Focus on COMI
Schemes of Arrangement are often used as a successful restructuring tool, whether by way of a scheme promulgated in a company’s home jurisdiction or overseas. One criteria that must generally be satisfied is that the scheme will substantially achieve its purpose in the key jurisdictions in which the company has liabilities or assets. The court does not need certainty as to the position under foreign law but will need to be satisfied that it will not be acting in vain in sanctioning a scheme.
So, what does this mean in practice? Whilst a hot topic, currently most common law jurisdictions, including the Cayman Islands and we understand, Hong Kong, adopts the English “rule in Gibbs” where, put simply, a debt is treated as discharged only if compromised within the law of the jurisdiction governing the debt (with the exception that it is binding on those who submit to the jurisdiction where a scheme is being promulgated).
We have seen several schemes promulgated in various jurisdictions, including Cayman, BVI and Bermuda, which compromise New York law governed bonds. To satisfy a court that the scheme would be substantially effective in New York and binding not only on those creditors who had submitted to the jurisdiction but those who had not, often companies will seek recognition of the scheme by way of a Chapter 15 proceeding.
In a recent case in the US, a Chinese real estate developer, Sunac China Holdings Ltd (whose home jurisdiction is the Cayman Islands), has successfully obtained such Chapter 15 recognition of its Hong Kong scheme as a main proceeding. Recognition must be as a main proceeding (where the company has its centre of main interests “COMI”) or a non-main proceeding (where there is an establishment). Chapter 15 does not define COMI but there is a rebuttable presumption that the COMI is in the place of incorporation.
The New York bankruptcy judge in this case was satisfied that the centre of main interests is in Hong Kong and not in the PRC. Factors considered included the place where the company was head-quartered, the listing in Hong Kong, Hong Kong being the place of the company’s financial and restructuring activities, (including meetings) and the base of its historic operational activities. Whilst each case will depend on its own facts, and restructuring and other activities may be undertaken in the home jurisdiction or elsewhere, this case is a useful indicator as to how the US court will treat a Hong Kong scheme of arrangement of an offshore company with substantial assets in mainland China.
For more information in respect of Cayman, BVI or Bermuda advice, please contact any of the below or your usual Appleby contact.
