23 March 2021
A recent pair of decisions of the Hong Kong Companies Court (the “Court”) has immense potential significance for debtor companies listed on the Stock Exchange of Hong Kong (“HKEx”) and their Hong Kong creditors.
Facts
Re Lamtex Holdings Ltd [2021] HKCFI 622 and Re Ping An Securities Group (Holdings) Ltd [2021] HKCFI 651 both involved a familiar factual scenario:
-
the debtors were incorporated in Bermuda and listed on HKEx
-
the debtors’ business and operations were in Mainland China and/or Hong Kong. In other words, their centres of main interest (“COMIs”) were not in Bermuda;
-
the debtors were insolvent. Winding up petitions were presented in Hong Kong;
-
after the presentation of the winding up petitions in Hong Kong, the debtors entered soft-touch provisional liquidations for restructuring purposes (explained in our earlier post) in Bermuda;
-
the provisional liquidators (appointed by the Bermudan court) applied to the Hong Kong Court for recognition and assistance;
-
the debtor companies applied to the Hong Kong Court to adjourn the winding up petitions pending the intended restructurings.
In both cases, the Court granted the provisional liquidators a recognition and assistance order. Two questions then arose:
-
should the Court adjourn the Hong Kong winding up petition?
-
more importantly, how does an offshore soft-touch provisional liquidation factor into this?
Adjournment of winding up petition pending restructuring
The guiding principles in an application for an adjournment to permit a company to progress a restructuring are summarised in our recent post. The Court applied these principles in both cases.
In Lamtex, the Court wound up the debtor as there was scant evidence on the proposed restructuring. In particular, the creditors (including the petitioner) were sceptical of the prospects of it. The Court found no reason not to defer to their views on this, which was essentially a matter of commercial judgment.
In Ping An, the Court adjourned the petition for two months, as the evidence showed that the restructuring might bear fruit by then.
A more pragmatic approach to common law recognition
In both cases, the Court considered the relevance of an offshore soft-touch provisional liquidation. In doing so, it made some important statements of principle on recognition of foreign insolvency proceedings in general.
The Court had traditionally followed English common law on recognition, i.e. the foreign proceedings to be recognised must have been commenced in the company’s jurisdiction of incorporation (see our earlier post on this). This is grounded on first principles: the place of incorporation is the jurisdiction in which a company should be liquidated.
However, the English approach does not serve Hong Kong well – as the Court observed in Lamtex. This is because many recognition applications before the Court have involved companies incorporated in offshore “letterbox” jurisdictions (commonly in the Caribbean) which are not their COMIs. Recognition of and assistance to insolvency officeholders appointed in these letterbox jurisdictions may not be justified in every case.
Instead, the Court favoured the Singapore court’s approach (see our earlier post on this), which is to look at the debtor’s COMI. This made more sense in light of the typical corporate structure of a HKEx-listed company. The Court suggested that foreign insolvency proceedings commenced in a debtor’s COMI (if different from its jurisdiction of incorporation) could also be recognised.
Offshore soft-touch provision liquidation
The Court observed that there has been a trend for debtors to rely on an offshore soft-touch provisional liquidation to oppose a Hong Kong winding up petition (Lamtex was squarely such a case). The Court found this tactic “questionable”.
Going forward, the Court will scrutinise these cases with more care:
-
Unless the agreement of a petitioner and supporting creditors have been obtained in advance, the Court will not deal with recognition and assistance applications made by soft-touch provisional liquidators on the papers after a winding up petition has been presented in Hong Kong.
-
In seeking to adjourn an existing winding up petition, a debtor whose COMI is in Hong Kong must satisfy the criteria by reference to which the Court assesses applications on similar grounds by companies incorporated in Hong Kong. The fact that the debtor may have subsequently entered soft-touch provisional liquidation in its jurisdiction of incorporation will not assist it. In fact, if the debtor fails to satisfy the criteria for adjourning the winding up petition, the Court will not recognise its offshore soft-touch provisional liquidation.
Insight
The decisions in Lamtex and Ping An appear to be a logical extension to the decision in Re FDG Electric Vehicles Ltd [2020] HKCFI 293 in November 2020 (see our blog post). In FDG, the Court held that a stay of proceedings in Hong Kong does not necessarily automatically follow from a recognition of an offshore soft-touch provisional liquidation. Taken together, they suggest that:
-
The Court will not automatically accord primacy to soft-touch provisional liquidations opened in a debtor’s place of incorporation. Instead, the Court will also look at where the debtor’s COMI lies.
-
Offshore debtors whose COMIs are not in their jurisdictions of incorporation will find it more difficult to use offshore insolvency/restructuring processes as a means to stall creditor actions in Hong Kong. The Court will subject these to a much higher level of scrutiny.
-
The Hong Kong Court will likely look at a debtor’s COMI in determining whether to recognise foreign insolvency proceedings.
Point 3 will bring Hong Kong law more in line with the Model Law on Cross-Border Insolvency (to which Hong Kong is not currently a party). How frequently the widened regime will be invoked remains to be seen. Almost all recognition requests before the Court in the past year have been made by Mainland Chinese business groups listed on the HKEx. These groups will likely have their COMIs either in Hong Kong or Mainland China. The former is not relevant in the context of a recognition request in Hong Kong; as regards the latter, at the moment it is unclear what collective insolvency processes in relation to a foreign company are available under PRC law.
That said, a widened common law recognition regime in Hong Kong could provide a useful basis for future developments in the law and open up new possibilities (e.g. in a cross-border restructuring of a multinational group with creditors in Hong Kong).
The Hong Kong courts have once again shown an acute awareness of local commercial reality as they continue to innovate and develop Hong Kong’s common law on cross-border insolvency in the absence both of purpose-built legislation and membership of applicable international conventions.
For further information, please contact:
Gareth Thomas, Partner, Herbert Smith Freehills
gareth.thomas@hsf.com
