Under the long-standing English principle known as the Gibbs Rule, a debt governed by a particular body of law cannot be compromised by a foreign insolvency proceeding unless the relevant creditor submits to the jurisdiction of the foreign Court.

In China Lumena, the company’s debt was governed by Hong Kong and PRC law. A parallel scheme was sanctioned in Hong Kong but no restructuring steps were taken in the PRC. There was one creditor with a PRC law governed debt which represented approximately 42 per cent of the company’s total indebtedness and that creditor did not vote at the meeting convened to approve the restructuring nor did it appear at the subsequent sanction hearing.

Consistent with the pragmatic approach taken by the English Courts, Justice Kawaley held that the scheme should be sanctioned despite the operation of the Gibbs Rule. In exercising the jurisdiction of the Grand Court to sanction a scheme, Justice Kawaley adopted the guiding principle that it was sufficient for the scheme to be substantially effective – it was not necessary for the scheme to have worldwide effectiveness. Further, certainty as to the position under foreign law was not a necessity but there should be some credible evidence to the effect that the court would not be acting in vain. In the present case, the PRC creditor had indicated its support for the scheme in writing even though it did not participate in the scheme process and the size of its claim was modest.

The acceptance of the “substantial effect” test is a welcome addition to Cayman Islands jurisprudence. It does however remain to be seen whether the Gibbs Rule, when argued fully before the Grand Court, will survive the global trend towards modified universalism and international cooperation.

Harneys acted for the Company and its liquidators.