Scheming for foreign companies

In the recent case of Re LDK Solar Co Ltd,(1) Justice Lam considered the approach that the court should take in deciding whether to invoke its jurisdiction to approve an arrangement or compromise between a foreign company and its creditors or members.

Introduction

In the recent case of Re LDK Solar Co Ltd,⁽¹⁾ Justice Lam considered the approach that the court should take in deciding whether to invoke its jurisdiction to approve an arrangement or compromise between a foreign company and its creditors or members.

In situations of financial distress, a company (or its liquidators) may elect to undergo restructuring rather than winding-up as this could have the benefit of realising more value out of the distressed assets. In such an event, the company may apply to the Hong Kong courts under the Companies Ordinance (Cap 622) for approval of a proposed scheme of arrangement or compromise to which the company and the creditors and/or members had agreed. 

When will the jurisdiction of the Hong Kong court be invoked?

Part 13, Division 2 of the Companies Ordinance sets out the statutory regime in relation to schemes of arrangement or compromise. Section 673 of the Companies Ordinance empowers the Hong Kong court to approve an arrangement or compromise between a company that is liable to be wound up and its creditors and/or members.

Re Real Estate Development Co⁽²⁾ established that in the context of the winding-up of a foreign company, the court should not exercise its jurisdiction unless the following three core requirements have been satisfied:

• A sufficient connection with Hong Kong is established;
• There is a reasonable possibility that the winding-up would benefit those applying for it; and
• The court can exercise jurisdiction over one or more persons in the distribution of the company's assets.

The question posed in Re LDK Solar Co Ltd was whether these three core requirements also apply to schemes and arrangements involving foreign companies. In Re LDK Solar Co Ltd, a group of companies involving entities with operations spanning the Cayman Islands, mainland China, Europe, North America and Hong Kong encountered financial difficulties from 2011 to 2013. In 2014, the holding company, which was incorporated in the Cayman Islands, applied to the Grand Court of the Cayman Islands for its own winding-up and appointment of joint provisional liquidators. The joint provisional liquidators eventually reached an agreement in principle with the majority creditors in the form of various restructuring proposals involving, among others, agreements governed by Hong Kong law and creditors incorporated in Hong Kong. By the time the restructuring proposals were put forward, claims had been lodged in Hong Kong regarding a number of companies under the group, two of which were incorporated in the Cayman Islands, including the holding company. Accordingly, the two Cayman companies would require schemes approved by the Hong Kong court to obtain a certain and effective release of those claims.

One of the creditors initially objected to a proposed scheme put forward by the provisional liquidators, based on, among others, a ground that the Hong Kong court should not invoke its power to approve the proposed scheme because the three core requirements had not been met. The creditor submitted that since a scheme is often a substitute for liquidation in the case of a company considered to be insolvent, it would be strange if the Hong Kong court exercised its discretion to approve a scheme in a case where it should not order a winding-up. Accordingly, it was submitted that the three core requirements test that applies in winding up foreign companies also applies in respect of approving schemes of arrangement.

Despite the fact that the creditor subsequently withdrew its opposition, the judge addressed the question as to whether the court should have jurisdiction to approve the scheme. The judge did not accept that the scenario of a scheme of arrangement necessarily follows that of a winding-up, and held that the three core requirements only go to the exercise of the discretion of the court in a winding-up proceeding, rather than the existence of its jurisdiction. As such, the judge did not see a basis for the discretionary power of approving a scheme to be governed by the same requirements regulating the exercise of discretion for winding-up.

Further, the judge observed that if a compromise was not approved and the foreign company was wound up, the company could be put into liquidation in other jurisdictions. Accordingly, the judge opined that the court can exercise its jurisdiction to approve a scheme if it is satisfied that a sufficient connection with Hong Kong is established (ie, the first of the three core requirements only), remarking that the other two requirements formulated in the context of winding-up might not be relevant. The judge explained that, in seeking a sufficient connection, the purpose is to ensure that the court does not exercise a prima facie exorbitant jurisdiction, save where it is appropriate to do so. In determining whether a sufficient connection has been established, the judge held that this is a matter of judgement to be made in view of the evidence as well as the object and purpose of the jurisdiction invoked.

Comment

Re LDK Solar Co Ltd can be seen as confirming that the Hong Kong courts are prepared to take an active approach in exercising their jurisdiction over approving schemes of arrangement involving foreign companies, and are ready to apply a lower threshold in exercising its discretion in this respect. With the growth in cross-border transactions between mainland China and other overseas entities, Hong Kong and its legal system are often part and parcel of an overall arrangement in terms of holding structures and business deals. It remains to be seen whether Re LDK Solar Co Ltd will attract an influx of applications for approving schemes of arrangement. However, it will certainly be more difficult for creditors or other interested parties to object to a proposed scheme based on jurisdictional grounds in the future.

Endnotes

(1) In the matter of LDK Solar Co, Ltd (in provisional liquidation) (unreported, HCMP 2215/2014, HCMP 2216/2014 and HCMP 2218/2014).

(2) [1991] BCLC 210, 217.