Cayman Court Grants Convening Order, Marking Key Step in Kaisa’s Recovery Plan

Background: Kaisa in crisis

Kaisa, the second-largest offshore debt issuer among Chinese property developers after China Evergrande Group,[1] has been severely impacted by the ongoing and well-documented crisis in the Chinese property sector dating back to  mid-2021.

Heavily burdened with over $12 billion in foreign debt, Kaisa defaulted on its bonds in late 2021, triggering a loss of investor confidence, further liquidity problems, and making it even more difficult to sell properties. In response, Kaisa has sought to effect a restructuring of the indebtedness of the Kaisa Group (the Group) whilst defending a winding up petition brought against it in the High Court of Justice of the Hong Kong Special Administrative Region of the People’s Republic of China.[2]

To effect the restructuring, several connected schemes of arrangement were proposed. In relation to Kaisa: one in Cayman (Kaisa Cayman Scheme) and one in Hong Kong (not an uncommon approach with the many companies incorporated in Cayman and listed in Hong Kong), and more interestingly for present purposes, in relation to one of Kaisa’s subsidiaries: a scheme in Hong Kong and a scheme in BVI (Rui Jing Scheme).

Schemes of Arrangement in the Cayman Islands

Kaisa, a Cayman-incorporated investment holding company, serves as the financing vehicle for the Group’s operations, including its substantial property business in China. Kaisa is the issuer of 16 series of US$ denominated notes governed by New York law (Notes). The Notes were guaranteed by Kaisa’s principal subsidiary, BVI-incorporated Rui Jing Investment Company (Rui Jing) along with various other entities.

Due to its precarious financial position and the necessity of debt restructuring, Kaisa filed a petition in the Cayman Islands requesting the Court to sanction a creditors’ scheme of arrangement under Section 86 of the Companies Act (2023 Revision) (Section 86).

Section 86 allows the Court to:

• order, at a scheme convening hearing, a meeting of creditors or members if a compromise or arrangement is proposed (as was promulgated by Kaisa); and

• sanction, at a sanction hearing, an arrangement that will be binding on all creditors (or a class of creditors)[3] and the company, even if some creditors object, constituting an element of “cram-down”.

As Justice Kawaley explains in his judgment, the principles governing the Court’s jurisdiction to sanction schemes of arrangement are well-established. A key legal principle under Section 86 is that, while the Court will assess the fairness and merits of the scheme at the sanction hearing, it is not for the Court to assess the commercial merits of the scheme – this is for the creditors to decide, provided the scheme is one that reasonable stakeholders could approve.

Scheme convening hearings – what to know

The Court’s role at a scheme convening hearing is also well-established. This judgment relies on Paragraph 3 of Practice Direction No.2/2010 (Practice Direction) and the decision in E-House (China) Enterprise Holding Ltd (FSD 2022/165). The Court’s considerations at this stage include:

1. any issues which may arise as to the constitution of the classes of creditor to vote at the meeting or meetings of creditors (an issue which often requires detailed thought and analysis);
2. any issues as to the existence of the Court’s jurisdiction to sanction the scheme;
3. any other issue (not going to the merits or fairness of the scheme) which might lead the Court to refuse to sanction it (which will usually include a review of the extent to which the scheme will be effective abroad in other relevant jurisdictions); and
4. whether adequate notice and information has been given to creditors of the purpose and effect of the proposed scheme and of the convening hearing.

Kaisa obtains Convening Order

In addressing these issues in this case, Justice Kawaley considered the following:

• The existence of three related schemes, in addition to the Kaisa Cayman Scheme and the potentially more favourable distributions of new debt instruments to creditors with overlapping claims under both the Kaisa Cayman Scheme and the Rui Jing Scheme, which goes (amongst other issues) to class composition.

• In determining class composition, the key issue for the Court to be satisfied on is that those placed in the same class do not have rights (both before and after) which are so dissimilar so as to make it impossible for them to consult together with a view to their common interest. To address this, it is necessary to look at the existing rights creditors have which are to be compromised or altered under the scheme and those they have if the scheme is implemented. This was an issue at the forefront of the Court’s mind when considering whether to approve the convening of a scheme meeting for Kaisa with all such creditors being placed in the same class.[4] The issue being that those creditors of Kaisa who held the Notes that were guaranteed by Rui Jing would also have rights under the Rui Jing Scheme. In a “narrow” determination of what constitutes a class, and what will be a welcome approach to debtor companies, Justice Kawaley found the logic of a single class compelling as all distributions to creditors under the Kaisa Cayman Scheme will take place on the same basis.

• The effectiveness of the proposed debt restructuring in the jurisdictions where the debts would be governed – noting the reasons given for his written decision being the existence of a parallel scheme in Hong Kong and the recognition of the scheme in the USA.

• Another significant factor was the evidence that approximately 80% in value of the creditors of both the Kaisa Cayman Scheme and the Rui Jing Scheme had signed a Restructuring Support Agreement. Additionally, and whilst is no way binding on the Cayman Court, it was noted that a similar Convening Order had been granted a few weeks earlier for the corresponding Kaisa scheme in Hong Kong.

Key takeaways

For those seeking to sanction a creditors’ scheme of arrangement in the Cayman Islands, this recent decision of Justice Kawaley highlights the following key elements in successfully navigating the restructuring process:

• Cross-jurisdictional coordination: when pursuing a restructuring that crosses borders, international effectiveness is critical. In this case, with the Notes being New York law-governed, effectiveness could be given to the Kaisa Cayman Scheme through a Chapter 15 process in the US, a feature now that is very common and well accepted in Cayman. Aligning Courts in different jurisdictions in terms of recognising and sanctioning the scheme is instrumental.

• Class composition: the Court emphasized the need for a rational approach to classifying creditors, carefully considering the different types of creditors, the nature of the claims, and clear definitions for creditors with overlapping claims so as to avoid challenges. But applying this, the Court was quite clear – the existence of some but not all scheme creditors with overlapping claims in the scheme of another company does not necessarily fracture the class.
• Communication with creditors: clear, accurate, and comprehensive communication with creditors is crucial for ensuring fairness and transparency, and will likely facilitate approval of the scheme. This has been the focus of a number of cases in other jurisdictions. This is predominantly a matter for advisers to ensure information is as complete and clear as possible. Cayman is ahead of the game with this with its longstanding Practice Direction which expects appropriate notice and the provision of information to creditors. Whilst not adopted everywhere, we are now seeing this as becoming best practice and followed, or “adopted”, in other jurisdictions.

 What next?

Interestingly, Justice Kawaley notes that in cases where a scheme meeting approves a scheme by the requisite majorities, it is very rare for dissenting stakeholders to appear and oppose. This is a very proper and astute point to make. Will things however change going forward?

We are beginning to see challenges elsewhere and an increasing amount of creditor action where battles take place not just with the company but creditor versus creditor. In Sino Ocean,[5] which involved an English Plan of Arrangement (and Hong Kong scheme) in relation to a Cayman company,[6] we saw a co-ordinated challenge by creditors, though in that case unsuccessful.

The English Plan of Arrangement is attractive to debtors with its cross-class cram-down provisions. Whilst it is a powerful restructuring tool for a debtor company, it undoubtedly gives rise to the spectre of more challenges. This perhaps can only be a good thing as it makes debtors more focused on getting things right, being transparent, and truly having a proper rescue plan in place.

Though Cayman does not (yet) have cross-class cram-down provisions, given it is a leading and innovative restructuring jurisdiction, this may change in the future and certainly the Cayman Courts will be well-placed to adjudicate on any issues arising.

[1] https://www.ft.com/content/f3fecdfb-aa31-4cc2-aa3a-c0e20cbd8409.

[2] Currently listed to be heard on 30 June 2025.

[3] Note the “Rule in Gibbs”, which, put simply, effectively means that creditors whose claims are governed by foreign law, notwithstanding a Cayman scheme compromising their claims, may still in certain circumstances seek to enforce their claims in a foreign court.

[4] Class composition is a matter for the debtor company to formulate.

[5] Re Sino-Ocean Group Holding Ltd, [2024] EWHC 2851 (Ch).

[6] Appleby acted for the company in that case as to matters of Cayman law.