The Hong Kong court has held that, in determining whether it should exercise its jurisdiction to sanction a scheme of arrangement in respect of the debts of an insolvent foreign company, the factors to take into account include whether any of the debts are governed by Hong Kong law, such that they would be discharged by an order sanctioning the scheme, and whether sanctioning the scheme would foster comity.
In LDK Solar Co., Ltd (in provisional liquidation), Unreported, HCMP 2215/2014, December 10, 2014, (LDK), two of the three companies in question were incorporated in the Cayman Islands, and joint provisional liquidators had been appointed with respect to them by the Grand Court of the Cayman Islands. In the course of approving the schemes, threshold questions for the Hong Kong court were whether it had jurisdiction in principle to sanction a scheme involving foreign companies, and if so whether it should exercise that jurisdiction1.
In a lengthy judgment on jurisdiction handed down despite the absence, ultimately, of any opposition, Mr. Justice G. Lam held that the power of the Hong Kong court to sanction a scheme of arrangement with creditors of a “company” is to be found in section 673 of the new Companies Ordinance, Cap. 622 (the new CO), which came into effect on March 3, 2014. This power extends to a “company” defined in section 668 of the new CO, namely any company which is “liable to be wound up under the Companies (Winding Up and Miscellaneous Provisions), Cap. 32” (the old CO). The old CO sets out the court’s jurisdiction to wind up both registered companies (section 177) and any “unregistered company”, including companies registered as non-Hong Kong companies under the new CO as well as foreign companies not so registered (section 327).
The court added that in order to determine whether an unregistered foreign company is “liable to be wound up” under the old CO for the purpose of sanctioning a scheme of arrangement under the new CO, the sole pre-condition for exercise of discretion is that there is “sufficient connection” with Hong Kong, and in that respect no single criterion, nor any prescribed combination of criteria, is to be considered an essential precondition for meeting the requirement. “Rather it is a matter of judgment to be made in the light of the evidence presented to the court in a particular case and … in the light of the object and purpose of the jurisdiction invoked”.
A principal concern of the court was whether the scheme, if approved, would have a substantial effect. In that respect, the judge noted that the primary function of obtaining the court’s sanction is to create an arrangement which is binding upon all creditors concerned, even those who dissent.
It is a facet of Hong Kong law that a debt governed by Hong Kong law is only discharged if there is a scheme sanctioned by the Hong Kong court itself. Conversely, a scheme sanctioned by a court outside Hong Kong does not discharge Hong Kong law debts. In the present case, the claims of many of the creditors were expressly governed by Hong Kong law, thus the choice of Hong Kong law to govern the debt constituted on its own a sufficient connection for the purposes of the court’s jurisdiction.
Another matter of significance was the fact that the Hong Kong court was only one of three courts being asked to sanction schemes, the others being the Cayman Grand Court and the U.S. Bankruptcy Court. But each of the schemes under consideration was “inter-conditional”, such that if any of them were not approved, none of them would be effective. In those circumstances, the court held that by sanctioning the Hong Kong scheme comity would be fostered and not thwarted. Having regard to these and other factors, the court was satisfied that there were sufficient factors to justify the exercise of the jurisdiction of the court to sanction the Hong Kong schemes.
The LDK case has resolved what many have perceived to be a state of flux regarding the circumstances in which the Hong Kong court will be prepared to sanction a scheme involving an insolvent unregistered foreign company. Any doubt has now been finally put to rest. Jurisdiction will be exercised where the “sufficient connection” test has been met. The fact that the liquidation process has been activated in LDK’s place of incorporation did not affect the sufficiency of LDK’s connection with Hong Kong, or make it easier to satisfy the circumstances in which the Hong Kong court will exercise its discretionary jurisdiction. TheLDK case may, as a result, encourage a greater use of schemes in cross-border restructurings, especially where financing agreements with creditors/investors are governed by Hong Kong law.