Hong Kong or Home Jurisdiction or Both?

The starting point for this practice may have been commendable, but the reality is that the interests of creditors of a distressed company may not be best served when the company continues to incur significant expenses in multiple jurisdictions. Pursuing a scheme of arrangement itself is a costly exercise. Recent decisions handed down by the Hong Kong Companies Court highlight this concern and shed light on the way forward for distressed companies and insolvency practitioners.

Da Yu Financial Holdings Limited [2019] HKCFI 2531

In Da Yu, Deputy High Court Judge William Wong SC expressed concern regarding the restructuring costs of the liquidators incurred in the Cayman-incorporated and Hong Kong-listed company’s pursuit of parallel schemes of arrangement in Hong Kong and the Cayman Islands. DHCJ Wong SC remarked that restructuring costs bear a direct impact on the scheme creditors’ interests, as such costs would reduce the amount the creditors may ultimately recover. The Court and insolvency practitioners were reminded to carefully consider the need and appropriateness of pursuing parallel schemes where the underlying debts are governed by Hong Kong laws only.

Re China Oil Gangran Energy Group Holdings Ltd [2021] HKCFI 1592

In China Oil, the Honourable Mr. Justice Harris considered the Cayman-incorporated Hong Kong-listed company’s pursuit of parallel schemes in Hong Kong and the Cayman Islands.

Whilst Harris J sanctioned the Hong Kong scheme, he was critical of the Cayman scheme. He considered that it was unnecessary for a Cayman scheme to be implemented, considering how the company’s centre of main interests was in Hong Kong: it was listed in Hong Kong and its creditors were almost exclusively Hong Kong-based. In fact, the company had no connection with the Cayman Islands save for the fact that it was incorporated there.

Harris J remarked that in the future, applicants pursuing parallel schemes will be required to justify the necessity of doing so to the Companies Court.

Re Grand Peace Group Holdings Ltd [2021] HKCFI 1563

In Grand Peace, Harris J was again presented with the pursuit of parallel schemes.

Harris J commented in obiter that parallel schemes are often superfluous. Indeed, while the starting point is to safeguard the interest of the company and its creditors, resorting to parallel schemes by default without balancing the costs and benefits is not in the service of the concerned parties’ interests. This is especially the case if the risks sought to be controlled are in any event generally mitigated by virtue of the Gibbs rule. Practitioners should note Harris J’s remarks at the end of his decision concerning how the Companies Court will expect future applicants to explain how parallel schemes, if pursued, are in the best interests of unsecured creditors. A failure to do so may very well result in the Hong Kong Court’s refusal to sanction the proposed Hong Kong scheme.

The Court’s recent indications are very timely and helpful in bringing the Hong Kong restructuring regime towards a more satisfactory direction insofar as costs and creditors’ interest as a whole are concerned. In the future, insolvency practitioners should carefully consider the need of pursuing parallel schemes and bear in mind the need to justify such necessity to the Companies Court. The mission of a scheme of arrangement is to restructure the company’s obligations and preserve the interests of all parties involved, and it would be unfortunate if these very interests are prejudiced in the potentially unjustifiable overabundance of caution which are often the nature of parallel schemes.

Partner, Gall Solicitors

Associate, Gall Solicitors