RE LDK SOLAR CO., LTD (in provisional liquidation)

HCMP 2215/2014,
HCMP 2216/2014 &
HCMP 2218/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2215, 2216 & 2218 OF 2014

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REASONS FOR DECISION

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Introduction

1. On 18 November 2014 I sanctioned three schemes of arrangement pursuant to s. 673 of the Companies Ordinance (Cap. 622) (“the Ordinance”) and said that I would hand down my reasons on the question of jurisdiction.  These are my reasons.

2. The three schemes respectively relate to (i) LDK Silicon Holding Co., Limited (“LDK Silicon Holding”), a company incorporated in Hong Kong; (ii) LDK Solar Co., Ltd. (“LDK Solar”), a company incorporated in the Cayman Islands; and (iii) LDK Silicon & Chemical Technology Co., Ltd. (“LDK Silicon”), also a company incorporated in the Cayman Islands.

3. Two materially identical schemes were proposed in respect of LDK Solar and LDK Silicon respectively and sanctioned by the Grand Court of the Cayman Islands (“Grand Court”) on 7 November 2014.

4. I shall refer below to the schemes before this court simply as the schemes.  Where necessary I shall distinguish between the schemes in the two jurisdictions by referring to them as the “Hong Kong schemes” and the “Cayman schemes” respectively.

The companies

5. LDK Solar was incorporated in the Cayman Islands on 1 May 2006 as an exempted company limited by shares pursuant to the Companies Law (2004 Revision).  Its paid up capital is approximately US$20.1 million divided into ordinary shares of US$0.10 each.

6. LDK Silicon – a direct wholly-owned subsidiary of LDK Solar – was also incorporated in the Cayman Islands as an exempted company limited by shares pursuant to the Companies Law (2009 Revision) on 8 December 2009.  It was registered with the Hong Kong Registrar of Companies on 5 December 2011 under Part 11 of the previous Companies Ordinance (Cap. 32) as a non-Hong Kong company.  Its issued share capital consists of 1,060 million fully paid-up ordinary shares of US$0.10 each and 240 million fully paid-up redeemable convertible preferred shares of US$0.10 each.

7. LDK Silicon Holding, a company incorporated on 12 January 2010 in Hong Kong under the previous Companies Ordinance (Cap. 32), is a direct wholly-owned subsidiary of LDK Silicon.  It has an issued share capital of HK$4 billion divided into 4 billion shares.

The group

8. LDK Solar is the holding company of a group of companies the business of which is to manufacture and sell a variety of photovoltaic products used in the production of solar generated electrical power.  Specifically, the group produces polysilicon, mono- and multi-crystalline ingots, wafers, cells, modules, systems, power projects and solutions, which in turn facilitate the production of solar panels by the group for sale and by other down-stream businesses.

9. The group’s operations are structured into what have been called the onshore operations and the offshore operations respectively.  The onshore part consists of operations in various cities on the Mainland of the People’s Republic of China (“PRC”).  The offshore part comprises operations in Europe, North America and Hong Kong.

10. The group established its offshore presence in order to access the international capital markets to finance the group’s activities.  LDK Solar made an initial public offering of its shares, in the form of American depositary shares (“ADSs”), in June 2007 whereupon the ADSs were listed on the Stock Exchange of New York, USA.

11. Following the initial public offering the group has undertaken many financing transactions.  For present purposes two arrangements are significant.

(1)   Senior Notes.  In February 2011, LDK Solar issued RMB-denominated US$-settled Senior Notes with a maturity date of 28 February 2014, guaranteed by certain subsidiaries of LDK Solar which did not include LDK Silicon or LDK Silicon Holding.  The Senior Notes are governed by the laws of the State of New York.  As at the maturity date of 28 February 2014, the amount of RMB 1,794,760,000 comprising both principal and interest became due and payable by LDK Solar to the noteholders.

(2)   Preferred Obligations.  These are 240 million Series A Redeemable Convertible Preferred Shares of LDK Silicon issued in June 2011 for a total consideration of US$240 million.  The subscription agreement and shareholders agreement relating to these preferred shares are each governed by Hong Kong law with an arbitration clause for arbitration in Beijing under the prevailing CIETAC rules.  The parties that are subject to obligations under the arrangement (called “Preferred Obligors”) include the three scheme companies, among others.

The financial difficulties

12. The solar power industry encountered significant challenges in the years 2011 to 2013 primarily as a result of the reduction in the price of solar panels and the declining price of polysilicon, a key raw material used to manufacture polycrystalline panels.  As an example, the average selling price of polysilicon was US$90.55 per kg in the first quarter of 2011 and dropped to US$23.92 by the second quarter of 2012.

13. Since 2011, the group has been affected by over-capacity and reduced demand in the global photovoltaic market.  Since 2012, the group has suspended its polysilicon production as it became economically not viable.  Hydrochlorination systems were introduced to lower the cost of production of polysilicon but these were only recently installed with test-runs in September 2014.

14. In 2012, the holders of the preferred shares in LDK Silicon exercised their right under the Subscription Agreement by issuing redemption notices alleging certain breaches of the relevant terms and requiring LDK Solar and LDK Silicon, inter alia, to redeem or purchase the preferred shares.  LDK Silicon Holding also became liable as a Preferred Obligor.  On this basis, the preferred shareholders became creditors of all three scheme companies for, inter alia, the subscription amount of US$240 million.

15. On 28 August 2013, LDK Solar suspended payment of interest on the Senior Note and entered into a standstill agreement a month later with the majority holders of the Senior Note.  An ad hoc committee was formed and advisers were appointed to review the options.  Financial due diligence and extensive negotiations for restructuring the group commenced in September 2013 between the group’s advisers and the advisers of the ad hoc committee formed by some of the Senior Note holders.

16. On 21 February 2014, the New York Stock Exchange suspended the trading of the ADSs of LDK Solar.  De-listing procedures were commenced on 31 Mach 2014.

17. Before the Senior Note matured on 28 February 2014, to protect itself against enforcement action by any dissident minority Senior Note holder, LDK Solar presented a petition to the Grand Court for its own winding up and applied for the appointment of provisional liquidators.  On 27 February 2014, the Grand Court appointed two insolvency practitioners as joint provisional liquidators (“JPLs”) of LDK Solar.

18. The JPLs, who are officers of the Grand Court, thereupon continued the negotiations with the advisers of the ad hoc committee of the Senior Note holders and eventually reached an agreement in principle on the terms of a restructuring proposal towards the end of March.  The JPLs also reached agreement with four of the five creditors in respect of the Preferred Obligations. 

The Schemes

19. As stated above, concurrently with the three schemes before this court, two schemes were being promoted in the Cayman Islands.  All five schemes are linked and conditional upon, inter alia, each of the other schemes becoming effective in accordance with its terms.

20. In addition, since some of LDK Solar’s liabilities are governed by certain laws of the United States, the effectiveness of the Cayman scheme in respect of LDK Solar is conditional upon the granting of an order by the United States Bankruptcy Court for the District of Delaware for recognition of certain aspects of the compromise and arrangement set out in that scheme (unless the condition is waived by LDK Solar with the consent of certain parties). 

21. The schemes embody a restructuring proposal under which creditors affected are divided into three classes, broadly (i) the Senior Note holders (“the Senior Note Scheme Creditors”), (ii) the creditors in respect of the Preferred Obligations (“the Preferred Obligation Scheme Creditors”), and (iii) certain other creditors called “Ordinary Scheme Creditors”. Ordinary Scheme Creditors are holders of “Ordinary Claims”, which form a residual class comprising in broad terms all claims against LDK Solar other than claims under the Senior Note, claims relating to the Preferred Obligation, inter-company receivables within the group and specific excluded claims such as employees’ claims.

22. For present purposes it is unnecessary to go into the detailed provisions of the schemes.  Broadly speaking, the claims of the Scheme Creditors will be released and each such creditor may elect, in full and final satisfaction of his claim, a cash option or a non-cash option.  The non-cash option entitles the creditor to receive consideration in the form of shares (i.e. ADSs, at US$1.586 per ADS) issued by LDK Solar and bonds in the new series of 5.535% senior convertible bonds due 2018 issued by LDK Solar.  In the case of the Senior Note Scheme Creditors and Preferred Obligation Scheme Creditors, LDK Solar is not obliged to make funds available for the cash option and the evidence shows that it is unlikely that there will be sufficient funds for the cash option to be given effect.  In the case of Ordinary Scheme Creditors, however, LDK Solar is bound to pay the creditors who elect the cash option, subject to a specified maximum aggregate amount.  There is a long stop date of 31 December 2014 for the schemes to take effect.

23. On 23 September 2014, pursuant to s. 670 of the Ordinance, I ordered class meetings of scheme creditors to be held for the purposes of considering, and if thought fit, approving each of the Hong Kong schemes.  On 17 October 2014, five meetings were held as directed, namely, (i) a meeting of the Senior Note Scheme Creditors of LDK Solar; (ii) a meeting of the Preferred Obligation Scheme Creditors of LDK Solar; (iii) a meeting of the Ordinary Scheme Creditors of LDK Solar; (iv) a meeting of the Preferred Obligation Scheme Creditors of LDK Silicon; and (v) a meeting of the Preferred Obligation Scheme Creditors of LDK Silicon Holding.  The respective schemes were approved by 100% of the Ordinary Scheme Creditors who attended the relevant meeting, by 94 out of 97 Senior Note Scheme Creditors who attended, representing a majority in value of 99%, and by 4 out of 5 Preferred Obligation Scheme Creditors who attended, representing a majority in value of 79.2%.  The requirement in s. 674 of the Ordinance for approval by a majority in number representing at least 75% in value of the creditors present and voting in each scheme class meeting was therefore met.

24. In the meeting of the Preferred Obligation Scheme Creditors for each scheme company, Apollo Asia Investment Limited (“Apollo”) voted against the scheme.  Further, at the first hearing of the petition on 7 November 2014, Apollo appeared by leading counsel Ms Linda Chan SC to oppose the petition.  Following an adjournment of the hearing, however, Apollo came to an agreement with a third party and withdrew its opposition to the schemes.  It did not appear at the resumed hearing of the petition on 18 November 2014.

Jurisdiction

25. Given that LDK Solar and LDK Silicon are not companies incorporated in Hong Kong, one of the matters the scheme companies properly drew to the attention of the court at the outset and, indeed, one of the grounds of objection advanced by Apollo, is the question of the jurisdiction of the Hong Kong court to sanction schemes of arrangement in respect of foreign companies. Even though Apollo no longer opposed the schemes, I must of course satisfy myself that the court has jurisdiction to sanction them.

26. The Ordinance came into effect on 3 March 2014, replacing most of the provisions of the previous Companies Ordinance (Cap. 32).  Division 2 of Part 13 of the Ordinance sets out the provisions concerning, inter alia, arrangements and compromises entered into by a company with its creditors or members.  It largely restates the relevant provisions in the previous Companies Ordinance, including in particular ss. 166, 166A and 167.[1]

27. The power to sanction an arrangement or compromise between a company and its creditors or members or both is conferred by s. 673(2).  S. 673 provides:

“(1) This section applies if the creditors or the class of creditors, or the members or the class of members, or both, with whom the arrangement or compromise is proposed to be entered into, agree or agrees to the arrangement or compromise.

(2) The Court may, on application made for the purposes of this subsection, sanction the arrangement or compromise.

(3) Subject to subsection (4), an application for the purposes of subsection (2) may be made only by—

(a) in the case of an arrangement or compromise proposed to be entered into with the creditors of a company, the company or any of the creditors;

(b) in the case of an arrangement or compromise proposed to be entered into with a class of creditors of a company, the company or any creditor of that class;

(c) in the case of an arrangement or compromise proposed to be entered into with the members of a company, the company or any of the members; or

(d) in the case of an arrangement or compromise proposed to be entered into with a class of members of a company, the company or any member of that class.

(4) If the company is being wound up, an application for the purposes of subsection (2) may be made only by the liquidator or provisional liquidator.

(5) An arrangement or compromise sanctioned by the Court under subsection (2) is binding—

(a) on the company or, if the company is being wound up, on the liquidator or provisional liquidator and contributories of the company; and

(b) on the creditors or the class of creditors, or the members or the class of members, or both, with whom the arrangement or compromise is proposed to be entered into.

(6) An order made by the Court under subsection (2) has no effect until an office copy of the order is registered by the Registrar under Part 2.

(7) If the order of the Court amends the company’s articles, or any resolution or agreement to which section 622 applies, the office copy of that order delivered to the Registrar for registration for the purposes of subsection (6) must be accompanied by a copy of those articles, or the resolution or agreement, as amended.

(8)   If subsection (7) is contravened, the company, and every responsible person of the company, commit an offence, and each is liable to a fine at level 3.”

28. By s. 668(1), “company” means, except in s. 675 (which being concerned with reconstruction and amalgamation is irrelevant here):

“a company liable to be wound up under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32)”.

“Liable to be wound up”

29. LDK Silicon Holding as a company incorporated in Hong Kong can of course be wound up under s. 177 of that Ordinance.  Apollo however contended that neither of the other two scheme companies, being entities incorporated outside Hong Kong, is a “company” within the meaning of s. 668(1).  In summary, the submission was that those two companies are “unregistered companies” within the meaning of s. 326 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance and that there are insufficient connections with Hong Kong to satisfy the three so-called “core requirements” which, on the authorities, need to be met before the Hong Kong court would wind up an unregistered company.

30. There is no dispute that each of LDK Solar and LDK Silicon is an “unregistered company”.[2] The jurisdiction to wind up unregistered companies is derived from s. 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance.  That section provides:

“(1) Subject to the provisions of this Part, any unregistered company may be wound up under this Ordinance, and all the provisions of this Ordinance with respect to winding up shall apply to an unregistered company, with the exceptions and additions mentioned in this section.

(2) No unregistered company shall be wound up voluntarily under this Ordinance.

(3) The circumstances in which an unregistered company may be wound up are as follows-

(a) if the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs;

(b) if the company is unable to pay its debts;

(c)  if the court is of opinion that it is just and equitable that the company should be wound up.”

31. Although the statute speaks in terms of any unregistered company, it is well established that the court’s jurisdiction to wind up a foreign company will not be exercised unless three core requirements are satisfied, namely:

“(1) there must be a sufficient connection with Hong Kong, but this does not necessarily have to consist in the presence of assets within the jurisdiction;

(2) there must be a reasonable possibility that the winding-up order would benefit those applying for it; and

(3)   one or more persons interested in the distribution of the company’s assets must be persons over whom the court is able to exercise jurisdiction.”

See Re Yung Kee Holdings Ltd [2014] 2 HKLRD 313 (CA) at §38; [2012] 6 HKC 246 (Harris J) at §70.

32. There have been some discussions in the cases whether the three core requirements are conditions for the existence of the jurisdiction or conditions that go to the exercise of the jurisdiction.  The distinction is usually immaterial but in this case Apollo in effect submitted that an unregistered company is not “liable to be wound up” unless the core requirements are satisfied.

33. In Re Drax Holdings Ltd [2004] 1 BCLC 10, Lawrence Collins J (as Lord Collins of Mapesbury NPJ then was) considered the equivalent English provisions in the Companies Act 1985 and the Insolvency Act 1986.  He concluded that whether a company was “liable to be wound up” within the meaning s. 425 of the Companies Act 1985 so as to give rise to the court’s jurisdiction to sanction an arrangement and compromise depended on whether jurisdiction existed for the winding up of the company, and that in the case of an unregistered company, the three core requirements went to the discretion of the court, not to the existence of its jurisdiction to wind up an unregistered company under s. 221 of the Insolvency Act 1986.

34. I respectfully agree.  The phrase “liable to be wound up” seems to me to indicate the kind of company capable of and which can be put at risk of being wound up under the Companies (Winding Up and Miscellaneous Provisions) Ordinance.  The statute sets out the limits by providing in s. 327 that it is only an “unregistered company” that can be wound up under that part of the statute, and by stating in s. 326 what kind of entities qualify as an “unregistered company” in that context.

35. I also think that the three core requirements go to the exercise of the power of the court under s. 327 rather than the existence of the jurisdiction.  The same view has been taken by Harris J in Re China Medical Technologies Inc [2014] 2 HKLRD 997, although the distinction was not crucial to his decision in that case.  While it has sometimes been loosely said that these are “jurisdictional” conditions (see the authorities cited in Re China Medical Technologies Inc at §26), such statements can be readily understood once it is appreciated that the word “jurisdiction” is often used in two different senses, as explained by Lord Scott NPJ in the Court of Final Appeal in Re Chime Corporation Limited (2004) 7 HKCFAR 546 at §§40-41, where his Lordship said:

“40.  The fact, however, that the terms of a statute create or confer a jurisdiction in very wide terms does not necessarily mean that the courts have an unlimited jurisdiction to make any orders that are within the wide statutory terms.  This point was made by Pickford LJ in Guaranty Trust Company of New York v Hannay [1915] 2 KB 536.  The point arose out of an issue as to whether the court had jurisdiction to grant an injunction to restrain the institution or continuance of proceedings in a foreign court (see p.556).  At p.563 Pickford LJ said this

‘The word ‘jurisdiction’ and the expression ‘the Court has no jurisdiction’ are used in two different senses which I think often leads to confusion. The first and, in my opinion, the only really correct sense of the expression that the Court has no jurisdiction is that it has no power to deal with and decide the dispute as to the subject-matter before it, no matter in what form or by whom it is raised. But there is another sense in which it is often used, i.e., that although the Court has power to decide the question it will not according to its settled practice do so except in a certain way and under certain circumstances.’

The same point was made by Diplock LJ in Garthwaite v. Garthwaite [1964] P 356.  He referred at p.387 to the distinction drawn by Pickford LJ.  He said:

‘In its narrow and strict sense, the ‘jurisdiction’ of a validly constituted court connotes the limits which are imposed upon its power to hear and determine issues between persons seeking to avail themselves of its process by reference (1) to the subject-matter of the issue or (2) to the persons between whom the issue is joined or (3) to the kind of relief sought, or to any combination of these factors.  In its wider sense it embraces also the settled practice of the court as to the way in which it will exercise its power to hear and determine issues which fall within its ‘jurisdiction’ (in the strict sense) or as to the circumstances in which it will grant a particular kind of relief which it has ‘jurisdiction’ (in the strict sense) to grant, including its settled practice to refuse to exercise such powers, or to grant such relief in particular circumstances.’ ”

See also Re Chime Corporation Limited at §9 per Bokhary PJ; and The Joint and Several Liquidators of Kong Wah Holdings Limited (in compulsory liquidation) v The Grande Holdings Ltd (2006) 9 HKCFAR 766 at §4 per Lord Millett.

36. On this basis it seems to me that s. 327 confers on the court a wide and unfettered jurisdiction (in the strict sense) to wind up any unregistered company in the circumstances mentioned in s. 327(3), but that there has been a settled practice of the courts as regards the way in which they will exercise the power under s. 327 to wind up a foreign company.

The grounds in s. 327(3)

37. A separate point, not taken by Apollo but raised by Mr Smith SC, is whether the grounds for winding up specified in s. 327(3) go to the existence of the jurisdiction to wind up.  In other words, must it be proved that one of the grounds in s. 327(3) exists in order to show that the foreign company in question is “liable to be wound up” and therefore capable of being the subject matter of an application for sanction of an arrangement and compromise?

38. Both Re Drax Holdings Ltd at §§26-27 and Re Sovereign Marine & General Insurance Co Ltd [2006] BCC 774 support the view that it is not necessary to show that any of the conditions of s. 327(3) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance is in fact fulfilled for an unregistered company to be liable to be wound up.  The opposite view has been expressed in Johnston, The Conflict of Laws in Hong Kong (2^nd ed), §§8.052 & 8.053.  While I am inclined to the former view, it is unnecessary for me to decide this question, since it is clear on the evidence that both LDK Solar and LDK Silicon are insolvent and unable to pay their debts with the result that s. 327(3)(b) is indisputably satisfied. 

The connection necessary for s. 673

39. Like the jurisdiction to wind up a foreign company which has been said to be an exorbitant power, the jurisdiction of the Hong Kong court to sanction a scheme of arrangement in relation to a foreign company ought also to be exercised only where there is sufficient justification for the Hong Kong court to do so. 

40. Ms Chan SC submitted on behalf of Apollo that since a scheme is often a substitute for liquidation in the case of a company said to be insolvent, it would be strange if the Hong Kong court should exercise its discretion to sanction a scheme in a case where it should not order a winding up.  She submitted therefore that all three core requirements applicable in winding up cases are applicable in the present context.

41. With respect, this is a non sequitur.  The jurisdiction invoked in an application such as the present is not the power to wind up a company, but the power to sanction a scheme.  As I have explained above, the three core requirements go to the exercise of the discretion of the court in winding up under s. 327 rather than the existence of the jurisdiction.  I see no reason why the exercise of the discretionary power of sanctioning a scheme should be governed by exactly the same requirements regulating the exercise of the power of winding up.

42. Further, if a compromise is not sanctioned and the company in question has to be wound up, it does not necessarily have to be wound up in Hong Kong.  In fact, in this case the Hong Kong schemes are part and parcel of a wider restructuring mechanism occurring in several jurisdictions including Hong Kong.  It appears that LDK Solar, which is already in provisional liquidation as ordered by the Grand Court, and LDK Silicon, both Cayman Islands companies, would be put into liquidation there if the restructuring falls through.

43. I therefore respectfully agree with Lawrence Collins J when he said in Re Drax at §25 that the second and third core requirements in winding up cases “may not be relevant because they were formulated in the context of winding up” and “do not have to be fulfilled in the case of a scheme of arrangement”.

44. In my view, the justification for exercising the power to sanction a scheme of arrangement in relation to a foreign company is to be found in the connection that the scheme has with Hong Kong.  The Hong Kong court should not exercise that jurisdiction unless a sufficient connection with Hong Kong is shown.  In seeking a sufficient connection, the purpose is to ensure that the court does not exercise a prima facie exorbitant jurisdiction save where it is appropriate to do so: Re Yung Kee Holdings Ltd [2014] 2 HKLRD 313 at §42.

45. It is necessary to focus on the jurisdiction invoked in the particular case in determining what should be sufficient for the exercise of that particular jurisdiction with respect to a foreign company.  As Knox J said Re Real Estate Development Co [1991] BCLC 210, 217, the case in which the three core requirements were first formulated as such:

“The proposition that there has to be a sufficient connection with this jurisdiction prompts the question, sufficient for what? The perhaps rather circular answer I would give to that question is, sufficient to justify the court setting in motion its winding-up procedures over a body which prima facie is beyond the limits of territoriality. …”

46. As the Court of Appeal pointed out in Re Yung Kee Holdings Ltd at §42 in the context of winding-up, no single criterion, nor any prescribed combination of criteria, is to be considered an essential precondition for meeting the requirement of sufficient connection.  Rather, it is a matter of judgment to be made in the light of the evidence presented to the court in a particular case and, I might add here, in the light of the object and purpose of the jurisdiction invoked.

47. In the present context, the need for sufficient connection is not met by an unprincipled and abstract exercise in simply loading up every matter about the company or the scheme that has some relation to Hong Kong.  Rather, as David Richards J explained in Re Magyar Telecom BV [2013] EWHC 3800 (Ch) at §21, a principal concern of the court should be whether there are connecting factors with the jurisdiction so that the scheme, if approved, will have a substantial effect.  David Richards J illustrated this in §22:

“Likewise, the presence in England of substantial assets belonging to a company proposing a scheme with its creditors could in an appropriate case provide the requisite connection, because the scheme if sanctioned would have the practical effect of preventing execution by the relevant creditors against those assets, save in accordance with the terms of the scheme.  The presence of a sufficient number of creditors in England subject to the personal jurisdiction of the court might also supply the necessary connection, as those creditors would be bound to act in accordance with the scheme, both within and outside the jurisdiction.  The importance of the connection provided in cases where the rights of creditors are governed by English law lies in the effect which foreign courts may be expected to give to an alteration of those rights in accordance with English law.”

48. The primary function of obtaining the court’s sanction for a creditors’ scheme is to create an arrangement for the creditors affected which does not necessarily accord with their existing contractual or other legal rights against the company but which nevertheless is binding upon all creditors concerned despite dissent.  The company’s debts are frequently discharged in return for new rights under a scheme. 

49. As a matter of Hong Kong law, however, a foreign composition does not discharge a debt unless it is discharged under the law governing the debt: Hong Kong Institute of Education v Aoki Corporation [2004] 2 HKLRD 760; Anthony Gibbs & Sons v Societe Industrielle et Commerciale des Metaux (1890) LR 25 QBD 399. 

50. In the Aoki Corporation case, Aoki, a Japanese corporation, completed rehabilitation proceedings under the Civil Rehabilitation Law of Japan in September 2002.  The Hong Kong Institute of Education,however, commenced a claim in arbitration against Aoki for breach of contract, which was governed by Hong Kong law, which resulted in an award after the rehabilitation.  On the Institute’s application for leave to enforce the award, Reyes J, after considering the authorities and academic commentaries, held (as summarised in the headnote) that a discharge from any debt or liability under the bankruptcy law of a foreign country was a discharge therefrom in Hong Kong, if and only if, it was a discharge under the law applicable to the contract.  Adopting a two-stage approach, Reyes J allowed judgment to be entered in favour of the Institute against Aoki in terms of the award, but deferred the question of enforcement if and when the Institute applied for enforcement.  He stated (at §159), however, that if he had had to determine the matter in a single stage, he would have allowed enforcement of the award against Aoki notwithstanding the Japanese rehabilitation proceedings.

51. Likewise, it is stated in Dicey, Morris & Collins, The Conflict of Laws (15^th ed), vol. 2, at §31-96:

“On principle, it would seem that a foreign composition with creditors, like a discharge in a foreign bankruptcy, is not regarded as effective in England unless it operates as a discharge according to the law applicable to the contract.”

52. This underlies the importance in particular cases for there to be a scheme in the jurisdiction whose law governs the debts in question.  Thus, in Re Drax Holdings Ltd, while there were a large number of factors connecting the scheme companies with England (see §§32-33), Lawrence Collins J singled out one particular aspect (at §30):

“In the case of a creditors’ scheme, an important aspect of the international effectiveness of a scheme involving the alteration of contractual rights may be that it should be made, not only by the court in the country of incorporation, but also (as here) by the courts of the country whose law governs the contractual obligations. Otherwise dissentient creditors may disregard the scheme and enforce their claims against assets (including security for the debt) in countries outside the country of incorporation.”

53. In Re Rodenstock GmbH [2012] BCC 459, where the scheme concerned a German company with its centre of main interest in Germany having no establishment or asset in the UK, it was held that the choice of English law as the governing law of the debt and, for the benefit of the lenders, exclusive English jurisdiction, constituted on their own a sufficient connection for the purposes of the court’s jurisdiction to sanction a scheme.  Briggs J placed emphasis on the fact that the creditors had collectively chosen the governing law by a single agreement, governing what was in substance a single facility or set of facilities to which they had all contributed.

54. Similarly, in Re PrimaCom Holding GmbH [2013] BCC 201 at §§63-64, which concerned a scheme for a German company with no assets in England, Hildyard J considered that on the question of links or connection with the English jurisdiction, “the point which is of centrality for these purposes is the fact that all the creditors concerned in this case are creditors whose debts are governed by English law” and that “the fact that English law is the governing law for all creditor arrangements does provide a sufficient connection to the jurisdiction to warrant the exercise by the English court of the jurisdiction which … it has under section 895 [of the Companies Act 2006].”

55. In Re Apcoa Parking Holdings GmbH [2014] 2 BCLC 285 at §19, Hildyard J summarised the effect of recent English decisions in these terms:

“… as time has moved on, the court has been prepared to accept the choice of English law and the English forum as capable of constituting sufficient connections with this jurisdiction even without the comfort of the majority of creditors being present here, provided that it is also persuaded that the countries in the jurisdictions where the creditors would otherwise have been likely to seek enforcement would recognise the effectiveness of the English court order.  That is illustrated in Re Primacom Holdings [2011] EWHC 3746 (Ch) and [2012] EWHC 164 (Ch), Re NEF Telecom B.V. [2012] EWHC 2944 (Ch), Re Vietnam Shipbuilding Industry Groups [2013] EWHC 2476 (Ch) and Re Magyar Telecom B.V. [2013] EWHC 3800 (Ch).”

56. In the present case, the claims of the Preferred Obligation Scheme Creditors (including Apollo) against all three scheme companies, which arise from the same and single issue of preferred shares in LDK Silicon, are all governed by Hong Kong law.  Further, the claims of the Ordinary Scheme Creditors against LDK Solar are governed by various laws including in some cases Hong Kong law.  Indeed, one of the Ordinary Scheme Creditors, who was formerly the holder of certain convertible notes issued by LDK Solar, has obtained summary judgment in an action in Hong Kong against LDK Solar.  Execution of that judgment has been stayed pending the outcome of the restructuring exercise.

57. Although neither LDK Solar nor LDK Silicon is incorporated in Hong Kong, they require the Hong Kong schemes in order to obtain a certain and effective release of these claims.  If the restructuring is not sanctioned as a scheme in Hong Kong, there is a risk, as exemplified by the Aoki case, that the relevant creditors may be able to enforce the debts owed to them, or perhaps petition in Hong Kong for the winding up of at least LDK Silicon Holding, on the footing that their debts have not been discharged by any scheme recognised as having that effect in Hong Kong.

58. Conversely, nothing has been raised to suggest that the Hong Kong schemes, if sanctioned, would not be regarded in any other jurisdiction as effective in discharging those of the scheme companies’ liabilities that are governed by Hong Kong law.

59. Further, the evidence shows that, apart from the governing law of debts, there are other connecting factors with Hong Kong. Thus, two of the five Preferred Obligation Scheme Creditors, who account for US$165 million of the subscription amount, are incorporated in Hong Kong.

60. LDK Silicon is registered in this jurisdiction as a non-Hong Kong company.  It holds shares in LDK Silicon Holding, a Hong Kong company, as well as bank accounts in Hong Kong which were used to deposit the proceeds of capital raised from the Preferred Obligation Scheme Creditors and to distribute preferred dividends, albeit no significant sums are now held in those accounts.

61. As regards LDK Solar, it holds directly all the shares of two Hong Kong subsidiaries.  LDK Solar has maintained bank accounts in Hong Kong which were used to receive the proceeds of various fund- raising exercises albeit they now contain no significant sums.  One of the current directors of LDK Solar, Mr Maurice Ngai, is resident in Hong Kong.  In terms of its dealings with shareholders, despite being listed in New York and incorporated in the Cayman Islands, LDK Solar had actually held its annual general meetings in Hong Kong since 2009.

62. Moreover, as I have mentioned earlier, the Hong Kong schemes form part of a larger cross-border restructuring that includes the Cayman schemes and an application to the United States Bankruptcy Court for recognition of certain aspects of the Cayman scheme in respect of LDK Solar. The Hong Kong schemes and the Cayman schemes are materially identical and inter-conditional in the sense that each takes effect only if the others are sanctioned and become effective.  As such they constitute a unitary restructuring exercise.  It seems to me that, in these circumstances, in sanctioning the Hong Kong schemes, comity would be fostered and not thwarted.  A similar consideration was found to be of considerable importance in Re Drax Holdings Ltd, where Lawrence Collins J said at §34:

“Of fundamental significance in the present case is the fact that simultaneous orders would be made (if the schemes are sanctioned) in the courts of the place of incorporation, Cayman Islands and Jersey. The English Schemes will make those Schemes effective by binding the creditors who are subject to the English jurisdiction. I was also informed (although I was not given details) that Drax Holdings will, for a similar purpose, apply for injunctions under the United States Bankruptcy Law (11 USC section 304) granting relief, in aid of the schemes of arrangement in England, the Cayman Islands and Jersey, with the object of preventing United States creditors from taking action to frustrate the schemes.”

63. In my view, the connections that I have mentioned above, including in particular that the claims of the Preferred Obligation Scheme Creditors and some of the Ordinary Scheme Creditors are governed by Hong Kong law, that two of the Preferred Obligation Scheme Creditors are domiciled in Hong Kong, that LDK Silicon is registered here as a non-Hong Kong company and that the Hong Kong schemes as part of a multi-jurisdictional restructuring exercise are being promoted in parallel with schemes for LDK Solar and LDK Silicon in their place of incorporation i.e. Cayman Islands, are sufficient to justify the exercise of the jurisdiction of this court to sanction the Hong Kong schemes provided it is (as I was satisfied it was) otherwise appropriate to do so.