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Post-scheme modification – an easy guide

In the recent decision of Moody Technology Holdings Ltd[1], the Hong Kong Court of First Instance (the “Hong Kong Court”) provides useful commentary on the jurisdiction to modify a scheme of arrangement after court sanction – a matter on which there is no previous Hong Kong law authority.

Background

Moody Technology Holdings Ltd (Provisional Liquidators appointed for Restructuring Purposes) (the “Company”)[2] and its subsidiaries (the “Group”) are primarily engaged in the design, manufacturing and sales of fabrics, and the trading of shoes and clothes in the People’s Republic of China, Hong Kong, and Korea.

Between 2014 and 2019, the Company issued bonds for the purposes of funding the construction of factories, developing the Group’s fabrics business and for working capital. Due to financial issues which ultimately caused the Company’s bonds to be accelerated[3], in November 2020, the Company together with Provisional Liquidators[4] formulated a scheme comprising a debt for equity swap whereby the Company would issue shares to bondholders (i.e. scheme creditors) to discharge and release the claims owing by the Company to the scheme creditors in full.[5]

Harris J of the Hong Kong Court ultimately sanctioned the scheme on 28 June 2022 following the relevant scheme meeting approval.[6] However, following issues arising out of the proposed implementation of the scheme,[7] the Company agreed with the initial scheme administrators that they should be replaced. As a result, the Company made an application to the Hong Kong Court to modify the scheme.[8]

Modification of scheme of arrangement already sanctioned by Court

Having considered the Hong Kong authorities on modifications of a scheme at the time of the scheme meeting in Re Hong Kong Building and Loan Agency Limited[9] and Re Mongolian Mining Corp[10], and the English authorities on modification at a later stage in Re Aon plc[11] and Re Equitable Life Assurance Society[12], the Hong Kong Court determined that it had jurisdiction to properly modify a scheme after it has been sanctioned if:

  1. the scheme provides for an application for an amendment to make the Court; and
  2. where the modifications are minor and not such as might reasonably be thought would have caused a scheme creditor to have decided to vote against the scheme.

In this matter, given that the scheme expressly provided an application for amendment and the proposed modifications were plainly intended simply to ensure that the scheme is administered as was originally intended, the Hong Kong Court ordered the amendments to the scheme sought by the Company.[13]

Takeaways

Modification clauses are quite standard in offshore schemes to allow flexibility for the company to modify the scheme. Depending on how the clause is drafted, a scheme company’s right to modify a scheme’s terms can be made subject to the approval of the relevant Court. Generally, this type of provision is included to essentially address an immaterial error, oversight, or change of circumstances that needs to be corrected (as opposed foisting on a class of creditors something substantially different to what was approved at the relevant scheme meeting).

In assessing whether a modification may have caused a scheme creditor to vote against the scheme, as a general rule, a company will need to satisfy itself that what is proposed to be modified will not cause any reasonable scheme creditor to take a different view on the scheme had it been put before them.

Harneys does not advise on matters of Hong Kong law. Having said that, the judgment is likely to be of persuasive value in the courts of the British Virgin Islands, Cayman Islands and Bermuda.


[1][2024] HKCFI 452.
[2]Incorporated in the Cayman Islands with limited liability and continued in Bermuda with limited liability.
[3]The maturity dates of the majority of these bonds were accelerated by bondholders such that all bonds became due and payable as a result of the Company’s solvency issues.
[4]On 10 October 2019, the Company filed a winding up petition in the Supreme Court of Bermuda (Bermuda Court) together with an application for the appointment of ‘light touch’ provisional liquidators to facilitate a restructuring of the Company’s indebtedness. On 24 October 2019, the Bermuda Court ordered that the appointment of provisional liquidators to the Company. This appointment was recognised by the Hong Court on 24 January 2020 – which is in itself significant given soft-touch provisional liquidation being impermissible in Hong Kong.
[5]By 31 December 2020, the Company’s indebtedness largely comprised 230 unsecured bonds issued by the Company totalling approximately US$163 million (cRMB781.70 million), which amounted to approximately 97% of the Company’s liabilities.
[6]On 20 April 2022, the Hong Kong Court ordered that the scheme meeting be convened on 8 June 2022, at which the resolution to approve the scheme was duly passed. The scheme became effective on 5 September 2022 following completion of conditions precedent.
[7]These issues were: (i) that the initial scheme administrations had calculated that the number of scheme shares that needed to be issued by reference to the total value of the claims that has been submitted (rather than calculating them after it has been determined what the total value of the admitted claims were); and (ii) during the change of scheme administrator, all these scheme shares were allotted to scheme creditors, even though not all the claims had been assessed and admitted. Accordingly, it is intended that new scheme administrators would run a determination process to confirm scheme share entitlements of scheme creditors and cancel any scheme shares which may have already been issued in excess of that to which a scheme creditor is entitled, if required.
[8]Also, the time periods for the assessment of scheme claims needed to be adjusted from the periods specified in the original approved scheme.
[9]HCMP 2268/2018, 20 August 2019; [2019] HKLRD 373.
[10][2018] 5 HKLRD 48.
[11][2020] EWHC 1003.
[12][2002] BCC 319.
[13]On 25 January 2024, the Hong Kong Court had made an order in modifying the scheme with the following effect: (i) the identity of the scheme administrators be changed from Mr. Tang Chung Wah (Alan) and Mr. Kan Lap Kee (Terry) of SHINEWING Specialist Advisory Services Limited to Mr. Lai Wing Lun and Mr. Osman Mohammed Arab of Acclime Advisory Services Limited (the “New Scheme Administrator; and (ii) the New Scheme Administrators will continue to complete all the outstanding procedures of the scheme of arrangements as mentioned in the scheme documents. It is expected that the Company will take necessary procedures to apply to discharge the provisional liquidators and dismiss the winding up petition in the Bermuda Court following the determination process undertaken by the new scheme administrators.