Vol 10 (2013) - Issue 4

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Scheme of Arrangement for Creditors in Hong Kong: Enhancing Hong Kong’s Scheme and Lessons from Australia

Introduction
Last year and the year before, two articles published in International Corporate Rescue had highlighted some of the problems with corporate rescue in Hong Kong. This article builds on some of the matters previously raised and looks at the recent amendments to the major company law re-write in Hong Kong that have implications for scheme of arrangement for creditors. In addition, put forward suggestions to enhance the use scheme for creditors as well as draw from Australia’s statutory provisions to see if it could offer any lesson for Hong Kong. In view of the fact that Hong Kong has yet to enact formal corporate rescue procedures, enhancing existing measures is perhaps the most practicable way to encourage creditors in Hong Kong to explore the use of corporate rehabilitation instead of liquidation as a debt recovery mechanism.

Scheme in Hong Kong under sections 166 and 167
The power to compromise with creditors and members by way of arrangements and reconstructions is found in section 166 of Companies Ordinance (cap 32). Section 166 (2) stipulates that a majority representing three-fourths in value of the creditors or class of creditors, agree to any compromise or arrangement, if sanctioned by the court, be binding on all the creditors or the class of creditors, or on the members or class of members, as the case may be. Tyler et al argued that this provision, '[p]rovides that a compromise or arrangement effected in the manner set out shall be binding on all creditors or members or classes, as appropriate, notwithstanding the fact that there may be a dissenting minority.' Furthermore, 'In an insolvency situation the need for unanimity may cause a perfectly reasonable rehabilitation proposal to be defeated by a single recalcitrant creditor.' Whilst the object and stipulations of the law seemed plain, its application is anything but simple.
Brewer argued that, 'Schemes of arrangement were originally intended to provide a means by which failing and insolvent companies might be rescued by a so-called "white knight" investor whose capital injection and, in many cases, assumption of control, would persuade creditors to accept significant write-downs in the amount owed and perhaps take an equity interest in place of debt.' Thus, such transactions involving multiple parties can be complicated and frustrating because of inherent tensions stemming from their positions and interests. For example, white knight investors might want to heavily discount outstanding debt, whereas creditors hope to recover as much payment as possible. So the for creditors, having to decide between compromise and liquidation is disconcerting because the outcome of these choices can be uncertain.