Preserving creditor value in schemes of arrangement
In the recent decision of In the Matter of Grand Peace Group Holdings Limited, the Hong Kong Court noted obiter dicta that practitioners should, citing Re Da Yu Financial Holdings Limited, be cognisant that parallel schemes of arrangement in both the company’s place of incorporation and Hong Kong, where the offshore company is listed in Hong Kong, would seem generally to be unnecessary. Parallel schemes could result in an escalation in legal fees which is not in the interests of unsecured creditors.
These obiter dicta comments are entirely correct as to the necessity of a parallel scheme where there is no or marginal risk of dissentient creditor action. Unnecessary duplicative proceedings are to be avoided in favour of pragmatism as to assessing the risk of creditor support. This assessment changes over time as support is garnered by the restructuring professionals. Mr Justice Jonathan Harris noted that: “In future, I will need to be satisfied by any company or provisional liquidators who propose that parallel schemes are introduced that it is in the genuine best interests of unsecured creditors, that a scheme is introduced in the Company’s place of incorporation”. This is the correct starting point. It was further noted that by reason of the rule in Gibbs, any Hong Kong law debt compromised through a Hong Kong Court scheme of arrangement would be recognised by a common law Court.
The decision is a timely reminder of the need for the restructuring culture to change to maximize returns for stakeholders echoing analogous comments in the Cayman Islands decision of China Resources and the Hong Kong decision of China Bozza.