Legal Analysis: China South City Liquidation Reaffirms HK Court’s Strict Requirement For ‘Concrete’ Rx Plan to Adjourn Winding-Up Petitions

• The Hong Kong court continues to require companies to provide a “concrete” restructuring proposal with the requisite creditor support in order to adjourn a winding-up petition;
• Companies that merely point to commercial discussions with some creditors and make general assertions that they have been actively pursuing a restructuring proposal will not satisfy that threshold;
• China South City’s liquidation continues to illustrate the weakness and redundancy of the keepwell structure and the notional credit support they might provide – though bondholders continue to try to prove otherwise.

The Hong Kong court, in its August ruling winding-up China South City Holding Ltd., continued its consistent approach of rejecting adjournment requests when a company failed to show it has a “concrete” restructuring plan accompanied by the requisite level of creditor support to approve such a plan.

In the ruling, Justice Chan followed the principles she laid down in her May 2023 judgment winding-up Chinese property company Jiayuan International Group, which had already been embarking on a liability management exercise at the time for its offshore bonds.

Stringent adherence to the Jiayuan principles, which adopt a no-nonsense approach, is positive for creditors. These principles set out that where a company is insolvent, creditors are deemed to have the “real” interest in the company. It is then up to the company’s creditors to decide whether it is in their interest for the company to be wound-up.

The burden lies on a company to demonstrate “good grounds” for the court not to make a winding-up order.

Helpfully, the court reiterated in the China South City ruling that it is not enough for a company to simply point to certain commercial discussions with some creditors to make a general assertion that it has been actively pursuing a restructuring proposal.

This is what China South City tried to do in what would be its last adjournment application to combat the winding-up petition.

That petition was filed in January 2025 by the trustee of its $1.4 billion keepwell-backed senior notes, Citicorp International Limited, on the instruction of an ad hoc group holding 37.6% of the outstanding principal of the notes.

Last Chance

The company’s counsel asked the court to give the developer “one final chance,” with the goal of formulating a proposal that would reflect the value of the keepwell provided by state-owned key shareholder Shenzhen SEZ Construction and Development Group Co., or Shenzhen CDG.

The court had previously granted the company a three-month adjournment to the winding-up petition in order for it to negotiate and formulate a restructuring proposal with the AHG.

Keepwell Exclusion

The value of the keepwell support – which broadly sets out that Shenzhen CDG should provide financial support to the note issuer to make its payment obligations under the notes – was a point of contention during a 20-month failed negotiation between China South City and the AHG.

The AHG rejected the company’s numerous restructuring proposals over that time period, largely because China South City refused to reflect the value of the noteholders’ claims under the keepwell deeds and as shareholder Shenzhen CDG was not offering financial support for the restructuring.

However, contradicting the notion that the company would work toward folding in keepwell support to a new restructuring proposal, China South City’s counsel maintained that a restructuring proposal could be constructed with or without the SOE shareholder keepwell support.

The company’s counsel further highlighted to the court the complexity of the case due to an SOE’s involvement and urged that this be taken into account.

Both these points appear counterintuitive.

Firstly, why would the keepwell credit support be excluded from the restructuring. The entire point of the keepwell is to maintain the liquidity of the issuer for it to make payments under the notes. The company marketed the notes on the basis of keepwell support, and so it doesn’t make much commercial sense to then exclude such support at the moment it bites and matters.

The point that the involvement of a state owned entity creates complexity again seems counter intuitive. Presumably, Shenzhen CDG – owner of a 29.3% stake in China South City – understood its keepwell obligations when it entered into the deeds. There can only be so much road to run the argument that dealing with Chinese entities is complex. An unwillingness to engage constructively and pay offshore creditors in accordance with their credit support (absent a legal judgment) might be more accurate.

The failed restructuring discussions illustrate the continued inherent flaws in the keepwell structure and the misplaced notion that they should be relied upon as true credit support.

Noteholders will now need to revert back to their keepwell litigation (HCA 1054/2024), started in June 2024. While there have been successes in keepwell litigation, as highlighted by Octus, obstacles remain in terms of enforcing any Hong Kong keepwell damages judgment in Mainland China and extracting recovery from a keepwell provider.

[As we noted in our Special Situations Weekly two weeks ago, the holders are hoping that legally cutting off Shenzhen CDG from its sway over China South City will encourage the SEO to amenably engage on the keepwell.]

Business Improvement

While China South City’s business had improved in terms of year-on year operating income, which the company said showed it could formulate a restructuring plan without the need to involve the keepwell provider, the Hong Kong court characterised this improvement as “insignificant as compared to the net loss recorded in the Group’s FY2024 accounts.”

Furthermore, the court found that the only thing agreed between the AHG and the company was the payment of the group’s work fee. However, the company had been unable to arrange the requisite funds to pay the fees at the time of the hearing. Not highly compelling in terms of cash flow.

AHG Block

The court was also acutely aware that the company would need to use a scheme of arrangement to implement any restructuring. A scheme requires approval from 75% in value of the debt included in each creditor class.

Given the size of the AHG, it was in a position to block a scheme and thus its support for any restructuring proposal was required, but not forthcoming given the keepwell issue discussed above. The court noted that China South City was also aware of this dynamic.

Creditor Opposition

In support of its adjournment application, the company pointed to the opposition to the AHG’s winding-up petition from creditors representing 15.8% of China South City’s offshore debt.

However, as these creditors didn’t appear before the court, it was uncertain as to what restructuring terms they had supported. Plus they had not communicated why they thought it was in creditors’ best interests not to wind-up the company.

Court Finding

The Hong Kong court found the company to be grossly insolvent and that there had been “no real progress” during the negotiations and the company had “no viable” proposal to restructure its debts.

Therefore, the Hong Kong court did not find China South City’s arguments compelling enough to adjourn the winding-up petition, and instead liquidated the company.

The company was represented by Linklaters. The AHG’s legal counsel was Kirkland & Ellis. Trustee Citicorp International was represented by Johnson Stokes & Master.

See Octus’ Special Situations Weekly, court coverage and legal analysis on China South City for further details.