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Scheme of Arrangement and Bondholders’ Votes – Split Voting and Voting as Contingent Creditors

10 Nov 2018

Recent Hong Kong, Singapore and English cases have converged and re-confirmed how bondholders vote in schemes of arrangement where the bonds are issued in global form.  The position in summary is as follows:

(a)     if the bond trustee votes, a split-vote approach respecting the underlying beneficial bondholders’ wishes is to be adopted such that:

(i)      for the purposes of the headcount test, the trustee’s vote will be counted as one vote for, one vote against, or zero;

(ii)     for the purposes of the majority-in-value test, the trustee’s vote will reflect the beneficial bondholders’ wishes as if they were voting directly themselves;

(b)    alternatively, instead of the bond trustee voting, the underlying beneficial bondholders may vote directly as creditors on the basis that they are contingent creditors, provided the beneficial bondholders can acquire direct rights against the company in some (even remote) circumstances

Scheme voting requirements and bond issuance structure

Under Part 13 of the Companies Ordinance (Cap. 622), the court may sanction a scheme of arrangement between a company and its creditors provided the two pre-conditions set out in section 674(1) are satisfied. First, a majority in number of the class of creditors present and voting must agree to it (“headcount” test), and secondly, 75% in value of the class of creditors present and voting must agree to it (“majority-in-value” test).

The Companies Ordinance does not define “creditor, but case-law has established that “creditor” means anyone who has a monetary claim against the company which, when payable, will constitute a debt. Contingent claims are included for this purpose.

The application of the scheme voting requirements to bonds issued in global form have given rise to some potentially complex issues which have now been resolved by case-law.

When bonds are issued in global form, legal ownership of the bonds rests with the nominee of a common depositary (“bond trustee”). The direct creditor of the bond issuer is thus the bond trustee while he holds his interest on trust for the underlying beneficial bondholders.

This bond issuance structure gave rise to a concern that the underlying bondholders beneficially interested under a trust might not be considered to be creditors for the purposes of the scheme jurisdiction. If so, only the bond trustee could vote in a scheme of arrangement.

However, bond documents typically contain a mechanism whereby the beneficial bondholder can upon request become a direct creditor of the bond issuer. Typically, on the occurrence of an event of default, there is a provision that the global note is to be transferred to the beneficial owners in the form of definitive notes upon the request by the beneficial owners. Because of the existence of this mechanism, the ultimate beneficial bondholders may be regarded as contingent creditors of the bond issuer. The beneficial bondholders may thus vote as creditors in the bond issuer’s scheme of arrangement.

If the beneficial bondholders are not called upon to vote, the bond trustee may of course vote as he is the legal creditor of record in any event.

Where the bond trustee votes, case-law has established that his single vote is to be calculated using the split vote analysis. The split vote analysis produces the following consequences.

First, if all the beneficial bondholders accept or reject the scheme proposal, the bond trustee’s vote will be treated as one vote for or against the scheme, for headcount purposes.

Second, if the beneficial bondholders do not speak in one voice, then for headcount purposes, the bond trustee’s vote will be treated as one vote for and one vote against the scheme, thus cancelling each other out.

Third, for the majority-in-value test, the trustee’s vote will simply reflect the value for and against the scheme according to the beneficial bondholders’ wishes.

The recent cases confirming the above approach are Re Enice Holding Company Ltd [2018] HKCFI 1736, Re Mongolian Mining Corporation [2018] HKCFI 2035, Re Swiber Holdings [2018] SGHC 211, and Re Noble Group Ltd [2018] EWHC 2911 (Ch).

José-Antonio Maurellet SC and Look-Chan Ho