Scheme sanction and uncompromised creditors
In a recent decision of the Grand Court of the Cayman Islands (Re Freeman FinTech Corporation Limited), Segal J provides guidance on the principles to be applied when sanctioning a cross-border scheme of arrangement and the potential impact from creditors who fall outside the jurisdiction of the court.
Freeman FinTech Corporation Limited was a Cayman Islands incorporated company whose shares were listed on the Hong Kong Stock Exchange. After falling into financial difficulties, “light touch” provisional liquidators were appointed to the company and terms of a debt restructuring were proposed to its unsecured creditors. The compromise was to be promulgated through parallel schemes of arrangement in Hong Kong and the Cayman Islands. The debt of one unsecured creditor of the company, representing approximately 1-2 per cent of the company’s overall debt, was however governed by Macau law.
Segal J conducted a review of the authorities in relation to the function of the Court at a sanction hearing and concluded that the court must be satisfied that: (1) the statutory requirements were complied with; (2) the class of creditors the subject of the court meeting were fairly represented and that the statutory majority had acted bona fide and did not coerce the minority; (3) an intelligent and honest person, a member of the class concerned and acting in respect of his own interests, might reasonably approve the scheme; (4) there was no “blot” on (defect in) the scheme; and (5) there was no other reason which would preclude the court from sanctioning the scheme such as the scheme not achieving substantial effect if it was sanctioned (the court will not act in vain).
With regard to the Macau law governed debt, the creditor did not participate in the scheme or otherwise submit to the jurisdiction of the court, and consequently, there was a risk that the scheme would not be effective against him. Segal J conducted a review of the authorities and, adopting a pragmatic approach, held that based on the evidence before him, the court would not be acting in vain by sanctioning the scheme because the Macau creditor had not indicated any intention to take enforcement action, and even if he did, the amounts involved were sufficiently small to avoid interfering with the implementation of the scheme or impacting the fairness of the compromise as regards the other unsecured creditors.
This decision represents a useful summation and confirmation of the principles pertinent to Cayman Islands scheme sanction applications in the context of a cross-border debt restructuring.