In Re CIFI Holdings (Group) Co Ltd [2025] HKCFI 3250, the Hong Kong Court of First Instance sanctioned a scheme of arrangement under section 673 of the Companies Ordinance (Cap. 622) for CIFI Holdings (Group) Co Ltd ("Company"), facilitating the restructuring of US$6.8 billion in offshore debt.
This decision provides useful guidance on the Court's approach to large-scale cross-border restructurings involving substantial offshore liabilities. In particular, the decision addresses whether the fees and costs of an ad hoc group of note holders ("AHG") would fracture the class of scheme creditors or otherwise impact the Court's approval of the scheme.
Background
The Company, a Cayman-incorporated and Hong Kong-listed property developer with principal operations in the PRC, faced severe liquidity pressure following the downturn in the PRC real estate sector. The Company became unable to service its offshore debt obligations, prompting engagement with major creditor groups and the formulation of a restructuring plan.
Following negotiations, the Company entered into a restructuring support agreement with the AHG, paving the way for the proposed scheme. The scheme, which is part of a broader restructuring effort and was approved by 98.9% of scheme creditors, aims to restructure approximately US$6.8 billion of the Company's offshore indebtedness to avoid a group-wide liquidation. According to a liquidation analysis, the scheme creditors' recovery under the scheme is estimated to be up to 36.6%, whereas the recovery in a liquidation scenario would only be up to 9.9%.
Decision
The Court sanctioned the scheme, applying the well-established principles recently restated in Re Add Hero Holdings Ltd. One of the key factors considered by the Court in respect of class composition, was whether the AHG's work fees and other professional advisor fees ("Fees") fractured the class of creditors under the scheme. The Court found that the Fees did not fracture what was otherwise a single, cohesive class of unsecured creditors. Its reasons were as follows.
- Payments made by a company to certain creditors independently of a proposed scheme, which are not contingent on the scheme taking effect, do not give rise to a class issue.
- Work fees and advisor fees are commonplace in large-scale restructurings. They serve merely to reimburse the time, expense and expertise devoted to formulating and negotiating a restructuring and are not "bounties" or disguised consideration conferring a differential economic benefit.
- When such fees are offered to some but not all scheme creditors, the Court must evaluate their materiality. Only if the fees are so significant that the unpaid creditors' rights are rendered dissimilar, such that meaningful consultation with a view to their common interest becomes impossible, would separate meetings be required.
- In this case, the Fees which amounted to US$62.85 million, were awarded for the purpose of compensating the AHG for their substantial work, time, and effort over 35 months, including extensive due diligence and engagement with the Company and hundreds of entities in the wider group across multiple jurisdictions.
- The Fees represent approximately 0.92% of the aggregate outstanding principal amount of the offshore debt and approximately 2.94% of the AHG's holdings in the principal amount of existing notes, which is not significant compared to the estimated return under the scheme (i.e. up to 36.6%). The Court was satisfied that such additional realisation was not at a level that would make it impossible for the AHG to consult with other scheme creditors.
- Further, the Fees reflect the risks and opportunity costs the AHG faced due to trading restrictions on their significant holdings after receiving material non-public information, though this factor is less significant for distressed debt investors who knowingly accepted such restrictions.
Comments
This decision confirms that the payment of work fees and professional advisor fees to an ad hoc group does not normally, in itself, fracture the class of scheme creditors, provided such fees are not so material as to create a real divergence of interests. The Court's pragmatic approach recognises the commercial realities of large-scale restructurings, where creditor groups often incur significant costs in negotiating complex deals. The threshold for class fracture remains high: only where the economic impact of such fees is so significant as to undermine the ability of creditors to consult together with a view to their common interest will separate classes be required.
The Court's willingness to sanction schemes with international dimensions, and its pragmatic approach to recognition and enforcement, will be attractive to creditors seeking certainty and efficiency.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
