In Re Sino Oil and Gas Holdings Ltd [2024] HKCFI 1135, the Honourable Madam Justice Linda Chan refused to sanction a scheme of arrangement, saying that creditors had been given insufficient information about the restructuring and the scheme that would enable them to make an informed decision at the scheme meeting.

Full and fair

Chan J took the opportunity to remind practitioners of their role and responsibility when dealing with restructuring and schemes of arrangement which require sanction of the court. She criticised excessively lengthy scheme documents and said the problem would be less acute if companies and their counsel abided by their duty to provide creditors and the court with a full and fair summary of the key commercial terms of the restructuring and the scheme and explained their effect both before and after the restructuring in a way which can be readily understood by the creditors. That had not happened in this case.

It was the duty of counsel for the company “to draw to the attention of the court, at the convening hearing, whether there are terms which are novel, unusual or potentially objectionable, and whether there are issues which have been or may be raised by the creditors”. This was so the court can consider whether the company needs to take further steps to address the concerns and amend the scheme document before convening a meeting of creditors.

A new Hong Kong practice statement?

Drawing upon the practice statement which applies to Schemes of Arrangement under Part 26 and Part 26A of the Companies Act 2006 in the UK, Chan J took the opportunity to lay down criteria for future scheme applications.

Where a restructuring is conditional upon a scheme becoming effective or where the terms of the restructuring would have an impact on the return to the creditors under the scheme, the company would be expected to include a “full and fair summary on the key commercial terms and effect of the restructuring and the scheme in the scheme document”. If no such summary is provided, the court would “direct the company to provide such summary to the creditors alongside the scheme document for the purpose of convening the scheme meeting.”

Releases for directors and advisers – don’t go there

It has become relatively customary for scheme terms to have scheme creditors provide a waiver, release and discharge of certain liabilities.  Such exculpation provisions are typically provided in favour of certain parties like the scheme company, related finance parties along with the directors and advisors involved.  

The Sino scheme appears to have pushed the scope of these releases too far in seeking to give directors, staff, representatives and advisers protection from liability where they may have acted in breach of their duty of care or fiduciary duties. Or at least there was insufficient explanation given in the scheme for why these parties should be allowed to benefit from these provisions and in the absence of any such justification, the court was not willing to entertain these provisions being incorporated in the scheme.

Back to the drawing board

On the facts of the case, Chan J concluded creditors had not been given sufficient information about the scheme to enable them to make a decision at the scheme meeting. She also considered the company had failed to comply with the Companies Ordinance requirement to disclose the interests of one of the directors and that he would become a creditor in respect of a portion of the convertible bonds to be issued by the company to the investors.

The court dismissed the petition and ordered that the costs of the opposing creditors be paid by the company.

The decision serves as a timely warning that scheme documents must provide a meaningful summary of the key commercial terms.  In addition, counsel need to ensure the court is provided with a fair and full summary of the restructuring and scheme terms and their effect on creditors. Any novel, unusual or potentially objectionable terms or any issues which creditors may raise, need to be brought to the attention of the court at the convening hearing and detailed in counsels’ skeleton arguments lodged with the court.

Authored by Jonathan Leitch and Nigel Sharman.