Kong to implement its offshore restructuring through an English restructuring plan. Significant deleveraging was achieved by the restructuring plan as c.US$6 billion of debt was converted into US$2.2 billion of new debts (with the other elements of the consideration made up of MCBs and perpetual securities, the latter having similar characteristics to preference shares). 

By way of very broad outline as to how a typical offshore capital structure of a developer can be considered in light of the judgment: 

• Where the capital structure has English law debt, there is a risk that a developer could look to launch a similar restructuring plan in England (with the risk being some classes of debt are crammed down for a deal those classes do not support). 
• New York law debt is also liable to being crammed down in England, but it would be necessary for a developer proposing a plan in England to demonstrate a sufficient connection to England to launch a restructuring plan (for example, there being material other debts in the capital structure governed by English law or there being an English obligor). 
• A Hong Kong scheme of arrangement is required to compromise Hong Kong law debt (assuming such Hong Kong law creditors do not submit to the jurisdiction of England), this means that a class of creditors with Hong Kong law debt have a veto on the restructuring as the support of that class will be required in the scheme (it not being possible to cram down in Hong Kong). 

Where, for example, a developer’s capital structure has unsecured English law notes and Hong Kong law loans (with the Hong Kong law loans often benefitting from security or wider guarantor pools), it will likely be the HK law lenders in the driving seat for the purposes of negotiating any restructuring due to their better recoveries and Hong Kong law debt giving them a potential veto on the restructuring. With respect to the English law notes, even the threat of a restructuring plan, although not ultimately used, can help drive negotiating dynamics in a Company’s favour. 

More broadly 

In our forward-looking blog on what is coming for the restructuring plan in 2025 (here), we predicted that the question of the allocation of the restructuring surplus would need to be revisited. Sino-Ocean certainly does just that. The context of state owned entities which have access to more opportunities may be very jurisdiction-specific, but the precedent of shareholders retaining a significant amount of their shareholding without providing new money or it being “gifted” will certainly be relevant in other contexts too. It is also markedly different from regimes where the absolute priority rule applies.

Other aspects, such as including assenting classes to facilitate cross class cram down, had been trailed in previous restructuring plans (e.g. Virgin Atlantic, Houst, Cineworld) but the Sino-Ocean judgment addresses the points head on – and puts some of the arguments to bed.  

We would note that the sanction hearing of the Hong Kong Scheme is fixed for 19 February 2025, but this is unlikely to be controversial as it should see the Hong Kong Scheme with respect to the Class A creditors sanctioned. 

Restructuring professionals and investors alike will await with bated breath to see where the next restructuring plan judgments (such as Thames Water) take the jurisprudence next.