Hong Kong: Judicial guidance on schemes of arrangement in cross-border insolvencies
On 27 May 2022, the Honorable Mr. Justice Harris sanctioned a scheme of arrangement introduced by Rare Earth Magnesium Technology Group Holdings Limited, which was incorporated in Bermuda, to restructure its debt. The Reasons for Decision handed down on 6 June 2022 contain detailed discussions on, among other things, the use of schemes in cross-border insolvencies. The principles addressed by the court are particularly relevant to Hong Kong, where many business groups from Mainland China are listed using entities incorporated in offshore jurisdictions, and incur debt governed by multiple jurisdictions’ laws.
On the issue of a scheme’s effectiveness in cross-border insolvencies:
- A scheme sanctioned by the court of a non-Hong Kong jurisdiction “A” compromising debt governed by Hong Kong law would be treated in Hong Kong as binding on a creditor who submitted to jurisdiction “A”. The scheme would not bind a creditor who did not participate in the scheme proceedings or any associated insolvency process in jurisdiction “A”.
- A scheme in a non-Hong Kong jurisdiction “B” purporting to compromise a debt governed by the law of yet another jurisdiction (say, New York) would not be effective in Hong Kong. In such a case, recognition of the scheme under Chapter 15 of the United States Bankruptcy Code (“Chapter 15“) does not constitute a compromise of the debt that satisfies the Rule in Gibbs, which is followed in Hong Kong. If the creditor did not submit to jurisdiction “B”, the creditor would be able to petition the Hong Kong court for the company to be wound up.
Insolvency practitioners should have regard to these principles when considering whether to introduce parallel schemes in multiple jurisdictions, and whether to seek recognition of a scheme in other jurisdiction(s).
(*) The original post was published on Baker McKenzie’s Global Restructuring & Insolvency Blog