Re APP China Group Ltd

• Jurisdiction: Bermuda
• Judgment Date: 24 November 2003
• Date: 24 November 2003
• Docket Number: Companies (Winding-Up) Jurisdiction 2003 No. 381
• Court: Supreme Court (Bermuda)

In The Supreme Court of Bermuda

Kawaley, J

Companies (Winding-Up) Jurisdiction 2003 No. 381

BETWEEN:

Re APP China Group, Ltd.

Mr. N. Hargun for the Company/Petitioner

Mr. D. Kessaram for the Objectors

The following cases were referred to in the judgment:

Re Alabama, New Orleans, Texas and Pacific Junction Railway Co.ELR [1891] 1 Ch 213

Re English, Scottish and Australian Chartered BankELR [1893] 3 Ch 385

Re Wedgwood Coal and Iron CoELR (1877) 6 ChD 627

Re Allied Domecq plcUNK [2001] 1 BCLC 134

Re Osiris Insurance Ltd.UNK [1989] 1 BCLC 182 20

Companies Act 1981, s. 99, 100

Objections to sanction of scheme of arrangement — Whether classes of shareholders were fairly represented — Whether provisions of statutes complied with — Whether arrangement would be reasonably approved by man of business

JUDGMENT of Kawaley, Puisne Judge

Background

By Originating Summons dated September 23, 2003, the Company applied for leave to summon a meeting in connection with a proposed Scheme of Arrangement (‘the Scheme’) between the Company and its creditors, and for related directions.

The application was granted by me, in accordance with the standard practice, on an ex parte basis in Chambers. The Scheme was proposed on the basis that the Company was hopelessly insolvent, the liquidation return to creditors was estimated at nil, and that if creditors accepted shares in return for their debt, there was modest prospect of some future recovery.

The First Affirmation of Alex Goh stated that the application was urgent, because the ‘PRC Banks’ would absent the Scheme enforce their security over the operating subsidiaries, depriving the company of any future sources of earnings. It also stated that the Scheme documents had been prepared in consultation with Gabriel Moss Q.C., the leading authority on insolvent schemes of arrangement.

By its Petition dated October 31, 2003, the Company sought this Court's sanction for the Scheme under section 99 of the Companies Act 1981, on the basis that at the meeting of creditors held in Bermuda at 10.00 am on October 30, 2003 (‘the Court Meeting’) the Scheme had been approved by the requisite majority in number representing three-quarters in value of voting creditors.

Fidelity and John Hancock objected to the Scheme being sanctioned, and asked the Court to adjourn the hearing and to compel the Company to disclose further particulars of the creditors who voted in favour of the Scheme, based on their suspicions that affiliates of the shareholders might have recently acquired shares and not voted bona fide in the interests of the single creditor voting class.

After a hearing that lasted a little less than a full day at which both Counsel tendered written submissions and authorities, on November 7, 2003 I decided to sanction the Scheme over the Objectors' objections, and indicated that Reasons would be given later for this decision. At the sanction hearing, as on the Chambers application for leave to summon the meeting of creditors to consider the Scheme, The Company stressed that the viability of the Scheme required that it be implemented on an urgent basis.

The Petition

The background facts as set out in the Petition were mostly not in dispute. The Company is an indirect subsidiary of Asia Pulp and Paper Company Limited (‘APP’), the ultimate holding company of companies involved in the manufacturing of paper and pulp products in China and Indonesia (‘the APP Group’). The Company is the holding company for the China-based limb of the Group's operations (‘the APP China Group’).

The APP Group announced a standstill on the payment of certain debts on March 1, 2001 due to a liquidity crisis, triggered largely by the Asian financial crisis and a major decline in the prices of the Group's products. Restructuring negotiations with creditors have been pursued over the last two years. The APP China Group is dependent for working capital on the Chinese Bank Creditors. The Company's debt falls into three main categories:

• 1. US$403 million notes guaranteed by APP;

• 2. US$142 million in bank loans from a related party (BII Bank Ltd.), also guaranteed by APP;

• 3. US$7.5 million to related entities, including in respect of Scheme costs.

The PRC operating subsidiaries are, like the Company, insolvent, and the Chinese Bank Creditors have security over most of their assets. If they followed through with their threat to enforce such security, there would be no prospect of any recovery for the Company's creditors at all. The verified Petition asserts in paragraph 12 that after ‘a detailed and extensive consideration of the options available to the Company, it was determined that it was in the best interests of Creditors to implement a scheme of arrangement whereby Creditors would receive shares in the Company in exchange for their debt thereby giving them some chance of recovering their debt over time should the APP China Group become profitable’. Although the merits of the conclusion are not accepted by the Objectors, there is no doubting that the Scheme was put forward on this basis.

179 creditors attended the Court meeting and voted by proxy, with claims worth $659,334,256.14. Of these, 169 with claims worth $587,145,058.34 voted in favour of the Scheme, and 10 creditors with claims valued at $72,189,197.80 voted against. In percentage terms, the unchallenged Petition asserts, 94.4% in number and 89.1% in value voted in favour of the Scheme. This includes the vote of the arguably conflicted BII Bank, worth $143,429,839.94, although the objectors are bound to concede that if this claim is subtracted, there is no impact on the validity of the vote in terms of whether the statutory bar (50% plus in number and 75% in value) has been met.

The detail behind this summary may be found in the meeting report dated October 30, 2003, and the actual voting results exhibited to the Second Affidavit of Theodore Bloch of the same date.

As a prima facie case for the Court's sanction was clearly made out and the real controversy was on the merits of the objections, I summarize the evidence and Counsel's submissions below, reversing the order in which the respective cases were actually put.

The objectors' evidence

The substantive case of the Objectors in evidential terms is to be found in the November 5, 2003 Affidavit of Nathan Van Duzer (‘the Van Duzer Affidavit’), sworn by Fidelity's Senior Legal Counsel. John Hancock's Arthur Calavritinos supports the Van Duzer Affidavit in his own November 5, 2003 Affidavit.

The objectors together hold bonds worth US$ 25,790,000. Fidelity's claim could have been larger, but for an administrative error by their own bankers which prevented claims worth in excess of $14 million from voting (it is accepted this would not have affected the prima facie validity of the vote).

The main complaints made by the Objectors may all be distilled into one: the Scheme was approved not by the company's creditors voting bona fide in the interests of their creditor group, but by creditors motivated by a desire to advance the interests of the Controlling Shareholders in retaining control of the Company and achieving the benefit of being released from the guarantee obligations of APP. However, this assertion is not made as a matter of positive fact, but rather on the basis of suspicion and belief.

The first basis for these contentions is set out in paragraph 8 of the Van Duzer Affidavit: ‘the patent unattractiveness of the Scheme to an “independent” creditor also goes to suggest that those creditors who approved the Scheme may have had an ulterior interest or affiliation encouraging them to do so which is not made clear on the face of the Scheme Document’. In paragraph 14 of the Van Duzer Affidavit, it is suggested that the BII Bank advanced monies in 2003 at a time when no bona fide lender would have done so.

The second basis for these contentions is that the Scheme Document itself reveals that a select group of creditors have had detailed discussions about their post-Scheme role in the management of the Company (paragraphs 17–20 of the Van Duzer Affidavit, and subsequent paragraphs 21–27 complaining of inadequate responses at the Court Meeting to queries on this topic on the identity of noteholders issue).

The third basis for this complaint is Mr. Van Duzer's awareness ‘of there being significant market activity in purchasing the Existing Notes’ (paragraph 28). The suspicion that the APP Group interests have been involved in buying bonds to protect their interests is supported by a speculative story appearing on October 8, 2003 in the Shangai Daily edition, and a similar article appearing in the International Herald Tribune on October 6, 2003 which discusses the proposed Scheme. Complaint is then made that at the Court Meeting, Mr. Goh on behalf of the Company was was able to confirm that none of the noteholders were affiliated while all present on behalf of the Company were unwilling to disclose their identities.

The second broad, and arguably more substantive, point made Mr. Van Duzer is that insufficient information was provided on the identity of noteholders to enable the Objectors and reasonable independent creditors to make an informed decision when voting on the Scheme (paragraphs 31–34). This point is buttressed by the contention that on two grounds, independent creditors would not have supported the Scheme as proposed. The first ground is that the prospects under the Scheme are so bleak; the options of extending the debt or a liquidation should have been considered as alternatives, and it is worrying that the only available accounts are unaudited (paragraphs 35–43). The second ground is that no reasonable creditor would ever approve a Scheme under which they were asked not only to release their primary debt, but also their rights under a parent guarantee (paragraphs 44–52). This only benefited APP, and the explanation given at...