Schemes: Recognition Or Parallel Schemes Of Arrangement

In response to the turbulent economic times seen of late, there has been a significant growth in the use of schemes of arrangement to compromise creditors' claims where the company in question is facing financial difficulty.

This article discusses the circumstances in which an offshore debtor, whose debts are for example governed by the laws of Hong Kong SAR, may consider to implement a parallel scheme of arrangement in its jurisdiction of incorporation and in the jurisdiction concerning its debt obligations, as an alternative to commencing recognition proceedings in Hong Kong to sanction a "foreign" scheme of arrangement.

Offshore debtor with Hong Kong law governed debt obligations: Why Is Hong Kong law relevant?

Both the BVI and the Cayman Islands have statutory regimes for the implementation of schemes of arrangement, the detailed procedures of which are similar to many common law jurisdictions but are beyond the scope of this article. The efficacy of a scheme of arrangement for an offshore debtor that is subject to debt obligation governed by the laws of Hong Kong SAR and no doubt operations and assets worldwide, will however depend upon the recognition (or not) of the proposed scheme in jurisdictions where creditors may bring claims against the debtor.

This can be of particular importance because a foreign compromise does not necessarily discharge a debt unless it is discharged under the law governing the debt.1 In a creditors' scheme which seeks to vary contractual rights, the international effectiveness of the scheme may require that the debtor seek not only the sanction of the court in its country of incorporation, but also of the court in the country that governs its contractual debt obligations, to ensure that dissenting creditors cannot enforce their claims against the debtor's assets in countries other than that of its incorporation.2

The Hong Kong Courts' jurisdiction to sanction "foreign" schemes of arrangement

The Hong Kong courts have jurisdiction to sanction a scheme of arrangement in respect of a foreign company if there is a "sufficient connection" with Hong Kong to justify the Hong Kong courts sanctioning a scheme. However, the Hong Kong courts have not set out any single criterion that is to be regarded as being an essential precondition for satisfying the "sufficient connection" test. Rather, it is a matter of judgment to be made in light of the evidence presented to the court and in light of the object and purpose of the jurisdiction to be invoked.3

The court will also take into account other factors such as...