Schemes of Arrangement are used to compromise debts, as a way to restructure an insolvent company.  In the case of a listed company, a Scheme could assist it to lift its trading suspension and avoid delisting.  However, a question arises as to what debts are being compromised by the Scheme.  Pertinently, could a creditor with a debt governed by foreign law, nevertheless, present or continue a winding-up petition in Hong Kong?

The recent case of Re Rare Earth Magnesium Technology Group Holdings Ltd. [2022] HKCFI 1686 considered these questions.

Rare Earth Magnesium is a typical offshore (Bermuda) incorporated entity, whose shares are listed on the Main Board of the Hong Kong Stock Exchange. Soft-touch provisional liquidators were appointed to the Company in Bermuda in July 2020 and were subsequently recognised by the Hong Kong Court in August 2020.

The Company’s principal indebtedness arose from its unsecured interest-bearing bonds, which were governed by Hong Kong law.  It sought to avoid liquidation and return it to a solvent going concern, by discharging its unsecured indebtedness and restructuring its debts by way of a Scheme of Arrangement. The Scheme was approved by the requisite majority creditors.

In considering whether or not to sanction the Scheme, Harris J considered the principles in Re China Singyes Solar Technologies Holdings Ltd [2020] HKCFI 467, in particular:-

 whether the Scheme was for a permissible purpose;

• whether creditors who were called on to vote as a single class had sufficiently similar legal rights such that they could consult together with a view to their common interest at a single meeting;
• whether the meeting was duly convened in accordance with the Court’s directions;
• whether creditors had been given sufficient information about the Scheme to enable them to make an informed decision on whether or not to support it;
• whether the necessary statutory majorities had been obtained;
• whether the Court would be satisfied in the exercise of its discretion that an intelligent and honest man acting in accordance with his interests as a member of the class within which he voted might reasonably approve the Scheme; and
• in an international case, whether there was sufficient connection between the Scheme and Hong Kong, and whether the scheme was effective in other relevant jurisdictions.

 The Judge was satisfied with the Scheme meeting the requirements, and consequently, sanctioned the Scheme.

 Of interest is the Judge’s discussion of the debts that were being compromised by the Scheme and whether parallel Schemes were necessary elsewhere.  This issue raises the rule in Gibbs (named after the English case).

The Rule in Gibbs provides that a debt is treated as discharged if compromised in accordance with the law of the jurisdiction which governed the instrument giving rise to the debt. Harris J held that the scheme would therefore be recognised and effective abroad given that the debt to be compromised by the scheme was largely governed by Hong Kong law, i.e. the discharge would occur as a matter of substantive Hong Kong law, and therefore no parallel scheme of arrangement would be required in any jurisdiction. In addition, the Judge noted that Bermuda, Cayman Islands and other offshore jurisdictions all follow the Rule in Gibbs, making the scheme effective in these jurisdictions as well.

Harris J further added that if a creditor submits to the jurisdiction of a foreign insolvency process, he is taken to have accepted that his contractual rights will be governed by the law of the foreign insolvency process. Consequently, a scheme sanctioned by the court of an offshore jurisdiction compromising debt governed by Hong Kong law will be treated in Hong Kong as binding on a creditor, who submitted to the foreign jurisdiction. It will not bind a creditor who did not participate in the scheme proceedings or any associated insolvency process in the foreign jurisdiction.

But, what about a creditor whose debt is governed by, say, US law and who has not submitted to the US insolvency process or participated in the Hong Kong Scheme of Arrangement?  Can he still present or continue a winding-up petition against the company in Hong Kong?

Notably, it is common for Mainland business groups listed in Hong Kong to raise debts governed by US law, and then using schemes of arrangement in offshore jurisdictions recognised by Chapter 15 of the US Bankruptcy Code to compromise the debt.  In such circumstances, Harris J considered (in obiter) that, as recognition under Chapter 15 merely operates procedurally to prevent any action by a creditor against a debtor’s property in the US and it does not discharge the debt (as opposed to Chapter 11), it does not prevent that creditor from presenting a winding-up petition against the company in Hong Kong.

Subsequent to Harris J’s obiter comments in Rare Earth Magnesium, the case of Re Modern Land (China) Co. Ltd 2022 WL 2794014 in the US considered the issue.  In that case, Judge Martin Glenn held a different view on the effect of Chapter 15.  There, the company sought recognition of a scheme of arrangement sanctioned by the Cayman Islands Court which modified or discharged New York law governed debts.

In deciding whether the Cayman Scheme could be recognised and enforced abroad, Judge Martin Glenn referred to Harris J’s obiter in Rare Earth Magnesium, and was of the opposing view that debts governed by US law, of which the discharge was recognised and enforced by a US bankruptcy court through Chapter 15 could be treated as properly discharged abroad, provided that:

• the foreign court properly exercises jurisdiction over the foreign debtor in an insolvency proceeding; and
• the foreign court’s procedures comport with broadly accepted due process principles, a decision of the foreign court approving a scheme or plan that modifies or discharges New York law governed debt is enforceable.

In addition, Judge Martin Glenn stated that “Chapter 15 limits a US bankruptcy court’s authority to enjoin conduct outside the territorial jurisdiction of the United States, but it does not make a discharge of New York law governed debt any less controlling [sic].”

Given that the US Court has confirmed that Chapter 15 procedure could compromise or discharge debts governed by US law, it would appear that a creditor with such a debt should not be able to petition for winding-up in Hong Kong.

On 30 August 2022, the Court of Appeal handed down its judgment for the case of Re Guy Kwok-Hung Lam [2022] HKCA 1297, allowing the appeal and reversing the lower court decision dated 21 July 2021.  In doing so, the Court of Appeal upheld the effect of an exclusive jurisdiction clause and dismissed the bankruptcy petition on the basis that there is a dispute which ought to be determined first in accordance with the jurisdiction agreement.

At the heart of the case was a credit agreement under which the respondent petitioner advanced various term loans to a company called CP Global Inc. with the appellant as personal guarantor.  The agreement contained an exclusive jurisdiction clause in favour of New York for all legal proceedings arising out of or relating to the agreement.  Upon the default of the loans, the respondent, among other things, presented a petition to the Hong Kong court seeking a bankruptcy order against the appellant.  Linda Chan J granted the bankruptcy order and the appellant appealed.  The issue before the Court of Appeal was therefore whether the bankruptcy order should be set aside in light of the exclusive jurisdiction clause.

In the leading judgment by G Lam JA (with whom Barma JA agrees), it was held that the same approach as in the stay of ordinary actions based on exclusive jurisdiction clause should apply to winding up or bankruptcy proceedings.  The exclusive jurisdiction clause should ordinarily be given effect unless there are strong reasons to the contrary.  A winding up or bankruptcy petition should not be allowed to proceed if the underlying debt is disputed and the parties are bound by the clause.  In particular:

• As to whether the underlying debt is disputed, G Lam JA rejected the argument that there is no dispute if there is no bona fide defence, instead finding that the court should not embark upon a review of the merits in the first place.
• As to strong reasons to the contrary, while it was not possible nor desirable to define them, it was suggested that reasons may include, among others, where the debtor is incontestably and massively insolvent apart from the disputed debt, where there may be other creditors seeking winding up which are not subject to jurisdiction agreement, or where the assets may be in jeopardy.

While Chow JA agreed that the appeal should be allowed, his Lordship expressed reservation as to whether the approach in the stay of ordinary actions should be applied to winding up and bankruptcy proceedings, taking into account the well-recognised distinction and the wider public interest considerations pertaining to a bankruptcy/winding up petition.  His Lordship is also not prepared to accept that the Lasmos approach (which concerns the effect of arbitration clauses on winding up and bankruptcy petitions and its correctness is yet to be directly ruled on) should be extended and applied to exclusive jurisdiction clause context.  Chow JA found that the appeal should be allowed on a narrower basis that the lower court judge adopted a wrong approach in exercising of her discretion by allowing the petition to proceed unless it can be shown that there is a bona fide dispute of the debt on substantial grounds.

While this case concerns an exclusive jurisdiction clause in bankruptcy proceedings, the leading judgment contained a detailed analysis on the effect of arbitration clauses on winding up petitions, including the Lasmos approach and the argument on the fettering of statutory rights.  As suggested by the judgment itself, the law in this area is in a state of flux: this decision represents a step in its coherent development and can be expected to be applied in a wider context.

For further details, the full judgment can be found here.

The rise in cyber fraud and cybercrime featuring cryptocurrencies, like Bitcoin or Ether, has resulted in an increasing number of legal issues which require the Courts around the world to demonstrate a good understanding of technology and willingness to embrace technology.

Guidance on technical aspects of cryptocurrency

A recent notable case is Yan Yu Ying v Leung Wing Hei [2022] HKCFI 1660, where the Hong Kong court, among other things, granted a proprietary injunction over the Bitcoins which are the subject of a civil dispute. It is worth noting that in the decision dated 7 June 2022, the Court explained (in very understandable terms) the features of Bitcoin, the digital keys, their storage in cryptocurrency wallets, the differentiation between a “hot” cryptocurrency wallet and a “cold” cryptocurrency wallet, etc. An example of a hot cryptocurrency wallet is an account in a web-based cryptocurrency exchange, while an example of a cold cryptocurrency wallet is a hardware wallet which is not connected to the Internet. In this case, the dispute relates to a cold cryptocurrency wallet which can receive and send Bitcoin.

This explanation of technical terminologies in the judgment would likely be a helpful guidance for the courts and legal practitioners when dealing with disputes involving cryptocurrencies in the future.

Alternative Service on anonymous defendants

Another development to watch is that cryptocurrency fraud has become more common. Courts in some jurisdictions have adopted technology to address the difficulties of serving court documents on defendants involved in cryptocurrency fraud, particularly where the identities and addresses of the defendants are not known.

In the United States, in a case about alleged theft of cryptocurrency, the Supreme Court of the State of New York on 2 June 2022 authorised the plaintiff to serve the court’s order and other court papers upon the person(s) controlling a cryptocurrency wallet address via “airdrop” of a non-fungible token (NFT airdrop) (the “Service Token“) on the Ethereum blockchain to that wallet address. Airdrops involve the distribution of tokens to wallets, and have been used for marketing or promotion purposes. In this case, the Service Token contains a hyperlink to a website where the order and other legal papers for service can be accessed. (see LCX AG v. John Doe Nos. 1-25 (Dkt.No.,154644/2022) (N.Y. Supreme, Ct., NY County))

In the United Kingdom, it has been reported that on 24 June 2022, the High Court of England and Wales also granted an order permitting service of court proceedings by way of NFT airdrop in the case of D’Aloia v Binance Holdings & Others [2022] EWHC 1723 (Ch).

Victims of cryptocurrency fraud will be pleased to know that the courts in some jurisdictions have adopted and embraced technology by allowing alternative service of court documents using blockchain technology. When the right case comes, the Hong Kong court will consider whether blockchain technology (e.g. NFT airdrop) can be adopted for service of court documents.

This news article provides updates to our news article published on 31 January 2022, where we noted that the Competition Commission had commenced an enforcement action in the Competition Tribunal against five parties, comprising of three hotel operators, a travel services provider and a managing director of the travel services provider, alleging that the respondents were part of a travel services sector price-fixing cartel, and we noted that three of the respondents had elected to cooperate (“Settling Respondents“).

On 15 July 2022, the Tribunal granted orders to dispose of the proceedings between the Commission and the Settling Respondents by consent. The orders were granted based on the joint applications made by the Commission and the Settling Respondents. In the applications, the Settling Respondents admitted liability for contravening the First Conduct Rule of the Competition Ordinance or for being involved in the price-fixing cartel.

The Settling Respondents were: 1) Gray Line Tours of Hong Kong Limited (“Gray Line”); 2) Tak How Investment Limited (“Tak How”), owner and operator of InterContinental Grand Stanford Hong Kong; and 3) Mr. Wu Siu-Ieng, Michael, Managing Director of Gray Line (“Mr. Wu”). The Tribunal ordered Gray Line and Tak How to pay pecuniary penalties of HK$4,177,000 and HK$1,600,000 respectively, which reflected a 25% and 20% discount from their respective levels of recommended pecuniary penalty for their cooperation with the Commission, and ordered both to pay the Commission’s investigation and litigation costs. The Tribunal also ordered that Mr. Wu be disqualified from acting as a director in any company for three years. The enforcement action against the two hotel operators that did not elect to resolve the proceedings by consent continues.

The reduced pecuniary penalties that Gray Line and Tak How were ordered to pay reflect the benefits for undertakings to cooperate with the Commission pursuant to its “Cooperation and Settlement Policy for Undertakings Engaged in Cartel Conduct” (“Cooperation Policy“). The case with the Settling Respondents is significant as it is the first case where the Commission obtained an order from the Tribunal resolving an enforcement action pursuant to the Cooperation Policy.

For further information, the Commission’s guidelines and policy documents can be found here.

On 2 June 2022 the Court of Appeal handed down its judgment on the Competition Commission’s (“Commission“) appeal against pecuniary penalties imposed by the Competition Tribunal (“Tribunal“) against certain respondents.

One of the issues raised on appeal was whether the Tribunal erred discounting the pecuniary penalties imposed on certain respondents that did not directly engage in anti-competitive conduct. The respondents in question were construction and engineering contractor companies that had subcontracted the works on two public housing estates and let their Housing Authority licences to subcontractors who in turn were found to have entered into price-fixing and market sharing agreements in breach of the First Conduct Rule of the Competition Ordinance (Cap. 619) (“Ordinance“).

At first instance the Tribunal discounted the pecuniary penalties imposed on these respondents by one-third on the grounds that:

1. the pecuniary penalty was sought only against the respondents and not the respondents together with their subcontractors;
2. it would not be right or safe to assume that the respondents would be able to recoup all or part of the pecuniary penalty imposed from their subcontractors; and
3. the pecuniary penalty imposed should reflect the role of the respondents as only part of their respective undertakings.

The Commission sought to set aside this discount on the basis that the Tribunal had erred on principle and taken irrelevant factors into account (or had failed to take account of relevant factors). The Commission contended that the pecuniary penalty must be specific to the undertaking and the undertaking’s contravention of the Ordinance, not to the natural or legal persons constituting the undertaking and/or their role within the undertaking.  Rather, each respondent along with their respective subcontractors formed a single economic unit or undertaking, and each undertaking as a whole infringed the First Conduct Rule.

The Court of Appeal held that it would be wrong in principle to reduce the penalty to reflect the extent of the respondents’ role as part of the undertaking. Where an undertaking contravenes the Ordinance, it is for the undertaking to answer for that infringement, and in this case the respondents and their subcontractors were to be jointly and severally liable for the infringement. Joint and several liability follows when an undertaking constituted by a number of natural and legal entities engage in anti-competitive conduct and facilitates the effective enforcement of the Ordinance. The Court of Appeal accepted that it would be highly onerous for the Commission to name all the entities within an undertaking in enforcement proceedings before the Tribunal in order to avoid any discount to the penalty.

The Court of Appeal allowed the Commission’s appeal, setting aside the one-third reduction and restoring the amount of pecuniary penalties to be paid by the respondents in full.