RE MONGOLIAN MINING CORPORATION (in Provisional Liquidation in the Cayman Islands)

HCMP 370/2017 [2018] HKCFI 2035 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 370 OF 2017 ________________ IN THE MATTER of Mongolian Mining Corporation (in Provisional Liquidation in the Cayman Islands) and IN THE MATTER of section 673 of the Companies Ordinance (Cap 622) ________________ Before: Hon Harris J in Court Date of Hearing: 25 April 2017 Date of Decision: 25 April 2017 Date of Reasons for Decision: 7 September 2018 _________________________________ R E A S O N S F O R D E C I S I O N _________________________________ Introduction On 14 March 2017, under section 670 of the Companies Ordinance, Cap 622 (“Ordinance”), I gave leave to Mongolian Mining Corporation (“Company”) to convene a meeting (“Scheme Meeting”) of a discrete group of creditors (“Scheme Creditors”) in order that they could consider and vote on a proposed scheme of arrangement to restructure the debts owed to them (“Scheme”). The Scheme Meeting took place on 11 April 2017 and all Scheme Creditors present at the Scheme Meeting voted in favour of the Scheme. On 20 April 2017 the Company issued a petition seeking the court’s sanction, which I granted on 25 April 2017. These are my reasons for approving the Scheme. Background to the Scheme The Company is— a company incorporated in the Cayman Islands; registered in Hong Kong as an overseas company since 18 August 2010, with its principal place of business in Hong Kong; listed on the Hong Kong Stock Exchange since 13 October 2010; an investment holding company with operating subsidiaries in Mongolia carrying on the business of producing and exporting high quality coking coal; balance-sheet insolvent; and in provisional liquidation in the Cayman Islands since 19 July 2016. The Company’s financial indebtedness comprises— US$600,000,000 senior secured notes, governed by New York law, listed in Singapore, and secured by charges over shares in the Company’s subsidiaries in Hong Kong and Luxembourg (“Old Notes”); a secured loan facility of US$150,000,000; and two promissory notes in the aggregate original principal amount of US$52,500,000. In view of its financial difficulties, the Company’s debt restructuring is to be achieved— bilaterally and consensually in respect of the secured loan facility and promissory notes; and by means of inter-conditional parallel schemes of arrangement in Hong Kong and the Cayman Islands in respect of the Old Notes. In brief, the effect of the Hong Kong scheme is that debts owed to the Scheme Creditors will be released and discharged; in return, the Scheme Creditors will obtain new notes and shares in the Company. The effectiveness of the Hong Kong scheme is conditional on the Cayman scheme being sanctioned by the Cayman court and recognised in the United States under Chapter 15 of the Bankruptcy Code. Jurisdiction — Concept of Creditor As the Old Notes are held in a global form or global restricted form through the clearing systems, the Scheme Creditors are defined in the Scheme as the beneficial holders of the Old Notes who have a right, upon satisfaction of certain conditions, to be issued with definitive notes in accordance with the terms of the Old Notes. Counsel did not explain why the Scheme Creditors (as opposed to the legal holder of the global note) were proper parties to the Scheme, nor cite any authority for the court’s scheme jurisdiction over the Scheme Creditors. Nevertheless the court has conducted research and I am satisfied that the court has scheme jurisdiction over the Scheme Creditors. Part 13 of the Ordinance confers on the court a jurisdiction to sanction arrangements or compromises between a company and its creditors provided the two pre-conditions set out in section 674(1) are satisfied. First, a majority in number of the class of creditors present and voting must agree to it (“headcount” test), and secondly, 75% in value of the class of creditors present and voting must agree to it (“majority-in-value” test). There is no statutory definition of “creditor” for the purposes of Part 13. It is established that a “creditor” will consist of anyone who has a monetary claim against the company which, when payable, will constitute a debt. Contingent claims are included for this purpose. Creditor with security is also a creditor for the purposes of the scheme jurisdiction. In the present case, because the Scheme Creditors are entitled, upon satisfaction of certain conditions, to be issued with definitive notes in accordance with the terms of the Old Notes, they are contingent creditors for the purposes of the scheme jurisdiction. The Scheme Creditors are therefore proper parties to the Scheme. Jurisdiction — Sufficient Connection In order to justify the court exercising its jurisdiction to sanction the Scheme, it is necessary for the Company to demonstrate sufficient connection between the Scheme and Hong Kong. In the present case, sufficient connection between the Scheme and Hong Kong exists for these non-exhaustive reasons: the Company is registered as an overseas company in Hong Kong; the Company’s principal place of business is in Hong Kong; the Company is listed in Hong Kong; the Company has multiple bank accounts in Hong Kong; one key security agreement securing the Old Notes is governed by Hong Kong law; approximately 30% of the Scheme Creditors are in Hong Kong; and a significant part of the negotiations with the Scheme Creditors took place in Hong Kong. Jurisdiction — Sanction Issues The function of the court at the hearing of a petition to sanction a scheme is to consider— whether the scheme is for a permissible purpose; whether creditors who were called on to vote as a single class had sufficiently similar legal rights that they could consult together with a view to their common interest at a single meeting; whether the meeting was duly convened in accordance with the court’s directions; whether creditors have been given sufficient information about the scheme to enable them to make an informed decision whether or not to support it; whether the necessary statutory majorities have been obtained; and whether the court is satisfied in the exercise of its discretion that an intelligent and honest man acting in accordance with his interests as a member of the class within which he voted might reasonably approve the scheme. See Re Dorman, Long & Co Ltd; Re China Light & Power Co Ltd; Re Cable & Wireless HKT Ltd; Re PCCW Ltd; Re Wheelock Properties Ltd; Re Cheung Kong Holdings Ltd; Re China Assets (Holdings) Ltd; Re Enice Holding Company Ltd. First, it is well-established that debt restructuring is a permissible purpose of a scheme of arrangement. Secondly, it is appropriate that the Scheme Creditors vote in a single class because— there is only one class of the Old Notes; prior to the Scheme Meeting, the Scheme Creditors were given the same right to participate in a restructuring support agreement in return for a consent fee of up to 1% of the principal amount of their notes; and the Scheme Creditors are given the same scheme consideration. Thirdly, the requirements in the Order relating to the convening of the Scheme Meeting have been complied with. Fourthly, the Scheme Creditors were given sufficient information in the explanatory statement to exercise their judgment on how to vote at the Scheme Meeting. Fifthly, the requisite statutory majorities of the Scheme Creditors have voted in favour of the Scheme at the Scheme Meeting. Sixthly, I am satisfied that the Scheme is such as an intelligent, honest person acting in respect of his interest might reasonably approve. The court will not make an order with no substantive effect and accordingly, to sanction a scheme, the court needs to be satisfied that the scheme will be effective in practice. Here the Old Notes are governed by New York law and the Hong Kong scheme is conditional on the Cayman scheme being recognised under Chapter 15 of the US Bankruptcy Code. The Company has produced evidence to demonstrate that it was likely that the US Bankruptcy Court would grant recognition and the ancillary relief necessary to enforce the Cayman scheme. I am satisfied from the evidence filed that such Chapter 15 recognition will probably be granted and what in practice is the principal purpose of the Scheme will be achieved. Accordingly, I am satisfied that the Scheme should be sanctioned. (Jonathan Harris) Judge of the Court of First Instance High Court Mr José Maurellet SC and Mr Jason Yu, instructed by Davis Polk & Wardwell, for the Company