Cayman Islands restructuring of Chinese businesses: Evergrande in focus
19 September 2023
Chinese real estate developer China Evergrande Group ("Evergrande") filed for Chapter 15 bankruptcy protection under the US Bankruptcy Code in New York last month, seeking recognition in the United States of America of restructuring proceedings in Hong Kong and the British Virgin Islands. The hearing is scheduled for 20 September 2023.
Evergrande, incorporated in the Cayman Islands ("Cayman") in 2006, is also the subject of section 86 proceedings under the Companies Act (as amended) of the Cayman Islands before the Cayman Grand Court (the "Cayman Proceedings"). The Cayman Proceedings, which are not the subject of Evergrande's Chapter 15 application at this stage, are described as parallel and inter conditional to the Hong Kong proceedings, reflecting the same economic restructuring of the same obligations.
The Luckin path
As previously reported, the Cayman-based restructuring of Luckin Coffee Inc ("Luckin") and the Cayman court orders made subsequently in respect of MIE Holdings Corporation may prove to be a road map for Evergrande.
Like Evergrande, the holding company for Luckin was registered in Cayman giving access to the Cayman restructuring process of appointing "light touch" provisional liquidators to work alongside the current management team with the object of promoting a scheme of arrangement with creditors (a "Scheme of Arrangement"). During such a provisional liquidation, the restructuring company can benefit from a stay of litigation against it whilst it seeks to formulate a settlement with creditors. A settlement can be implemented by 50 per cent in number and 75 per cent in value of the creditors voting to approve the settlement.
The Evergrande scheme meeting was recently postponed to 25 September 2023, giving creditors more time to consider their options, particularly after Evergrande resumed trading in Hong Kong following a 1.5 year hiatus resulting in considerable share value loss.
Also like Evergrande, Luckin shares were listed in Hong Kong and bonds were issued in USD. In 2021, the Luckin provisional liquidators reported that a restructuring agreement existed with the Luckin bond holders which formed the basis of a Scheme of Arrangement filed after its scheme meeting at the end of November 2021. Ultimately, the Luckin winding up petition was dismissed and the provisional liquidators discharged following Cayman court orders in February 2022 approving the Scheme of Arrangement.
What creditors should know
The Luckin example demonstrates that for Cayman registered holding companies of Chinese based operating companies (like Evergrande), restructuring debt using the Cayman "light touch" provisional liquidators to promote a Scheme of Arrangement is well established and successful.
Nonetheless, creditors of Cayman registered Chinese holding companies would be well advised to understand the Scheme of Arrangement process before being approached by provisional liquidators and to understand their rights in the process. Bedell Cristin has advised creditors in many Schemes of Arrangement, including those involving Cayman registered Chinese holding companies.
Our previous briefing on Schemes of Arrangements provides a high level review of what is involved. Notably, the most common challenges at the sanction hearing that follows the scheme meeting is that classes of stakeholders were not constituted properly in accordance with established principles. For example, the relevant class should be limited to stakeholders whose legal rights are sufficiently similar so that they can consult and work with each other to identify their common interest.
If you would like any further information, please get in touch with your usual Bedell Cristin contact or one of the contacts listed.