Déjà vu - Cayman restructuring issues for class action creditors of Chinese companies

Issues that arose in the well-publicised Cayman Islands ("Cayman") based successful restructuring of Luckin Coffee Inc ("Luckin") may well be about to be seen again in respect of Miniso Group Holding Limited ("Miniso") the troubled Chinese based global value retailer which serves consumers primarily through its large network of Miniso stores.

Miniso and Luckin both:

• are holding companies incorporated in the Cayman Islands;
• primarily trade in the People's Republic of China ("PRC");
• issued American depository shares; and
• face US class action suits for Securities Act 1933 violations.

After it became known that Luckin had been claiming inflated revenues it took advantage of the Cayman restructuring process of appointing "light touch" provisional liquidators to work alongside the current management team with the object of promoting a deal with creditors using a scheme of arrangement. During the provisional liquidation a restructuring company can benefit from a stay of litigation against it whilst it seeks to formulate a settlement with creditors which can be implemented by 50% in number and 75% in value of the creditors voting to approve the settlement.

The Luckin joint provisional liquidators were able to achieve a restructuring agreement with the Luckin bond holders, which formed the basis for a scheme of arrangement but they were unable to achieve a scheme of arrangement for the class action creditors but instead settled with the lead plaintiffs. This is because there are significant challenges of how to count class action creditors for the purpose of voting in a scheme of arrangement in a situation where often only a few creditors are named as plaintiffs in the class as representatives of a group of creditors whose identity and claim value is yet unknown. Members of the class who "opt out" of the class are easily ascertainable for voting in a scheme. However, it is a challenge for a provisional liquidator to decide on a voting system which does not given the ascertained "opt outs", who would normally be the minority of the whole class, a disproportionate impact on the voting compared to the unascertained members who remain in the class who will usually turn out to be the majority of the whole class.

Despite these challenges a scheme of arrangement is the main restructuring tool that exists in the Cayman Islands for insolvent companies. Whether promoted by provisional liquidators or (after 31 August 2022) a restructuring officer (see our article here) class action claimants are, as creditors of a Cayman incorporated Chinese holding company, likely to have a scheme of arrangement proposed to them. It, therefore, makes good sense to understand the scheme of arrangement process in the Cayman Islands.

Bedell Cristin advised class action creditors in the Luckin proposed scheme of arrangement and we are well versed in the issues that arise, the class action procedure that is relevant to those issues as well as some of the specific issues that arise from the fact the debtor company is likely to have most of its money and other assets in PRC such as the State Administration for Foreign Exchange approval system, which is a major part of the process needed to enable any money from PRC trading activities to be made available to creditors of the Cayman holding company located outside the PRC.