Vol 22 (2025) - Issue 3

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The Distinction between ‘Legal Rights’ and ‘Interests’ when Determining Creditor Classes in a Scheme of Arrangement: An Examination of the Restructuring of China Aoyuan Group

Synopsis
When a scheme of arrangement involving a compromise or arrangement is proposed between a company and its creditors or any class of them, the court is required to consider whether it would be appropriate to convene one or more meetings of creditors for the purposes of considering and voting on the scheme of arrangement. The question of how creditors are to be classed is a crucial element to any scheme of arrangement as it often affects the bargaining power (and potential veto capabilities) of creditors which ultimately determines whether the relevant scheme will be approved by the requisite majorities at the scheme meeting.
It is well-established that, in determining whether scheme creditors are properly classed, the court looks at whether the creditors voting in the same class have sufficiently similar legal rights such that they can consult together with a view to their common interest. In determining whether a class of creditors can consult together, the court must consider both their existing legal rights and rights in the relevant alternative if the scheme is not implemented.
It is also well-accepted that it is the rights of creditors, not their separate commercial or other interests, which determine whether they form a single class or separate classes.
Whilst these principles relating to class composition are relatively uncontroversial, its application is often far less straightforward in practice. Complexities arise when the difference in the scheme creditors' relative positions involve different commercial interests and private rights, making it difficult to distinguish between 'legal rights' and 'interests'. This is particularly evident in the context of group restructurings where scheme
creditors often consist of some creditors who hold different claims against distinct entities within the same corporate group, and who may, as a result, have additional rights derived from the wider restructuring of the group which the scheme forms part of.
In this article, we explore the case of China Aoyuan Group, where the Hong Kong Court of First Instance and the Grand Court of the Cayman Islands grappled with the issue of whether certain creditors who purportedly had a special interest by reason of their ability to vote and receive scheme consideration in both of the inter-conditional schemes proposed by the China Aoyuan Group should be classed separately from other creditors who only had the right to receive consideration in one of the schemes.
In coming to its decision, the courts had to consider whether it should be limiting itself to solely considering a scheme creditor's rights under the specific scheme in question when deciding class composition, or whether it should also consider how the scheme creditor's rights would be affected by the broader restructuring (i.e., both inter-conditional schemes) as a whole.