English Court Sanctions Sino-Ocean Group Restructuring Plan, the First Used by a Chinese Real Estate Developer

Executive Summary

• Situation: Sino-Ocean Group Holding Limited (the Plan Company) proposed a Part 26A restructuring plan (the Plan) under the Companies Act 2006 to compromise approximately US$6 billion of offshore debt. The Plan Company and its subsidiaries (the Group) had been affected heavily by the ongoing People’s Republic of China (PRC) real estate crisis. The Plan is a part of the Group’s wider restructuring, which also involves an interconditional, parallel scheme of arrangement in Hong Kong.
• Decision: The High Court of England and Wales (Court) handed down its judgment sanctioning the Plan on February 3, 2025, despite opposition from a dissenting creditor on numerous grounds.
• Novel points:
  • This was the first restructuring plan in which one of the cramming classes comprised only foreign law–governed debt (in this case, Hong Kong law) in circumstances where a parallel process was being run in the relevant foreign jurisdiction (i.e., the Hong Kong scheme of arrangement). The Hong Kong law–governed debt (i.e., Class A) contributed to approximately 34% of the total offshore indebtedness to be compromised under the restructuring plan.
  • This was also the first restructuring plan in which a pari passu creditor class had “crammed down” another pari passu creditor class. The Court was satisfied that there was, in this case, a good reason to depart from the principle of equal treatment of pari passu creditors (all classes other than Class D, which is subordinated to the other classes), all of whom were unsecured, in-the-money creditors in respect of their debt obligations against the Plan Company. In short, the Court was satisfied that creditors would receive an amount of restructuring consideration proportionate to what they would receive in the relevant alternative (i.e., Groupwide liquidation). The liquidation recovery rates varied between classes due to different debt instruments having different co-obligors (i.e., different primary borrowers, issuers, and guarantors). The differences in treatment between classes ensured a “fair distribution of the benefits of the restructuring” under the Plan.
  • Finally, this was the first restructuring plan where the majority shareholders of the Plan Company (Institutional Shareholders) retained a proportion of equity for justified reasons in that it was overall better for all creditors if the Plan Company retained its state-owned enterprise status.

Background and proposed restructuring

Plan Company and terms of the Plan

The Plan Company is a Hong Kong–incorporated company, listed on the Hong Kong Stock Exchange, and the ultimate holding company of the Group. The Plan Company is principally engaged in property development and investment in the PRC and found itself in financial distress due to challenging market conditions affecting the PRC real estate industry.

The Plan Company is a guarantor of the Group’s main offshore existing debt instruments of c. US$6 billion (the Plan Liabilities) to be comprised as part of the Group’s wider restructuring in order to address its financial difficulties and continue as a going concern. In consideration for compromising the Plan Liabilities, US$6 billion of debt will be converted into New Debts (namely, a New Loan and New Notes) of US$2.2 billion, with the remaining debt converted into New MCBs and/or New Perpetual Securities.

Split across four creditor classes, the Plan Liabilities are to be composed as follows:

If the Plan were to fail, the Relevant Alternative (i.e., whatever the Court considers the most likely to occur in the alternative) was found to be a winding up of the Plan Company in light of the ongoing winding-up petition (filed in June 2024), followed by subsequent severe worldwide distress across the Group, including equivalent formal insolvency proceedings against other Group members.

Interconditional Hong Kong Scheme

The Plan is part of the Group’s wider offshore restructuring, which includes a parallel interconditional scheme of arrangement in Hong Kong (the Hong Kong Scheme) proposed by the Plan Company subsidiary, Sino-Ocean Land (Hong Kong) Limited (Sino-Ocean HK Land). The Hong Kong Scheme comprises the same Class A debts (governed by Hong Kong law) to be compromised under the Plan. Sino-Ocean HK Land is the primary borrower of each of those debts. The parallel Hong Kong Scheme ensures international recognition of the compromise of the Class A debt under Hong Kong law. This was necessary as a result of the rule in Gibbs², which applies both in England and in Hong Kong and states that a debt obligation can be discharged only by a legal process in the jurisdiction of its governing law. Thus, both the Plan and Hong Scheme must be sanctioned to achieve full and effective compromise of the Plan Liabilities in all relevant jurisdictions.

The Hong Kong Scheme sanction hearing is scheduled to take place on 19 February 2025.

Challenge to the Plan

The Plan was opposed by Long Corridor Asset Management Ltd. (Long Corridor), a creditor with holdings across the Class B, C, and D Notes, on several grounds addressed in the judgment, as summarized below. Long Corridor claimed to represent an ad hoc group of noteholders (whose identities and respective holdings were undisclosed to the Court).

Decision

On February 3, 2025, the Court handed down its decision in sanctioning the Plan. In summary, with respect to the main points of the case, the Court held the following:

• Inclusion of the Hong Kong law–governed Class A debt under the Plan was not artificial or abusive:
  
  • The Court noted that the Gibbs rule is not absolute; there is a notable exception. Under the Plan, where the Class A creditors’ debts are governed by Hong Kong law and they vote in favor of the restructuring plan, then they will have submitted to the jurisdiction of the English courts in a way that would be recognized by Hong Kong law, giving “substantial effect” of the Plan on the Class A creditors.
  • In respect of the Class A creditors under the Plan, the Court stated that the position was no different from the position of an assenting class of creditors being allowed to act as a cramming class against otherwise dissenting classes of creditors and the question of whether the inclusion of such assenting class was artificial or abusive. In this regard, the Court will ask “whether the plan has a meaningful impact on the assenting class” (i.e., the assenting class is adversely affected in the relevant alternative and would be substantially impaired under the restructuring plan). In this case, the Court held that there was nothing artificial as to the inclusion of the Class A creditors under the Plan as, looking at the broader restructuring proposed by the Group under both the Plan and Hong Kong Scheme, the arrangements affected all classes, including Class A creditors.

• The “relevant alternative” was the liquidation of the Plan Company:
  
  • The Court accepted, based on the Plan Company’s evidence, that the most likely “relevant alternative” to the Plan was a liquidation of the Plan Company, including subsequent triggering of additional formal insolvency processes of Group subsidiaries.
  • Notably, Long Corridor did not formally challenge the Plan Company’s expert evidence as to the relevant alternative. Long Corridor did not seek to demonstrate that a particular alternative outcome was the most likely outcome should the Plan fail, nor did Long Corridor adduce counter-expert evidence to show that a different alternative to the Plan (e.g., the Alternative Proposal, which involved the distribution of 95% of the Plan Company’s equity to creditors) would result in a better return to creditors than the Plan.

• The Institutional Shareholders’ retention of equity in the Plan Company is justified, despite objectively receiving a better return under the Plan and not contributing any new financial support:
  • In exercising its discretion, the Court found there was a good reason to depart from the usual division of benefits in an insolvency scenario, where the Institutional Shareholders would receive nothing. While the Institutional Shareholders would have a substantially better return under the Plan than they would in the relevant alternative, this was justified given the overall benefits they provided as PRC government state-owned enterprises (SOEs). The ongoing involvement of the Institutional Shareholders was shown to be critical to the Plan Company’s business and continued operations in the PRC. This was reflected in a higher valuation of the new debt instruments to be issued under the Plan, due to increased confidence in the PRC market resulting from maintaining SOE shareholders.

• The votes of an affiliate of a shareholder of the Plan Company were not precluded from being counted toward the total votes of Class C creditors:
  
  • The Court noted that when considering a challenge to the representative nature of votes in a class, it will consider the requirement of members of the majority in that particular creditor class having voted in the interests of the class as a whole. It is a key function of the Court to ensure that the minority in a creditor class is not being overridden by a majority’s having interests of its own, clashing with those of the minority, whom they seek to coerce.
  • In this case, the Court found that while it may be argued that the affiliate of the shareholder of the Plan Company had a special interest in supporting the Plan, this was viewed as an “additional reason” rather than the “predominant cause” for that particular creditor’s voting in favor. The Court held that this additional reason did not clash or conflict with the interests of the class as a whole, including because the Class C creditors would receive substantially better returns under the Plan than in the relevant alternative. There was no evidence that the affiliate of the Plan Company’s shareholder had voted with the interests of the shareholder at the forefront.
  • The Court was also persuaded by the fact that excluding the votes of the affiliate, more than a simple majority of Class C creditors had voted in favor of the Plan (at 63.1% votes in favor, by value).

Key takeaways

1. A creditor class, comprising foreign law-governed debt, is not necessarily prevented from being a cramming class under an English restructuring plan, where there is also a foreign parallel restructuring process: This is the first restructuring plan to be sanctioned where a creditor class with foreign law–governed debt was used as a cramming class against creditor classes whose debts are governed by English law. This case highlights that the Court will assess the entirety of a restructuring with multiple processes as a whole, to assess the appropriateness of class composition across such restructuring processes, and whether such classes are artificial or abusive in nature. In this case, the majority of the Class A creditor class (with Hong Kong law–governed debt) had submitted to the jurisdiction of the English courts, which gave substantial effect of the Plan on such Class A creditors. That said, the Hong Kong Scheme was still necessary to bind those Class A creditors that did not actively participate in, or vote in favor of, the Plan.
2. Justified departure from pari passu principle and difference in treatment of different creditor classes: Following the Adler³ case, this case is significant in providing an example of circumstances where there are good reasons to depart from the pari passu treatment of otherwise pari passu ranking creditor classes against the plan company (i.e., all classes other than Class D, which is subordinated to the other classes). Under the Plan, the differential treatment was justified in order to provide a similar multiple of returns to each class of creditor based on their calculated recoveries in the relevant alternative, which varied between classes due to different co-obligors’ (i.e., primary borrowers, issuers, and guarantors) providing varied recovery returns.
3. Importance of identification of the “relevant alternative” in support (or challenge): Long Corridor argued that the relevant alternative was not a liquidation of the Plan Company but either an alternative restructuring launched by the Plan Company, after renegotiating with creditors to provide more equity and dilute existing shareholders, or a liquidator-led restructuring on purportedly fairer terms. The Court was not convinced by the vague relevant alternative put forward and highlighted the need for a “putative alternative plan” to be put forward for the Court to duly consider the effect on creditors in the relevant alternative; without such specified detail, it would be “impossible” for the Court to make any judgment as to whether there was in fact a better and/or viable alternative plan with at least some prospect of implementation in the given circumstances. The Court’s emphasis on expert evidence (or the absence thereof) in identifying the relevant alternative inevitably will motivate all constituents to strengthen their record and presentation at trial, which highlights the importance of experienced counsel in this critical exercise.
4. Justification for retention of shareholders’ equity does not require financial support: This case demonstrates the flexibility that a restructuring process in England provides, including the lack of any absolute priority rule. In this case, the shareholders were able to retain a proportion of equity in the Plan Company for justified reasons, other than providing any direct financial contribution (e.g., new money). This case develops upon previous restructuring plan case law in expanding the justifications for the retention of equity by existing shareholders.
5. Use of parallel restructuring processes: This case is a good example of when a parallel restructuring process is needed to ensure the international effectiveness of a cross-border restructuring where the rule in Gibbs applies to the governing law of the debt. This case showcases that creditor classes across parallel processes need not mirror each other exactly, and a creditor class made up of foreign law–governed debt is not necessarily restricted from being included in an English restructuring process, even where there is a parallel process in the relevant foreign jurisdiction.

Find out more

The Sidley team was led by partners Christopher Cheng (China Corporate and Finance), Kieran Sharma (Restructuring), Carrie Li (Capital Markets), Olivia Ngan (China Corporate and Finance), Dhevine Chandrapala (Restructuring), and Matthew Shankland (Litigation) and Sarah Lainchbury (Litigation).

Sidley’s global restructuring practice is at the forefront of the largest, most challenging, and most complex cross-border restructuring and insolvency matters across Asia, Europe, and the United States — ranked among the top five firms in the world for cross-border restructuring and insolvent matters (GRR 2024).

Notably, in the past two years, Sidley’s APAC restructuring practice has worked on several mandates with a combined total value of over US$90 billion, of which restructurings with a combined value of US$20 billion have been successfully completed.

If you have any questions regarding this case, please contact a member of the Sidley team above or the Sidley lawyer with whom you usually consult.

¹ Note, aggregate outstanding debt amounts are based on figures as of June 30, 2024.
² Antony Gibbs & Sons v Societe Industrielle et Commerciale des Metaux (1890) 25 QBD 399.
³ Re AGPS Bondco [2024] EWCA Civ 24, [2024] Bus LR 745.