In the recent case of Re China Singyes Solar Technologies Holdings Limited, the Hong Kong Court took another look at the Gibbs rule in sanctioning a parallel scheme of arrangement.
China Singyes Solar Technologies Holdings Limited is incorporated in Bermuda and listed in Hong Kong. Together with its subsidiaries, it engages in the business of curtain wall installation and solar engineering and construction in the PRC. In 2018, the group’s financial condition deteriorated and China Singyes defaulted in its offshore obligations, comprising convertible bonds and notes.
The proposed schemes, promoted in Hong Kong and Bermuda, sought to compromise those debt securities with US$41.4 million paid upfront and new notes being issued to the value of the remaining debt.
In considering whether to sanction the Hong Kong scheme, the Hong Kong Court applied the well-established principles in Re Mongolian Mining Corp and Re Da Yu Financial Holdings Ltd, including but not limited to considering whether the scheme has utility. The Court held it did so because:
- It is effective in its place of incorporation because there is a parallel scheme in Bermuda.
- The convertible bonds are governed by English law but there is no need to seek recognition of the scheme in England because 100 per cent of the holders voted in favour of the scheme, bringing into operation the exception to the Gibbs rule of submission to the jurisdiction of the foreign Court.
- The notes are governed by New York law but Chapter 15 recognition is not required because the vast majority of the Noteholders voted in favour of the scheme, there is no invariable rule that Chapter 15 recognition is necessary whenever New York law governed debts are compromised and there was no reason to believe that any of the non-voting unknown scheme creditors would try to enforce their claims in the USA.
Ultimately, the guiding principle is that the Court should not act in vain or make an order which has no substantive effect. A scheme does not require either worldwide effectiveness or worldwide certainty.
Considering whether there was otherwise a defect in the scheme by it purporting to compromise contractual rights of third parties, in this case guarantors, the Court held there was not. As the release of the guarantee liabilities was necessary to prevent the scheme being undermined, the compromise was permissible. Nor would the class be fractured by the proposed receipt by some creditors and not others, of an enhanced benefit.
This decision follows Re Lumena New Materials Corp as another example of common law courts robust approach to the sanctioning of schemes and the application (or otherwise) of the Gibbs rule.
Harneys acted as offshore counsel in both China Singyes and Re Lumena New Materials Corp.
Bermuda law advice is provided through Zuill & Co., an independent Bermudian law firm in exclusive association with Harneys.