Can an insolvent HK company use a scheme of arrangement to restructure debts without liquidation, and what does the process involve?

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Yes, an insolvent company in Hong Kong can use a scheme of arrangement to restructure its debts without entering into liquidation. This process allows a company to propose a compromise or arrangement with its creditors, which, if approved, becomes legally binding and enables the business to continue operating, often with a new capital or ownership structure.

The Restructuring Process
A scheme of arrangement is a formal, court-supervised procedure under the Companies Ordinance (Cap. 622). The process generally involves three main stages.

Initial Court Application: The company first applies to the Hong Kong High Court for an order to convene meetings for its various classes of creditors. At this stage, the court will review the proposal to ensure it is for a permissible purpose.

Creditor Meetings and Voting: The company's creditors are organized into classes based on the similarity of their legal rights, allowing them to consult on their common interests. For the scheme to be approved, it must be passed in each class by a "dual majority": a majority in number (over 50%) of creditors present and voting, who must also represent at least 75% of the total debt value of that class.

Final Court Sanction: After the creditors approve the scheme, the company returns to court for a final hearing. The court scrutinizes the scheme for procedural compliance and overall fairness. If the court sanctions the scheme, it becomes legally binding on all creditors involved in the scheme, including those who voted against it.

Approvals and Key Roles
The approval of a scheme of arrangement is a multi-step process involving the company, its creditors, and the court.

The Company: The debtor company typically initiates the process by proposing the scheme to its creditors and members.

Creditors: Creditors hold the primary power of approval through the voting process at the scheme meetings. Without the required 75% majority in value and 50% in number in each class, the scheme cannot proceed to the final court stage.

The High Court: The court plays a crucial supervisory role. It must grant permission to convene the creditor meetings and give the final sanction that makes the scheme legally binding. The court’s approval is not automatic; it can refuse to sanction a scheme if it is deemed unfair or procedurally flawed.

Timeline and Legal Assistance
Timeline
The overall timeframe for a scheme of arrangement can vary significantly depending on the complexity of the company's debts and the number of creditor classes. However, a typical offer structured as a scheme generally takes between three to six months to complete from its announcement.

Legal Representation
It is essential to have legal representation to initiate and negotiate a scheme of arrangement. The process is legally complex, involving court applications, the proper classification of creditors, drafting the detailed scheme documentation, and negotiating with creditors. Legal and financial advisors are critical for navigating the Companies Ordinance, representing the company in court, and ensuring the scheme has the best chance of being approved by both creditors and the court.

An important consideration is that initiating a scheme of arrangement does not provide an automatic moratorium or "freeze" on creditor actions. A creditor could still try to sue the company or file a winding-up petition while the scheme is being prepared. To gain the protection of a moratorium, a company may sometimes need to apply for a provisional liquidation simultaneously.