Vol 1 (2004) - Issue 4

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Recognition of Japanese Reorganization Proceedings

In March 2004 the court in Hong Kong gave judgment in a case concerning the effect to be given to the reorganization of a Japanese corporation conducted under the Civil Rehabilitation Law 2000 of Japan (‘the Rehabilitation Law’); and, in particular, whether a debt arising under a contract governed by Hong Kong law could be discharged or otherwise affected by the Japanese insolvency proceedings. The judgment in Hong Kong Institute of Education v Aoki Corporation will be of interest to practitioners well beyond Hong Kong, since there is no material difference between Hong Kong and English law on this topic and the Hong Kong court’s judgment contains an extensive review of the English case law and literature.

Legal background

There is a venerable rule of English law that a contract, and more particularly a debt arising under a contract, may only be discharged in accordance with its governing or ‘proper’ law. Thus, as a general proposition, an English debt cannot be discharged by a foreign insolvency. (Although this rule is modified by statute in relation to United Kingdom insolvencies and will no longer apply in EC cases. Despite the fact that the discharge rule was initially laid down in the eighteenth century, in very different social and economic times, it has regularly been affirmed by the English courts - most recently by the House of Lords in Société Eram Shipping Co Ltd v Cie Internationale de Navigation and the Privy Council in Wight v Eckhardt Marine GmbH.

Nevertheless, it was also noted long ago that the discharge rule is far from satisfactory and may operate in an unfair way. For example, if the debtor were domiciled in New York, a New York bankruptcy would be recognized in England and would vest the debtor’s English assets in the New York trustee. Yet, at the same time, the New York bankruptcy would not discharge any English debts. Hence, the debtor might, as far as English law was concerned, be left (perhaps for years) with liabilities but no assets from which to pay them.

When turning to corporate insolvency, it is probably fair to say that the discharge rule – although affirmed by the Privy Council in a number of old cases - was of limited importance, simply because the liquidation of a corporation would typically result in its demise as a legal entity. Discharge does not really matter if the insolvency terminates the existence of the debtor. However, the increasing global trend towards corporate rehabilitation has made the discharge rule that much more relevant today. It is not difficult to imagine a scenario where a corporation based in New York (or Tokyo or Beijing) goes into insolvent restructuring in its home jurisdiction and subsequently, after the acceptance of its restructuring plan by the requisite majority of creditors, it emerges to continue its business activities (with or without new management).