Hong Kong’s last remaining independent airline carrier, Hong Kong Airlines Limited has undergone a significant debt restructuring. In parallel proceedings (a restructuring plan in the UK and a scheme of arrangement in Hong Kong), both the English and Hong Kong courts sanctioned the proposed restructuring, with the English court giving its approval on 9 December 2022 and the Hong Kong court following suit on 14 December 2022. The decisions provided a number of "firsts" in terms of cross-border restructuring law and practice.
The restructuring comes as the world emerges from the pandemic which all but stopped travel globally and contributed to a 85.3 per cent drop in the company's revenue for the period February 2020 to January 2021.
The proposal presented by Hong Kong Airlines Limited (the company) in late 2022 accounted for HK$31.55 billion of the company's overall HK$49.01billion indebtedness. The company was already at that point the subject of a winding up petition before the Hong Kong courts, being both cash flow and balance sheet insolvent.
The proposal filed by the company in late 2022 had three key components:
- A new investor would inject HK$3 billion in exchange for a 99 per cent equity stake.
- The aircraft fleet would be reduced from 53 to 20 aircraft, with the 20 aircraft being retained on modified terms and liabilities associated with them being compromised.
- The claims of unsecured creditors would be compromised.
As well as the injection of new funds, the proposed restructuring consisted of:
- A Hong Kong scheme of arrangement under section 670 and 673 of the Companies Ordinance (Cap 622) (the scheme).
- A restructuring plan under Part 26A of the United Kingdom (UK) Companies Act 2006 (which would compromise the same debts as the scheme on top of the indebtedness with respect to perpetual notes and the related guarantees) (the plan).
- Restructurings to resolve certain secured liabilities and other liabilities carved out from the scheme and the plan.
Both jurisdictions apply The Rule in Gibbs which provides that the discharge or compromise of an obligation will only be recognised if the discharge or compromise is carried out under the law applicable to the obligation - meaning that the English Plan could not compromise Hong Kong law governed liabilities and the Hong Kong Scheme could not compromise English law governed liabilities.
Therefore, the two proposals were conditional upon the other as without the approval of both the scheme and the plan, liabilities would have remained outstanding such that the company would not have been able to obtain investment from the new investor.
English Restructuring Plan
Sir Alastair Norris (sitting as a Judge of the High Court) identified seven groups of issues on which a decision was required, namely:
- Questions of jurisdiction;
- Compliance with statutory requirements;
- Constitution of the class meetings;
- Whether there were sufficient statutory majorities in favour of the plan;
- Whether the court could safely rely on the outcome of the class meetings;
- Whether the plan was “fair”; and
- Whether there was any technical or other defect in the plan that would affect its effectiveness.
In terms of questions of jurisdiction, given this was the first restructuring to be implemented by way of parallel Hong Kong scheme and English restructuring plan, Sir Alastair Norris took time to consider whether the company had "sufficient connection" with the English jurisdiction to ensure that the court did not seek to exercise "exorbitant jurisdiction contrary to international comity".
The court found that there was a "sufficient connection" based on the following:
- The company was an overseas company registered as such at Companies House.
- The perpetual notes were governed by English law and, therefore, could only be varied by the order of an English court.
- The English law governed debt amounted to 42 per cent of the company's total indebtedness – whilst in some cases a sufficient connection had been found because the "overwhelming majority" of indebtedness was English law governed, Sir Alastair Norris held that "sufficiency" falls to be established by an intense focus on the facts… and not by satisfaction of some (yet unstated) numerosity requirement";
- There had been "active participation" in the plan by holders of non-English law debt;
- The plan was proceeding "hand-in-glove" with the scheme, such that the "English court is simply playing its part in cross-border insolvency proceedings".
- It was considered preferable to have a "comprehensive plan" supported by "parallel schemes" rather than a "jigsaw of interlocking schemes".
A further jurisdictional issue the court had to consider was the application of the Convention on International Interests in Mobile Equipment 2001 (the Cape Town Convention) which regulates, among other things, the rights of lessors under insolvency law.
Under the terms of the Cape Town Convention, where a lessee has suffered an "insolvency-related event" no obligations may be modified without lessor consent. It was hoped that the plan would deal with the "vexed question of whether a Part 26A plan is "an insolvency related event" in order to provide some clarity to airlines struggling to recover from the impact of the Covid-19 restrictions and who wish to rely on the English restructuring plan to effect rescues as a going concern.
Fortunately for the company (although perhaps less fortunately for those wishing to see this issue addressed), as with Re MAB Leasing Ltd  EWHC 379, the court did not need to consider this question as the lessors of the aircraft to be retained by the company (the Critical Lessors) voted in favour of the plan and were given an alternative to the modification of their rights. Accordingly, we are still awaiting a "test case" on the interaction between the Cape Town Convention and an English restructuring plan.
The plan was also the first of its kind to consider whether secured creditors could be included in and vote as part of an unsecured creditor class in respect of the unsecured portion of their claims. The judge found that for the unsecured portion of a secured creditors' claims, the secured creditors could be viewed as having rights not so dissimilar to an unsecured creditor as to make it "impossible" for them to consult together with a view to their common interest.
The court also noted that the unsecured class should not be fractured despite the fact the claims of the unsecured creditors arose out of obligations governed by English, Hong Kong and PRC law. The court was satisfied that the claims that could be advanced in the liquidation of the group would be governed by Hong Kong rules of winding up such that the governing law of the original obligation was immaterial.
A further class issue arose in relation to the Critical Lessors. Although they would potentially have different outcomes under the plan because of differences in the market value of rental payments and because they could opt not to continue to let the aircraft on modified terms (instead opting to take back the aircraft in which case they would be treated as unsecured creditors), these differences were held not to fracture the class because the differences were held not to constitute material differences in rights against the company.
Typically the "fairness" of a restructuring plan is a ground which is hotly contested by dissenting creditors. In this case all classes voted in favour of the plan and the court received no objections on grounds of fairness. The large majorities supporting the plan in each class helped to demonstrate to the court that the plan was fair; Sir Alastair Norris noted that "such creditors are the best judges of their own commercial interests".
Hong Kong scheme of arrangement
In considering whether to sanction the scheme, the court recalled and applied the following established principles summarised in Re China Singyes Solar Technologies Holdings Ltd  HKCFI 467;  HKCLC 379 (see Hogan Lovells alerts: Hot on the heels – Hong Kong Court continues to favour corporate restructuring of overseas entities):
- 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 such 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;
- 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; and
- In an international case, whether there is sufficient connection between the scheme and Hong Kong, and whether the scheme is effective in other relevant jurisdictions.
Key considerations for the Hong Kong scheme of arrangement
Importantly, the court was of the opinion that the scheme was a genuine debt restructuring of a distressed company and that was a permissible purpose for the scheme to seek to discharge debts owed by principal obligors (i.e. the related debtors), and guaranteed by the company. The company had become the joint obligor with the principal obligors through entering into a number of deeds of contribution.
The technique of using a deed of contribution in allowing a guarantor's scheme to discharge debts owed by principal obligors is not necessary in Hong Kong (see Hogan Lovells alert: Moving in unity – Hong Kong court does away with deed of contribution requirement in sanctioning guarantor's scheme). However, as there was a parallel plan, the court noted that the company had acted consistently with the English practice in entering into deeds of contribution.
The court was also satisfied that the scheme creditors were properly placed in two different classes, namely the class of the unsecured creditors and the class of the Critical Lessors, the financiers or lessors of retained aircraft.
Though certain unsecured creditors had partly secured claims against the company, the scheme would only be applicable to the unsecured portion of the creditors' claims. The court noted that this is an acceptable and established practice in Hong Kong.
The restructuring consideration given to the Critical Lessors was similar in principle, but differed in terms of the length of the lease or the loan extension that could be elected by such Critical Lessors. The court did not think that such differences would fracture the class, as the difference in rights was only a result of the election made by the Critical Lessors. This did not override the fact that the Critical Lessors were given the same right to choose between the options and hence it was possible for them to consult collectively as a class with a view to a common interest.
A decision full of firsts
As well as the practical result of rescuing the company from imminent insolvency, the restructuring saw a number of firsts: the first parallel and inter-dependent Hong Kong scheme and English plan; the first restructuring to allow a secured creditor to vote as part of an unsecured creditor class to the extent of that part of the secured creditor's debt not satisfied by its security; and the first to confirm that while a "sufficient" part of the compromised debt had to be governed by English law to establish the requisite "sufficient connection" for an overseas company, sufficiency was fact specific and there was no specific numerosity test.
The restructuring also confirmed a number of scheme requirements in Hong Kong. Perhaps unfortunately, ultimately the English court did not have to grapple with the question of whether a restructuring plan is an "insolvency-related event" under the Cape Town Convention – an issue which will have to wait for another day.