Background
The Company was incorporated in the Cayman Islands and listed on the Main Board of The Stock Exchange of Hong Kong since 2016. The Company sought to implement the Scheme to restructure approximately HK$233.7 million in debts, governed by Hong Kong law, which arose from the following obligations:
1. Loans taken out by the Company (i.e., primary obligations).
2. Guarantee obligations of the Company for primary debt taken out by affiliated entities.
The scheme sought to compromise and discharge not only the unsecured indebtedness of the Company itself, but also other obligations of the Company’s joint obligors and guarantors, among other things.
Hong Kong Court’s Decision
Among other things, the Hong Kong Court considered how a guarantor’s scheme by the Company, could operate to discharge debts owed by principal obligors who are members of the group, of which the Company is its holding company. The Hong Kong Court restated the Hong Kong and English law position that it is a permissible purpose of a scheme to release obligations of third parties connected with the scheme company’s debts. The court recognized the practical importance of releasing the debt of subsidiaries, which is guaranteed by the ultimate parent company, as a matter of business viability.
The court observed that, in Singapore, a line of jurisprudence had emerged enabling the release of a principal obligor’s obligations through a guarantor’s scheme without the guarantor resorting to a deed of assumption to trigger a claim against itself, commonly known as a ricochet claim, which is the established technique used in English schemes. The Singapore Court considered that there is no difference between a primary and a secondary obligation for the purpose of determining jurisdiction in sanctioning a scheme. Since the discharge of the principal obligors extinguishes the right to pursue the guarantor and vice versa, it was irrelevant to the court’s jurisdiction whether the scheme applicant is the principal obligor or the guarantor: “… even if it was the guarantor and not the primary obligor who was the scheme applicant, a release of the third party debt owed by the primary obligor to the scheme creditors would still be regarded as necessary, since otherwise liability and enforcement risks would merely be shifted between members of the corporate group and the overall restructuring objective would be entirely unmet.” (Pathfinder Strategic Credit LP v. Empire Capital Resources [2019] SGCA 29).
The Hong Kong Court approved the Singaporean approach and also considered it unnecessary to distinguish between a release of the obligations of a third-party guarantor of a company’s debt and a release of a principal obligor’s liability, which has been guaranteed by the company.
Analysis and significance
This case confirms that the guarantor’s scheme can discharge debts owed by principal obligors who are members of the same group. This is in line with previous decisions of the Hong Kong Court in Re Century Sun International [2021] HKCFI 2928 (“Re Century Sun”). Re Century Sun held that a scheme can contain provisions that release rights against a third party (in that case, the scheme company’s guarantors and joint obligors) if it is necessary for the scheme to be effective. This case is a welcome expansion of the general principle and shall provide the much needed certainty for restructuring practitioners in formulating schemes for companies with complex holding and debt structures.
