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The need for parallel schemes: efficacy and dissentient creditors

Schemes of arrangement are frequently used by companies to give effect to a debt restructuring.

A debt restructuring implemented via a scheme of arrangement in, for example, Hong Kong, will often be supported by restructuring processes in other jurisdictions, including one or more parallel schemes of arrangement in jurisdictions such as the BVI, the Cayman Islands or Bermuda, together with recognition proceedings in the US. Successful parallel schemes of arrangement will be linked and inter-conditional upon each other. As Mr Justice Lawrence Collins (as he then was) explains in Re Drax Holdings Ltd [2003] EWHC 2473 (Ch) at [30]: "In the case of a creditors’ scheme, an important aspect of the international effectiveness of a scheme involving the alteration of contractual rights may be that it should be made, not only by the court in the country of incorporation, but also (as here) by the courts of the country whose law governs the contractual obligations. Otherwise dissentient creditors may disregard the scheme and enforce their claims against assets (including security for the debt) in countries outside the country of incorporation.

As Mr Justice Harris held in Re Winsway Enterprises Holdings Ltd [2017] 1 HKLRD 1, "it is common, certainly in the Hong Kong context, for there to be parallel schemes in various jurisdictions including:(1) the place of incorporation [such as BVI, Cayman or Bermuda]; (2) in the case of public companies such as the present the jurisdiction in which they are listed [such as HK]; and (3) where debt is governed by the law of a third jurisdiction which also has provision for a scheme of arrangement, such as England, that jurisdiction. The parallel scheme will prevent action being taken within the jurisdiction of the offshore court such as the BVI, Cayman Islands or Bermuda; or onshore such as Hong Kong, regardless of the governing law of the debt (recent examples are Mongolian Mining Corporation (in provisional liquidation) HCMP 370/2017, Re Kaisa Group Holdings Ltd [2017] 1 HKLRD 18 and Re LDK Solar Co Ltd [2015] 1 HKLRD 458). It will often require, at a minimum, sufficient creditors to support the schemes at the scheme meetings to attain the requisite statutory majorities by first entering into restructuring support agreements (usually entered into some weeks in advance of launching the parallel schemes). 

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