Judicial comments cast doubt on the ability to compromise US law-governed debt effectively based on Chapter 15 recognition alone.
A recent first instance decision in Hong Kong has highlighted an important conflict-of-laws issue that will inform where debtor groups with a Hong Kong presence choose to promote a restructuring. Re Rare Earth relied on the rule in Gibbs to cast doubt on the ability of an offshore scheme of arrangement to compromise New York law-governed debt.
Long-Arm Reach of Gibbs
The rule in Gibbs is derived from a 19th century English case, which decided that, as a matter of English law, only the governing law of a contract may validly discharge or amend it. Therefore, absent the agreement of the creditor (by its submission to the jurisdiction in question or by otherwise participating in the foreign proceedings), only an English law process may validly amend or discharge English law-governed debts. This rule is likely to remain a feature of English law for the foreseeable future, given the UK government’s statements in its recent consultation on the proposed implementation of the UNCITRAL Model Law on the Recognition and Enforcement of Insolvency-Related Judgments.
Offshore Borrowers and Compromises of Foreign Law-Governed Debt
In Rare Earth, a Bermuda-incorporated borrower listed in Hong Kong and with operations in mainland China proposed a Hong Kong scheme of arrangement to compromise its largely Hong Kong law-governed debt. In sanctioning the scheme, the Hong Kong court was satisfied that the scheme’s effect would be recognised in Bermuda (the jurisdiction of incorporation) and the Cayman Islands (the jurisdiction of the scheme company’s ultimate parent).
As the Hong Kong scheme compromised Hong Kong law-governed debt, the relevance of the rule in Gibbs to the case was not readily apparent. However, in obiter comments, the judge considered the effect of an offshore scheme of arrangement (for example, one proposed in Bermuda or the Cayman Islands) on Hong Kong law-governed debt. The judge found that, unless a creditor had submitted to the offshore scheme jurisdiction, the creditor would not be prevented from suing for its debt in Hong Kong because, under Gibbs, Hong Kong law-governed debt could only be compromised by a Hong Kong law process. That statement was helpful insofar as it removed any lingering doubt that the Hong Kong court would apply the rule in Gibbs in determining the effect of a foreign law compromise on Hong Kong law-governed debt.
However, the judge extended his analysis still further to a hypothetical (but common) structure, under which an offshore-incorporated borrower with assets in Hong Kong has issued US dollar-denominated debt under an instrument governed by New York law. How would the Hong Kong court treat the New York law debt if the borrower successfully proposed a scheme of arrangement in the offshore jurisdiction and obtained recognition in the US under Chapter 15 of the Bankruptcy Code? The judge held that a Hong Kong court would not necessarily recognise the scheme as compromising the New York law debt. This was because the court considered that any relief granted under Chapter 15 would not in itself compromise New York law debt as a matter of US law, but would be limited to ancillary relief to prevent a creditor taking action against the company (or its assets) in the US. A creditor with New York law-governed debt would therefore be at liberty to seek recovery for its uncompromised claim in the Hong Kong court, and by extension petition to wind up the company in Hong Kong notwithstanding any Chapter 15 recognition that had been obtained.
The Extent of Chapter 15 Relief and the Intrusion of Gibbs
The decision was surprising. Chapter 15 has been commonly used as a way of recognising compromises of New York law-governed debt by a foreign court (whether by way of scheme of arrangement or otherwise), and it has become common practice to obtain expert New York law advice confirming their effectiveness as part of a scheme of arrangement. Other affected jurisdictions tend to follow the lead of the US Bankruptcy Court where matters of New York law-governed debt are concerned. The Hong Kong court’s approach appears to raise new uncertainty where, at least under the governing law of the debt (being New York law), no such uncertainty exists.
Indeed, the US Bankruptcy Court has subsequently held in a different case that a Cayman Islands scheme of arrangement, recognised as a main proceeding under Chapter 15, would constitute a substantive discharge of New York law-governed debt. It therefore remains to be seen whether, on similar facts, the Hong Kong court will continue to gainsay this outcome by insisting on the primacy of the rule in Gibbs, notwithstanding that the courts of the governing law of the debt consider it to be validly compromised.
However the position evolves judicially, the decision will likely prompt Hong Kong-domiciled debtors incorporated offshore with New York law-governed debt to consider carefully whether to propose a creditor compromise under the laws of that offshore jurisdiction.
 Re Rare Earth Magnesium Technology Group Holdings Ltd  HKCFI 1686; HCCW 81/2021.
 Antony Gibbs & Sons v. La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399 (English Court of Appeal).
 In re Modern Land (China) Co., Ltd., Case No. 22-10707 (MG) (Bankr. S.D.N.Y. July 18, 2022).