18 March 2020
Hong Kong schemes of arrangement are effective tools to compromise debts governed by non-Hong Kong laws, as three recent cases show, namely, In re Agrokor d.d., 591 B.R. 163 (Bankr. S.D.N.Y. 2018); Re China Lumena New Materials Corp  HKCFI 338; and Re China Singyes Solar Technologies Holdings Ltd  HKCFI 467.
Such schemes are effective despite the old common law Gibbs rule (so called because it derives from the English Court of Appeal decision in Antony Gibbs & Sons v La Société Industrielle et Commerciale Des Métaux (1890) 25 QBD 399)). The Gibbs rule states that the question of whether an obligation has been discharged is governed by its proper law. The effect of the Gibbs rule is thus that creditors whose claims are governed by foreign law may, notwithstanding a Hong Kong scheme compromising their claims, enforce their claims against the company in a foreign court.
These recent cases show how the Gibbs rule can be overcome in scheme practice, namely:
(i) a foreign court’s refusal to recognise the Gibbs rule: Agrokor;
(ii) creditors’ submission to the scheme jurisdiction: Singyes and Lumena;
(iii) sufficient creditors’ support of the scheme: Singyes and Lumena.
How is the Gibbs rule relevant to the Hong Kong scheme jurisdiction?
The Gibbs rule has no relevance to the scope of the Hong Kong scheme jurisdiction because the Hong Kong Court has jurisdiction to sanction schemes compromising debts governed by the law of any jurisdiction.
The Gibbs rule, however, is relevant to the exercise of the Hong Kong scheme jurisdiction because, before sanctioning a scheme, the Hong Kong Court would need to be satisfied that the scheme is effective in all relevant jurisdictions so that the Hong Kong Court’s sanction order would not be in vain. In other words, if the Gibbs rule has the effect that the Hong Kong scheme would not be effective in the relevant foreign jurisdictions, the Hong Kong Court might not sanction the scheme.
Below is a brief review of how recent cases overcame the Gibbs rule.
Agrokor – Croatian restructuring compromising English and New York law-governed debts
Agrokor d.d. and its debtor affiliates (“Debtors”) were subject to Croatia insolvency proceedings pursuant to which a restructuring plan was approved by the Croatian court (“Settlement Agreement”). About 64% of the debts compromised by the Settlement Agreement were governed by English law; the rest were governed by New York law. As the Debtors had creditors in the US, the Debtors requested the US Bankruptcy Court to recognise and enforce the Settlement Agreement under Chapter 15 of the US Bankruptcy Code.
Judge Glenn duly granted the recognition sought and concluded that the Gibbs rule would not prevent the US Bankruptcy Court from extending comity to the Croatian insolvency proceedings.
Judge Glenn agreed with the Singapore decision in Re Pacific Andes Resources Development Ltd  SGHC 210;  5 SLR 125 (Justice Ramesh) that the Gibbs rule should be jettisoned. Judge Glenn also cited a number of academic commentaries in support of this conclusion, including Kannan Ramesh, ‘The Gibbs Principle: A Tether on the Feet of Good Forum Shopping’ 29 Sing. Acad. L.J. 49; Ian F. Fletcher, Insolvency in Private International Law (2nd edn., Oxford 2005); and Look Chan Ho, Cross-Border Insolvency: Principles and Practice (Sweet & Maxwell, 2016).
Judge Glenn reasoned that the Gibbs rule is premised on a misconception which is fundamentally inconsistent with insolvency principles:
“[T]he parties to a contractual relationship governed by the law of a jurisdiction adhering to the Gibbs rule should be attributed with the expectation that their claims might be discharged in proceedings in a jurisdiction where the debtor has an established connection based on residence or ties of business…
Look Chan Ho criticizes the notion that insolvency proceedings should be characterized as contractual issues… [T]he Gibbs rule centers around the idea of a party’s contractual or consensual choice to be bound to a certain forum’s rules.
A theoretical and practical issue with applying such a contractual analysis in the context of insolvency proceedings, as Look Chan Ho and others argue, is that bankruptcy discharges by their very nature imply diverging from the terms of most of the debtor’s prepetition contracts. The primary disputes in a bankruptcy are ordinarily not about the rights of a single creditor against the debtor; insolvency proceedings are collective proceedings in which the rights of all creditors are determined for a slice of a pie that is not big enough to repay all creditors in full…
Additionally, as Look Chan Ho notes, framing the issue of which law should govern a creditor’s rights in a bankruptcy as a solely contractual issue between two parties overlooks orthodox English classification of bankruptcy as an in rem proceeding. The Gibbs rule’s contractual analysis seems to be based on the contractual parties’ expectations; but if parties’ expectations created the rule, is it realistic for creditors to multinational corporations to expect that, in the context of an insolvency proceeding, their contractual bargain will ultimately prevail? …
As Justice Ramesh argues, a fundamental problem with the use of the Gibbs rule in international insolvency cases is that it mischaracterizes the discharge of debt as a contractual issue, rather than as a bankruptcy or insolvency law issue…
The Court agrees with Justice Ramesh that a creditor’s autonomy is relevant in the context of an insolvency proceeding only to the extent that it does not impede the underlying public policy that governs a collective insolvency or bankruptcy proceeding.”
It follows from this clear and authoritative judgment that, when the Hong Kong Court considers whether a Hong Kong scheme compromising foreign law governed debts will be effective in the US, the Gibbs rule will not be an obstacle. The Gibbs rule will not prevent the US Bankruptcy Court from recognising the Hong Kong scheme under Chapter 15.
Prior to Agrokor, there was a practice of adducing expert evidence to the Hong Kong Court about the possibility of Chapter 15 recognition of Hong Kong schemes (eg Re Winsway Enterprises Holdings Ltd  1 HKLRD 1). Agrokor has now rendered such practice redundant.
Singyes – compromising English and New York law-governed debts
Singyes concerned a Hong Kong scheme compromising convertible bonds governed by English law and notes governed by New York law.
In considering whether to sanction the scheme, Harris J had to consider whether the scheme would be effective in England and the US.
Harris J concluded that the scheme would be substantially effective in these jurisdictions even though there was no application to the English and US court for recognition of the Hong Kong scheme. His Lordship reasoned thus:
(a) 100% of the holders of the convertible bonds had acceded to the restructuring support agreement and voted in favour of the scheme. This thus came within an exception to the Gibbs rule, namely submission to the scheme jurisdiction. Accordingly, the scheme would be effective in England.
(b) More than 99% of the holders of the notes had acceded to the restructuring support agreement and voted in favour of the scheme. The remaining creditors had not come forward and there was no reason to believe that any of them would try to enforce their pre-scheme claims in the US. Therefore the risk of adverse enforcement by a dissenting creditor in the US would be de minimis.
Lumena – compromising Mainland law-governed debts
Lumena concerned a Hong Kong scheme compromising debts governed by Hong Kong and Mainland law; the latter accounted for about 42% of the company’s total indebtedness.
In considering whether to sanction the scheme, Harris J had to consider whether the scheme would be effective on the Mainland. Harris J had in mind the possibility of the Mainland court applying something equivalent to the Gibbs rule in respect of the Mainland law-governed debt.
Harris J concluded that the scheme would be substantially effective on the Mainland for two reasons.
First, all of the Mainland law-governed debt was held by the Zhejiang branch of the China Development Bank (“CDB”). Although CDB’s Zhejiang branch did not attend the scheme meeting, CDB’s Hong Kong branch had voted in favour of the scheme in respect of its Hong Kong law-governed debt. Therefore, CDB had submitted to the Hong Kong scheme jurisdiction, thereby triggering the exception to the Gibbs rule mentioned above.
Second, although CDB’s Zhejiang branch did not attend the scheme meeting, they had written to the company expressing their support of the scheme. There was therefore no reason to think that CDB’s Zhejiang branch would try and enforce its pre-scheme claim in the Mainland court.
While the Gibbs rule continues to be valid in England and possibly in Hong Kong, these cases show that it often does not pose a practical obstacle to the success of international restructuring.
But the Gibbs rule does present practical inefficiencies, such as the need for parallel insolvency proceedings in different jurisdictions. Indeed DHCJ William Wong SC recently highlighted the inefficiencies of parallel schemes in Re Da Yu Financial Holdings Ltd  HKCFI 2531.
Pending legislative removal or judicial abandonment of the Gibbs rule, practitioners will continue to work around this antiquated rule.
Look-Chan Ho acted for (i) the provisional liquidators and company in Re China Lumena New Materials Corp, and (ii) the company in Re China Singyes Solar Technologies Holdings Ltd.