Schemes of Arrangement: Towards More Practical Rules for Managing Creditor Scheme

The Scheme of Arrangement (SOA) is a statutory procedure widely used within Commonwealthjurisdictions to restructure a company’s relationship with its shareholders and creditors; itsorigins can be traced back to the UK in the late nineteenth century. It has been used bycreditors and shareholders to, among other things, restructure or merge larger corporateentities. In an increasingly globalized world, financial centres have become more attractivebecause of the availability of this procedure. Although part of Hong Kong (HK) law for sometime, there is a need to ensure that the SOA is as efficient and effective as possible. It isnecessary to ensure that HK (where no purpose-built corporate rescue procedure is available)has a streamlined SOA regime which remains attractive to investors and companies seeking toexpedite a compromise without having to obtain the unanimous consent of all corporatestakeholders. Creditors' schemes have become increasingly important in the UK, Australia, andSingapore, for various reasons, as well. This project will identify issues which may affect theattractiveness of this procedure in HK as a corporate restructuring and liability-managementtool. Research into the use of SOAs in HK may have been curtailed due to criticisms of the utilityof this reorganisation mechanism; such criticisms are no longer justified if internationalexperience is any guide. Since the mid-1990s, the SOA has proven to be an integral tool (in anumber of commonwealth jurisdictions) for facilitating corporate turn-arounds, speedyresolution of complex litigation arising out of large-scale insolvencies, and in better managing acompany's contingent liabilities. Some of the difficulties surrounding the current SOAprocedure that require closer scrutiny include: (i) complexities regarding the classification ofcreditors that affect voting on scheme proposals; (ii) difficulties in classifying schemeparticipants that may be caused by the jurisdiction of courts considering schemes; (iii) practicalissues that have been suggested regarding the rationality of the current statutory voting rulesin regard to the approval of schemes; and (iv) issues regarding judicial principles developed bythe courts regarding the nature of their discretion over the confirmation of schemes. Drawingupon an experienced international team of legal researchers, the research will proposesolutions to these problems which draw upon international best practice and which are suitableto the circumstances of HK. Thereby, the project will better position HK as a key centre foreffective corporate reorganizations in East and Southeast Asia.