When a company is insolvent, it is possible that the creditors would agree on a scheme of arrangement to restructure its debt. Sometimes, the courts will be asked to sanction such scheme. The courts will consider six factors for determining whether or not to sanction a scheme of arrangement, one of which is whether the scheme is for a permissible purpose: Re Mongolia Mining Corporation,  5 HKLRD 48.
While it is well-established that debt restructuring is a permissible purpose of a scheme of arrangement, another novel issue arose in a recent case: Re Freeman Fintech Corporation Limited  HKCFI 310 – “whether the court should sanction the scheme of arrangement which concerns a debt of a PRC based creditor of the Hong Kong company.”
The general rule under the common law is that a foreign composition does not discharge a debt unless it is discharged under the law governing the debt. The fact that some of the debt which the scheme of arrangement covers is not governed by Hong Kong law does not affect the court’s jurisdiction to sanction it. The court highlighted that it will consider the issue of utility and whether the scheme is likely to substantially serve the purpose for which it has been introduced.
In the Re Freeman case, the court was asked to determine whether a scheme of arrangement to compromise the debt governed by Macanese law should be sanctioned. The court held that the scheme should be sanctioned because the company concerned has no assets in Macau and enforcement in Macau is not of concern to the company and has no bearing on the utility of the scheme of arrangement. In other words, the scheme will prevent action being taken within the jurisdiction of the Hong Kong courts regardless of the governing law of the debt and therefore the court should sanction it.
This judgment is important as it explains how Hong Kong court determine whether or not to sanction a scheme of arrangement to restructure foreign debt.
If you have any concerns in relation to restructuring the foreign debt by way of a scheme of arrangement, please contact us today for a discussion.