Bestway Global Holdings Inc: A summary of the principles applied when considering sanction applications for schemes of arrangement and capital reductions

Oct 2021

In Bestway Global Holdings Inc. (FSD 208 of 2021 – unreported), Doyle J gave a comprehensive and helpful review of the principles to be applied by the Court when considering whether to sanction a scheme of arrangement and confirm a capital reduction. Although schemes of arrangement are commonplace in the Cayman Islands, rarely are the principles and authorities considered at sanction hearings so thoroughly set out in published judgments. The decision therefore provides useful guidance to practitioners.

The objective of a scheme of arrangement is to allow the company to enter into an agreement with its shareholders and/or creditors (or any class of them) to either:

1. restructure its affairs while solvent (including the frequent use of schemes to privatise public companies); or
2. reach a compromise or arrangement with creditors or shareholders (or any class of them) after liquidation has commenced.

A scheme of arrangement in the Cayman Islands requires the sanction of the Grand Court in order for it to be binding on the company and its shareholders and/or creditors (“Scheme Participants”).  In every case, the court will consider whether it is appropriate to convene class meetings of the Scheme Participants and, if so, what the composition of those classes should be.  The applicant must satisfy the court that the scheme documentation will provide the Scheme Participants with all information reasonably necessary to make an informed decision about the merits of the proposed scheme of arrangement and will have the right to attend and be heard at the hearing of the petition.

Here, the court was asked to sanction a scheme of arrangement under section 86 of the Companies Act (2021 Revision) (“The Companies Act”) and to confirm a reduction of share capital pursuant to section 15 of the Companies Act. In summary, the purpose of the scheme was to privatise the company, offering scheme shareholders a good opportunity to realise their investment without suffering any discount due to low trading liquidity. The costs associated with the Company’s listing status were longer justified, so privatising the Company was in the interests of the various stakeholders of the Company.

The Court considered the purpose and effect of the scheme, the proposed scheme documents, the determination of classes and made an order for directions for the convening of the scheme meeting and for the hearing of the petition.

At the hearing of the petition, Doyle J noted the undertakings to the Court given in the petition, the purpose and principal features of the scheme of arrangement, that he was satisfied that the directions order regarding the Court Meeting had been complied with and that the meeting had been duly convened. He noted the outcome of the Court meeting (that 60 out of the 61 scheme shareholders present voted in favour of the scheme (representing 99.989234% of the shares in value) and that the statutory majorities in section 86 of the Companies Act had been met (namely a majority in number representing seventy-five per cent in value of the scheme shareholders).

In considering whether to sanction the scheme, Doyle J noted that:

1. The proposed scheme was a scheme of arrangement within the meaning of section 86 of the Companies Act (noting in particular the authorities of Re SIIC Medical Science and Technology Group Limited 2003 CILR 355; Euro Bank Corporation (In Liquidation) 2003 CILR 205);
2. The scheme document provided all the material information reasonably required to enable the scheme shareholders to come to an informed view on the merits of the scheme (as required by Order 102 rule 21(4)(e) of the Grand Court Rules (2015 Revision), Practice Direction No. 2 of 2010 at 3.7 and citing Re XL Capital Limited 2010 Vol. 1 CILR 52 Hon. Smellie CJ);
3. The Court meeting was properly held and the statutory majorities were achieved;
4. There was no reason to believe that the views of the overwhelming majority of those who voted in favour of the scheme did not fairly represent the views of the scheme shareholders as a whole, that they were not acting bona fide or that they were subject to coercion;
5. The scheme of arrangement was fair in the sense that an intelligent and honest person acting in respect of his relevant interest might reasonably approve of it. Those voting are the best judges of their own commercial interest and reasonableness of the terms of the scheme of arrangement. Being fully informed, an overwhelming majority had voted in favour of the scheme at the Court meeting. In commercial matters members and creditors are generally much better judges of their own interest than the courts; and
6. There was no good reason for the court to exercise its residual discretion not to sanction the The judgment of Mr Justice Snowden (as he then was) in Barclays Bank PLC [2019] EWHC 129 (Ch) at paragraph 33 was referred to. The Court should give due recognition to the commercial judgment of others directly involved in the scheme and that the details of the scheme are not a matter for the court provided the scheme as a whole is found to be fair.
7. In respect of the capital reduction, Doyle J considered section 15 of the Companies Act and In the Matter of China.Com Incorporated [2009] CILR 384 (which set out the considerations of the Court when exercising its discretion to confirm a reduction) and was satisfied that:
   1. The Company had the power (in its Articles) to reduce its share capital ;
   2. The shareholders had passed a valid resolution to do so;
   3. The Company’s creditors will be adequately protected;
   4. The shareholders will be treated equitably;
   5. The proposed reduction was properly explained; and
   6. The reduction was for a discernible purpose and was part and parcel of the scheme of Therefore the Court sanctioned the Scheme and confirmed the capital reduction sought.

This useful restatement of the existing legal position will enable practitioners to use the guidelines and considerations helpfully set out and considered by Doyle J in future applications seeking sanction of a scheme of arrangement and/or confirmation of a capital reduction.

Ben Hobden of Conyers appeared on behalf of the Company.

For further information, please contact your usual Conyers lawyer or one of the contacts listed below.