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Hong Kong Court’s first consideration of PRC law governed debt in sanctioning a scheme of arrangement: Gibbs Rule revisited

Delivering the first known judgment of its kind, Mr. Justice Harris in In Re China Lumena New Materials Corp. considered sanctioning a scheme of arrangement where a significant part of the debt was not governed by Hong Kong law, thus raising the spectre of the Gibbs Rule once again. The written judgment followed hot on the heels of the ex tempore judgment of Justice Kawaley in the Grand Court when sanctioning its parallel scheme of arrangement in the Cayman Islands.   

Concluding that the usual well-established principles for sanctioning a scheme were satisfied, the only matter that required further consideration was that the scheme purported to compromise debt governed by PRC law (approximately 42 per cent). This invoked deliberation of the Gibbs Rule, which is followed in Hong Kong and provides that a foreign composition does not discharge a debt unless it is discharged under the law governing the debt. Mr. Justice Harris was clear that this does not impact on the Court’s jurisdiction to sanction a scheme, but is relevant to the exercise of its discretion to do so. The existence of the foreign law governed debt called into question the utility of the scheme, there currently being no clear mechanism for the recognition of a Hong Kong scheme of arrangement in the PRC. The Court will not sanction a scheme which has no, or limited utility.

Confirming that in assessing this, the Court would take a robust and practical approach. Mr. Justice Harris concluded that the scheme did have utility. Of note is the indication that whilst the Court found that the PRC creditor had submitted to the jurisdiction of the Hong Kong Court (which is an exception to the Gibbs Rule) by reason of its Hong Kong branch voting in favour of the scheme in respect of its Hong Kong law governed debt, the Court would have sanctioned the scheme in any event.

The guiding principle is that the Court should not act in vain. Worldwide effectiveness or worldwide certainty was not however required; instead the focus should be on the jurisdictions in which there are substantial assets or in which creditors might make claims. In this case, the PRC creditor had indicated its support for the scheme despite not voting for logistical difficulties and there was no reason to suppose it would seek to enforce its debt outside the scheme. The scheme should accordingly serve its purpose, does have utility and should be sanctioned.

As noted by Mr. Justice Harris, the case is of particular significance, being the first recorded case of a scheme purporting to compromise PRC law governed debt in Hong Kong.

Hong Kong Court’s first consideration of PRC law governed debt in sanctioning a scheme of arrangement: Gibbs Rule revisited

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