Rb. Amsterdam, 23-06-2022, nr. NCC 22-011

Credit Suisse submitted as pledgee an application with exhibits by regular mail on 27 May 2022 requesting permission for a private sale of pledged shares, and re-submitted the application on 31 May 2022 in eNCC.

The Court gave directions on 1 June 2022. It identified the Pledgor, the Company and the Purchasers as interested parties (belanghebbenden) and requested the parties who had not already done so, to inform the Court of their wish to be heard on the application. In response to a request made by Credit Suisse, the Court ruled that the valuation report made on behalf of Credit Suisse is a confidential document. The Court prohibited all parties from disclosing any information in that report to third parties on the basis of Article 28(1) Dutch Code of Civil Procedure (DCCP).

The Pledgor and the Company indicated that they wished to be heard on the application. A hearing was scheduled.

On 1 June 2022, Mr Munnik requested the Court to identify Ruyi Textile as an interested party, and allow this company’s board of directors to submit a statement of defence. The Court responded the next day by accepting Ruyi Textile, being the borrower under the Facilities Agreement, as an interested party, and allowed Mr Munnik to submit a statement of defence for the board of directors.

On 5 June 2022, Credit Suisse objected, alleging that only the receivers of the Borrower have exclusive authority to appoint counsel to represent the Borrower in these proceedings. The Court directed on 7 June 2022 that it would deal with this issue at the hearing.

On 8 June 2022, Mr Munnik submitted a statement of defence, with exhibits, on behalf of the Board. Credit Suisse submitted additional exhibits.

A hearing was held on 9 June 2022.

Credit Suisse was represented by its Hong Kong lawyer, Mr Warboys (online) and its Dutch lawyers, Ms Strik and Mr Roelofs, who have argued the case on the basis of pleading notes that have been added to the case file. Ms Strik and Mr Roelofs also represented the Purchasers.

The Pledgor, the Company and the Receivers were represented by their lawyers, Mr Van den Berg and Mr Spinath, who have argued the case on the basis of pleading notes that have been added to the case file. Mr [board member] and Mr [board member] attended the hearing by videoconference as members of the board of directors of the Company, and Mr [receiver] also as one of the Receivers. Mr Fairbairn joined online as well as the Hong Kong solicitor of the Receivers.

The Board was represented by its lawyers Mr Verhoeven, Mr Ensink and Mr Munnik. Mr Verhoeven argued the case on the basis of pleading notes that have been added to the case file. On behalf of the Board, Ms [president], president of Shandong Ruyi International Fashion Industry Investment Holding Company Limited (parent company of Ruyi Textile), using an interpreter, attended the hearing online, as well as Mr S.H.P Anderson, the Board’s Hong Kong lawyer.

During the hearing Mr Holterman explained his valuation report.

Mr Munnik submitted an additional exhibit, a term sheet containing a proposal for the acquisition by a third party of ‘the entire debt due under the Facility Agreement’, which resulted in a short recess of the hearing.

After extended debate, the parties requested that the Court give judgment. The date for judgment was set for today.

The Pledgor is the sole shareholder of the Company, which in turn is the holding company of a group of foreign subsidiaries (the Lycra Group). The Borrower is the sole shareholder of the Pledgor.

On 21 September 2018, the Borrower entered into a Hong Kong law governed Facilities Agreement (FA) with Credit Suisse. The FA was amended twice, in January 2019 and August 2019 respectively, when other entities entered into the agreement as lenders. Credit Suisse as the original lender serves as agent for these other lenders, also referred to as the Mezzanine Lenders. Credit Suisse assigned its rights as the original lender to the Mezzanine Lenders. The Pledgor and the Company provided guarantees to Credit Suisse to the effect that they would immediately pay any unpaid amount as if they were the principal obligor.

The payment obligations under the FA are secured by a share pledge dated 30 January 2019 under which the Pledgor pledged its shares in the Company to Credit Suisse as pledgee. The Share Pledge is ruled by Dutch law. Under the Deed of Pledge, the Share Pledge is immediately enforceable following the occurrence of an acceleration event, provided that there is a default (verzuim) within the meaning of Article 3:248(1) Dutch Civil Code (DCC). The Deed of Pledge further provides that such Acceleration Event shall occur following the issuance of an acceleration notice by Credit Suisse as Agent under the FA, where such notice may be issued following the occurrence of an Event of Default which is continuing.

Article 21 of the Deed of Pledge provides:

“21 Governing law and jurisdiction

Governing law

(a) This deed and any non-contractual obligations arising out of or in connection

with it are governed by Dutch law(…)

Jurisdiction

(a) The courts of Amsterdam, the Netherlands, have exclusive jurisdiction to settle

any dispute arising out of or in connection with this deed (including a dispute relating to non-contractual obligations arising out of or in connection with this deed or a dispute regarding the existence, validity or termination of this deed) (a "Dispute").(…)”

Pursuant to the terms of the FA, several financial facilities were made available to Ruyi Textile as Borrower, in particular a term loan facility of USD 300 million and a term loan facility of USD 100 million, both of which were fully drawn on 28 September 2018.

Ruyi Textile was under the obligation to repay all loans on or before 21 September 2021 (the Maturity Date). Prior to this date, Ruyi Textile was under the obligation to repay USD 50 million by 30 September 2019, USD 100 million by 31 December 2019 and USD 150 million by 31 March 2020.

On 18 November 2019, Credit Suisse as Agent served an acceleration notice on the Pledgor, the Company and the Borrower. It notified these parties that they were in default on repaying inter alia USD 50 million and that the Mezzanine Lenders had instructed the Agent to declare the loans immediately due and payable.

On the Maturity Date (21 September 2021), none of the lenders had received any payment from the Borrower (Ruyi Textile) except for a partial payment of USD 15,330,000 in January 2021.

On 21 February 2022, upon instruction of Credit Suisse, Mr [receiver] and Ms [receiver] were appointed as joint and several receivers over inter alia all assets of Ruyi Textile.

Credit Suisse and the other Mezzanine Lenders reached an agreement on a proposed Share Purchase Agreement (SPA) providing for a (private) sale of the shared pledges to the Mezzanine Lenders. The SPA consists of the following elements:

On the filing date of the application, the aggregate amount owed by Ruyi Textile to the lenders exceeded USD 600 million.

Credit Suisse requests the Court to decide, by means of an immediately enforceable decision, that the pledged shares in the Company may be sold in a private sale - instead of in a public sale - and transferred by Credit Suisse as Pledgee to the Mezzanine Lenders as Purchasers under the conditions described in the draft SPA, for an amount of USD 450 million.

Preliminary issues

The first question the Court needs to decide is if the board of directors of Ruyi Textile can be heard as an interested party in these proceedings. The receivers appointed by the Pledgee contest that the Board has a right to represent Ruyi Textile in these proceedings.

The Court notes that there are proceedings pending in a Hong Kong court, in which the Board inter alia challenges the appointment of the Receivers. However, those proceedings are irrelevant when it comes to identifying who is an interested party in these proceedings regarding the enforcement of the pledged shares. The key issue in these proceedings is whether there is a better offer available for the shares than the credit bid presented to the Court. Anyone having information on that topic should be heard in court, and this includes the Board of Directors of the Borrower. Therefore, the Court allows the Board to participate in these proceedings.

The Board disputes the NCC having jurisdiction over the case, as - in its opinion - the NCC agreement between Credit Suisse as Pledgee, the Pledgor and the Company was entered into by the Pledgor’s newly appointed board of directors, whose appointment is subject to nullification. The Board argues that the decision for dismissal of the previous board of directors was made without observing the rules of Dutch company law (Articles 2:8 and 2:227 DCC).

The Court observes that exhibits 34 through 36 submitted by Credit Suisse show that the previous board of directors of the Pledgor was notified of and invited to attend a shareholders’ meeting on the intended dismissal by the Receivers. Therefore, the previous board of directors was aware of the impending dismissal and was granted the opportunity to be heard and cast a consultative vote. On this basis and in the context of these summary proceedings, the Court assumes that the current board of directors was appointed in observance of the rules of Dutch company law. The current board of directors of the Pledgor was therefore authorized to enter into the NCC agreement.

As no further issues were raised as to the jurisdiction of the Court, the Court finds that it has jurisdiction to deal with this case.

The Company’s statutory seat is in the Netherlands and Dutch law therefore provides the rules on company law and on property law in respect of the Shares. The parties to the Share Pledge also explicitly chose Dutch law as the applicable law. Hence, Dutch law will be applied.

On the merits

Enforcement of the pledge

Under Article 3:248 DCC the pledgee is entitled to sell the pledged property and to have recourse against the proceeds for what is owed to him, where the obligor is in default of performing that for which the pledge serves as security. Articles 3:250 and 251 DCC govern the enforcement of the pledge. Article 3:250 DCC provides that an enforcement sale is to be held in public, i.e. by way of a public auction. Article 3:251 DCC offers an alternative:

Article 3:251 Alternative way to accomplish a sale by foreclosure

- 1. Unless otherwise stipulated, the interim relief judge of the District Court may determine, at the request of the pledgee or the pledgor, that the pledged property will be sold in a manner other than that provided in the preceding article; at the request of the pledgee, the interim relief judge of the district court may also determine that the pledged property will remain with the pledgee as buyer for an amount to be determined by him.

When the right to enforcement arises, a pledgee has the right to decide if and when to proceed with enforcement. The Court has to examine whether, at the time the application was made, the requested alternative to a public auction (in this case: the proposed sale under the draft SPA) would realise the maximum possible value. This examination is done in the interest of the pledgor, other secured creditors and other creditors in general. The interest of the company whose shares are being sold do not prevail over the interest of the pledgee and creditors to realise the maximum possible value (reference is made to: Amsterdam District Court, 23 September 2009, ECLI:NL:RBAMS:2009:BJ8848).

The Board’s main argument against this private sale is that it would effectively result in a form of prohibited expropriation, and therefore would constitute a violation of the European Convention on Human Rights (Article 13 and Article 1 First Protocol), the EU Charter (Article 17), and the Treaty on the Functioning of the European Union (Article 63).

The Court fails to see how the free movement of capital is relevant here. The EU Charter only comes into play where the court applies EU law (Article 51 EU Charter), which is not the case here. Therefore, the Board’s argument on these two topics will be disregarded.

Insofar as the rights of an indirect shareholder (Ruyi Textile) are to be considered a “possession” in the meaning of Article 1 First Protocol, there are more property rights than only Ruyi Textile’s to consider. The right to property safeguarded by Article 1 also applies to the right of the direct shareholder (see ECHR 12 October 1982, ECLI:CE:ECHR:1982:1012DEC000858879 Bramelid v Norway), which is the Pledgor, as well as the person holding a right in rem on the shares (see ECHR 23 February 1995, ECLI:CE:ECHR:1995:0223JUD001537589 Gasus v Netherlands), the Pledgee (Credit Suisse). A court decision granting the Pledgee’s request for enforcement of the pledge may be considered a deprivation of property of the shareholder, but at the same time denying the request may interfere with the Pledgee’s rights in rem on the shares.

An interference with property rights is only compatible with Article 1 First Protocol if it complies with the principle of lawfulness and pursues a legitimate aim by means reasonably proportionate to the aims to be realised (inter alia ECHR 5 January 2000, ECLI:CE:ECHR:2000:0105JUD003320296 Beyeler v Italy).

Article 3:251 DCC satisfies the requirement of lawfulness. This provision is sufficiently accessible, precise and foreseeable in its application. It is compatible with the rule of law, as it strikes a fair balance between the interests at stake; in this case between the rights of the (indirect) shareholders of the pledgor who apparently have agreed to offer security for the debt of Ruyi Textile, Ruyi Textile as the borrower, and Credit Suisse as the holder of the right in rem (on behalf of the creditors). The enforcement of the pledge is therefore not an arbitrary measure, but a foreseeable measure in case of default, legitimised by law.

The interference also pursues a legitimate aim: it serves to protect the rights of the creditors: the right to receive repayment of the money lent to Ruyi Textile. Since Ruyi Textile is the (indirect) shareholder of the Pledgor and the Company whose shares are at stake, it can be assumed that these subsidiaries also have benefited from the funds provided by the creditors.

On this basis, the Court rules that a sale of pledged shares under Article 3:251 DCC does not constitute a violation of Article 1 First Protocol. Furthermore, the Court regards these proceedings as an effective legal remedy for the Board to have its rights assessed. The Board’s claim that Article 13 ECHR has been violated is therefore rejected as well.

Fair trial

The Board further alleges that the limited time available to prepare its defence amounts to a violation of its right to a fair trial. The Court rejects this assertion. The Dutch legislature considered the enforcement of pledged shares to be such an urgent matter that it designated the court in summary proceedings as the court having jurisdiction. For the proposed private sale to be effective, the proceedings allowing or disallowing such a sale need to be swift. In the case of a distressed company, such as the Company and its subsidiary companies of the Lycra Group, a speedy execution of a private sale is often the only way of preventing a rapid decrease in the value of the shares.

The Court acknowledges that the Board has had limited time to prepare an own valuation report. But such a report is not required in the defence against a valuation report prepared by the Pledgee. As the board of directors of the indirect shareholder - knowing the economic situation of the group - the Board is in a good position to comment on the Pledgee’s valuation report, especially since the main question is whether the price offered of USD 450 million is high enough.

The Court therefore denies the Board’s request to stay the proceedings in order to give it extra time to refute the valuation report.

In default or not?

One of the requirements for allowing a pledgee to enforce a pledge is that the debtor is in default (verzuim) on its payment obligations. This issue is governed by Dutch law. It is up to the Court to determine whether this requirement under Dutch law (Article 3:248 DCC) is fulfilled or not. The FA, which is governed by Hong Kong law, determines only whether there are any agreed deadlines, and what the agreed consequences for not meeting those deadlines are. In that context the Hong Kong proceedings initiated by the Board may be relevant. The question is whether this also means that the Court must wait for those proceedings to be concluded, as the Board requests.

The Court notes that it is not in dispute that the Borrower did not meet the various payment deadlines as agreed upon in the FA as well as that the Maturity Date for the loan has lapsed, and that the outstanding amount is more than USD 600 million. The Receivers of Ruyi Textile, as well as the Pledgor and the Company agree with the Pledgee (Credit Suisse) that there is a continuing default.

In the Hong Kong proceedings the Board argues that the default is not continuing, as the default is waived by the Pledgee’s statements and conduct. It relies on what is known as the Estoppel Defence.

The starting point for the Court is that there has been a default. After all, there is no evidence of payment of any amounts due under the FA other than the partial payment of USD 15,330,000, although the Maturity Date has lapsed. The question is whether there is still a continuing default which entitles the Pledgee to enforcement. The Board obviously claims in the Hong Kong proceedings that the Pledgee through its statements or behaviour has waived his rights. However, the FA requires explicitly that the Pledgee must have waived its rights in writing (Section 1, Interpretation, under 1 Definitions and Interpretation, 1.2 Construction, under (e), page 38). The Board has not argued that there has been such a written waiver nor has it produced such a document. Apparently, under Hong Kong law a party can waive a non-waiver clause, but the Board has also not alleged that this had been the case. Against this background, the Court may assume that the Estoppel Defence will fail. In case the Hong Kong court rules differently, the question might raise whether the Pledgee is liable for damages, but this in itself gives the Court not a sufficient reason to stay these proceedings and to await the outcome of the Hong Kong proceedings. In the context of these summary proceedings the Court rules that it is likely that there is a default and that it is continuing.

The price is right?

The key factor in deciding whether the Pledgee should be given permission to enforce the pledge in a private sale is whether the proposed price for the shares is right. Two things are relevant here:

Valuation

The Pledgee presented a valuation report made by Mr Holterman, a partner at Value Insights BV and Professor of Business Valuation at Groningen University.

In its directions dated 1 June 2022, the Court ordered this report to be kept confidential because it contains competition-sensitive information, and - pursuant to Article 28(1) DCCP - prohibited all parties from disclosing its contents to third parties. At the hearing, closing the doors of the courtroom, as requested by the Pledgee, appeared not to be necessary as no confidential information was discussed. The Court will honour the confidential nature of the document as well. It will limit the references in this judgment to those elements that are strictly necessary to substantiate its ruling on the contents of the report.

As these proceedings are not stayed and this judgment is a final decision on the merits, the Board has no interest in being relieved from its confidentiality obligation. Its request to that effect is therefore denied.

Mr Holterman concludes that the current fair market value of the shares (valuation date 30 April 2022) is in the range of USD 400 to 500 million. This valuation is based on a discounted cash flow valuation method, which is an internationally accepted valuation method in situations such as this one where there is an enterprise that is still in business. However, Mr Holterman considers the shares to be distressed assets because of the Lycra Group being highly leveraged with significant default risks. Also, Mr Holterman indicates in his report that his valuation does not include various elements that would have a negative impact on the price:

The Pledgor, the Receivers and the Company support the valuation made by Mr Holterman.

The Board disagrees with the valuation, but does not raise any specific concerns as to the how the valuator came to his conclusions. The Board only argues that it had insufficient time to prepare its own valuation report. The Court already responded to that objection in para. 4.16 and further of this judgment. The Board further points out that several valuations have been made in the preceding years (submitted as exhibit 10), but these are not as up to date as the valuation report made by Mr Holterman. Besides, the Board does not dispute the Pledgee’s assertion that these alternative valuations were made for other purposes than a private sale of shares. Moreover, these were made under less tense economic circumstances for the Company. These alternative valuations are therefore insufficient to invalidate Mr Holterman’s valuation report.

This leads to the conclusion that the fair market value of the shares is between USD 400 and 500 million.

The price offered by the Purchasers is USD 450 million, within the range indicated in the report.

Other buyers?

The Board argues that there are third parties with an interest in obtaining the shares in the Company for a higher price than USD 450 million. It refers to:

Under established case law (see Amsterdam District Court 23 September 2009, ECLI:NL:RBAMS:2009:BJ8848) an offer made for the purchase of pledged shares will only be taken into consideration in pledge enforcement proceedings if the offer is binding and better and without conditions. Galaxy’s bid in essence is a proposal for negotiations. It does not contain a binding and unconditional offer. The term sheet shows that the bid is subject to (1) a satisfactory due diligence result, (2) internal approval, and (3) satisfactory documentation. Therefore it fails to meet the aforementioned requirements.

In these proceedings no offers made by Sinopec Capital were submitted. The Board argues that such an offer was not made because the Receivers refused to meet with Sinopec. The Court does not accept this argument. The letter dated 28 April 2022 (the Board’s exhibit 7) is evidence that the Receivers did not refuse to meet Sinopec. To the contrary, they invited the Borrower to present “serious, credible and well-developed proposals”. Apart from this, the Court fails to see why any conduct by the Receivers would make it impossible for Sinopec to produce an binding, unconditional and better offer in these proceedings.

In the previous years, various news articles were published on the distressed state of the Lycra Group. This did not result in any other third party bid. This underlines the absence of any third party willing to make a (binding and better) offer for the Pledged Shares. Therefore, the credit bid proposed by the Pledgee is accepted as offering the best price for the shares. The Court considers it unlikely that a public auction would result in a better price, especially since the various elements as indicated by Mr Holterman that would have a negative impact on the price and that he did not take into account in his valuation (see para. 4.27), are likely to deter third parties from making a bid at an auction if it were to be held. Also the following facts will have a dissuasive effect on potential buyers:

Conclusion

In light of the above, the Court concludes that the proposed sale will deliver maximum value for the Shares. Therefore, the Court will grant the permission requested.

Costs

Based on Article 289 DCCP, the Court can award costs. However, as these proceedings were necessitated by law (Article 3:251 DCC) and the permission requested is granted, the Court sees insufficient grounds for awarding costs.

THE COURT IN SUMMARY PROCEEDINGS:

Permission is granted for the Shares to be sold and transferred by the Pledgee to the Purchasers under the conditions described in the draft SPA.

No costs are awarded.

This judgment is enforceable notwithstanding appeal.

Done by M.A.M. Vaessen, Judge, assisted by W.A. Visser, Clerk of the Court.

Issued in public on 23 June 2022.

APPROVED FOR DISTRIBUTION IN eNCC