Chinese property developer Sunac receives Chapter 15 recognition

In what is believed to be a first—a United States Bankruptcy Court in November 2023 recognized, as a “foreign main proceeding”, the Hong Kong scheme of arrangement for a holding company whose subsidiary’s operations were all in mainland China. After some hesitation, the US Bankruptcy Court took a deep dive into the foreign debtor’s center of main interests (“COMI”), alleged to be in Hong Kong but with extensive property development and investment projects in mainland China. This article examines the US Bankruptcy Court’s consideration of the debtor’s COMI and ultimate recognition of the scheme of arrangement sanctioned by the Hong Kong Court.

Sunac files for judicial restructuring in Hong Kong

Sunac, officially known as Sunac China Holdings Limited, is a Cayman Island-incorporated company, which maintains a principal place of business in Hong Kong and is listed on the Hong Kong Stock Exchange. Sunac consists of a group of companies involved in property development and investments focused on property development of integrated residential and commercial properties in China (including over 890 property development projects in China), property management services, and cultural and tourism operations (including development and operation of theme parks, hotels, ski resorts, and other entertainment venues). Sunac describes its group of companies as “committed to providing wonderful living environment and services for Chinese families through high-quality products and services and integration of high-quality resources."¹

As the parent holding company, Sunac has numerous subsidiaries operating projects in mainland China. Sunac itself, however, conducts its operations exclusively outside of mainland China and, in that respect, is situated quite differently than its subsidiaries for purposes of Chapter 15 recognition, as discussed below.

Facing liquidity pressures as a result of the distressed Chinese property development and capital markets, Sunac engaged legal and financial advisors to formulate restructuring plans. In the first part of 2023, Sunac entered into an agreement with some of its creditors to implement a restructuring via a scheme of arrangement, through the court in Hong Kong and a Chapter 15 case in the US.

The proposed scheme of arrangement generally provided for a restructuring of Sunac’s existing debt through an exchange for new debt and/or equity—the “restructuring consideration.” The restructuring consideration includes:

• US$1 billion convertible nine-year bonds;
• If elected by the creditor, up to US $2.75 billion mandatory convertible bonds;
• If elected by the creditor, up to 449 million shares, or up to approximately 14.7% of the currently issued shares of Sunac’s subsidiary, Sunac Services Holdings Limited, which are listed on the Hong Kong Stock Exchange; and
• Up to eight tranches of new notes to be issued by Sunac in an aggregate principal amount equal to the sum of the creditors’ claims minus (i) the aggregate amount of the convertible bonds, (ii) the aggregate amount of the mandatory convertible bonds, and (iii) the aggregate amount of existing debt to be exchanged for the Sunac Services’ shares.

Sunac’s scheme of arrangement proposed to cancel all existing debt and release all guarantees in connection with the existing debt, as well as require creditors to provide additional releases of certain parties involved in the proposed restructuring.

In July 2023, the Hong Kong court authorized Sunac to convene a meeting of its creditors to consider and approve the proposed scheme of arrangement. In order for the Hong Kong court to approve the scheme of arrangement, Sunac had to demonstrate that it had obtained approval of the scheme by a majority in number, representing at least 75% in value, of the creditors voting at the scheme meeting. Sunac did so easily, receiving overwhelming approval from its creditors. In October 2023, the Hong Kong court entered an order sanctioning the scheme of arrangement, with a proposed effective date of no later than December 31, 2023.

The foreign representative requests US recognition

As an international property development and investment company, Sunac’s debt is comprised of, in part, senior notes governed under US (specifically, New York) law. To deal with these US-related issues, Sunac initiated a Chapter 15 case in the US Bankruptcy Court for the Southern District of New York in September 2023. Sunac asserted that it was essential for the scheme of arrangement and the Hong Kong court’s orders to be binding and enforceable in the US, in order to prevent creditors from taking any actions in the US that may interrupt Sunac’s restructuring.

As part of its recognition request, and in order to obtain the automatic stay and other relief provided by Chapter 15 of the US Bankruptcy Code to “foreign main proceedings,” Sunac alleged that its COMI was in Hong Kong. It asked the US Bankruptcy Court to make that finding after considering a variety of factors, including:

• The location of Sunac’s headquarters;
• The location of those who actually manage Sunac;
• The location of Sunac’s primary assets;
• The location of the majority of Sunac’s creditors or of a majority of creditors who would be affected by the case; and
• The jurisdiction whose law would apply to most disputes

In applying the factors, Sunac claimed that (i) it is registered on the Hong Kong Register, despite being incorporated in the Cayman Islands, (ii) it has its principal place of business in Hong Kong, and (iii) its shares have been listed on the main board of Hong Kong Stock Exchange since October 2010. Moreover, Sunac asserted that Hong Kong is the primary location of the individuals who actually manage Sunac. For example, Sunac’s operations are conducted in large part in Hong Kong, it has multiple directors in Hong Kong, its Chief Financial Officer/Company Secretary lives in Hong Kong, and the entire board of Sunac has been focused on monitoring and coordinating Sunac’s affairs in connection with the Hong Kong restructuring.

Sunac also noted for the US Bankruptcy Court that over 60% of the creditors who agreed to the restructuring support agreement for the scheme of arrangement in Hong Kong have registered Hong Kong addresses, and both the creditors’ advisors and Sunac’s advisors are based in Hong Kong. Sunac further urged the US Bankruptcy Court to defer to the creditors’ acquiescence in, or support of, Sunac’s center of main interests being located in Hong Kong, due to the large number (over 99%) of creditors voting in favor of the scheme of arrangement.

Lastly, Sunac argued that Hong Kong law would apply to most disputes involving Sunac because it maintains its principal place of business in Hong Kong and thus must submit to Hong Kong law, it is subject to the jurisdiction of the Hong Kong Securities and Futures Commission, and the majority of its debt (and the restructuring agreement it entered into in connection with that debt) is governed by Hong Kong law.

For all of those reasons, Sunac asked the US Bankruptcy Court to find that Sunac’s COMI was located in Hong Kong, and not in mainland China - the location of the group’s principal operations and assets.

The US Bankruptcy Court grants recognition

The US Bankruptcy Court set an initial hearing to consider recognition of the Hong Kong scheme of arrangement for October 31, 2023. At that initial hearing, the US Bankruptcy Court questioned Sunac’s connection to Hong Kong and asked that Sunac provide further evidence that its COMI was in Hong Kong. The US Bankruptcy Court was particularly concerned about where Sunac’s management was actually located and where board meetings were taking place. The US Bankruptcy Court also found that the existing evidence was insufficient to establish that the “locus of decision making” was in Hong Kong, rather than mainland China. Given the US Bankruptcy Court’s concerns, the initial recognition hearing was rescheduled for an additional 15 days, to allow Sunac additional time to provide information to the US Bankruptcy Court regarding its COMI.

Prior to the rescheduled recognition hearing, Sunac filed updated papers with the US Bankruptcy Court, including a supplemental declaration providing additional evidence in support of Hong Kong as the location of Sunac’s COMI. The declaration stated that none of Sunac’s four principal business activities (the restructuring, the listing of its equity securities on the Hong Kong Stock Exchange, the issuance of new debt, and the holdings of its subsidiaries and certain investments) are based in mainland China. Sunac further emphasized that it does not have any business licenses in mainland China, it is not registered to do business in mainland China, and it does not file any tax returns in mainland China.

As far as management activities, Sunac explained that, from 2010 to 2019, all of the meetings of its board of directors were physically held in Hong Kong, and since 2019, board activity has taken the form of written resolutions or virtual meetings rather than in person meetings. Sunac also reoriented the US Bankruptcy Court on its organizational structure, explaining that although certain individuals may conduct business activities in mainland China, those individuals and activities relate to the operations of Sunac’s subsidiaries, not of Sunac itself.

Sunac also emphasized that all preparation and company approval of the scheme of arrangement, restructuring support agreement, and the reorganization activities in general took place in Hong Kong—including activities related to the issuance of the existing debt, investor calls and roadshows, and the physical locations of investment banks, other financial institutions, and professional advisors and service providers involved with the existing debt and restructuring.²

At the rescheduled recognition hearing, the US Bankruptcy Court was satisfied with Sunac’s additional evidence—noting that the evidence showing that Sunac’s headquarters was located in Hong Kong was the most important factor he considered—and entered an order in November 2023 finding that Hong Kong is Sunac’s COMI and that the Hong Kong judicial restructuring is entitled to recognition as “foreign main proceeding” by the US Bankruptcy Court under Chapter 15 of the US Bankruptcy Code. As a result of that recognition, Sunac’s creditors were permanently enjoined from commencing or continuing any action or proceeding in the US inconsistent with Sunac’s scheme of arrangement.

The importance of establishing center of main interests in Chapter 15 proceedings

The issues raised by the US Bankruptcy Court in Sunac’s Chapter 15 proceeding highlight the importance of setting forth adequate evidence of a foreign debtor’s COMI from the outset. While the US Bankruptcy Court could have instead found that Sunac had only an “establishment” in Hong Kong, this finding would not have resulted in the automatic protections against creditors seeking relief in the US against Sunac. Those protections are available only in “foreign main proceedings,” which requires a finding that the foreign insolvency proceeding is pending in the debtor’s COMI. Thus, Sunac’s supplemental declaration (with additional facts regarding Sunac’s relationship with Hong Kong) was critical to convincing the US Bankruptcy Court that Hong Kong was Sunac’s COMI and that the Hong Kong scheme proceeding was a “foreign main proceeding” entitling Sunac to automatic relief under Chapter 11 in the US during the pendency of its scheme of arrangement.

Particularly with an entity like Sunac, a Hong Kong-based holding company with subsidiary operating companies whose primary operations are in mainland China, establishing factors to support the corporate separateness and the holding company’s interactions with Hong Kong were integral in achieving US recognition of the Hong Kong proceeding as a main proceeding. As noted by the US Bankruptcy Court, Sunac’s recognition could set precedent for future companies that operate in mainland China but otherwise have significant ties to and restructure in Hong Kong. Stay tuned for further developments as restructurings of other Chinese property development companies percolate through the system and eventually land in US Chapter 15 cases.

Postscript: In fact in January 2024, Chinese real estate developer China Aoyuan Group Limited was granted Chapter 15 recognition of a Hong Kong proceeding by the US Bankruptcy Court in New York. The Aouyan debtors are holding companies who proposed Hong Kong schemes of arrangement to implement a holistic financial structuring of their existing debt, in conjunction with parallel inter-conditional proceedings in the Cayman Islands and the British Virgin Islands. The debtors, citing to the recent decision in Sunac, successfully established that their COMI existed in Hong Kong, despite their subsidiaries’ primary operations being focused in China.