15 April 2021
The recent Court of First Instance decision in Li Yiqing v Lamtex Holdings Limited [2021] HKCFI 622 (11 March 2021) is a landmark decision in cross-border insolvency law in Hong Kong, in which the Court held that when it is considering the recognition of foreign insolvency proceedings, regard should not simply be had to the place of incorporation of the relevant company, but that in a departure from previous practice, the location of the company’s centre of main interest (COMI) is also a factor. This decision is likely to have a significant impact on future recognition applications.
Background Facts
Lamtex Holdings Limited (Company) is incorporated in Bermuda and listed on the Main Board of the Stock Exchange of Hong Kong Limited. Before the Company encountered problems that caused it financial difficulties which rendered it insolvent, the Company carried on a series of businesses in the Mainland and Hong Kong, namely loan financing and securities brokerage, trading and manufacturing electronic businesses (in the Mainland) and hotel operations (in the Mainland).
In August 2020, the Petitioner issued a winding-up petition (Petition) against the Company. Subsequently, the Company presented a petition in Bermuda, seeking a winding-up order and an order appointing provisional liquidators for restructuring purposes. The Company also issued an application for appointment of soft-touch provisional liquidators (JPLs). The Bermudan Court granted the application and issued a letter of request seeking the recognition and assistance of the JPLs by the High Court of Hong Kong. The Hong Kong Court granted the application by the JPLs for their recognition and assistance in progressing a restructuring of the Company’s debt. The issue before the Hong Kong Court was whether to put the Company into immediate liquidation in Hong Kong or to adjourn the Petition to allow the Company and the JPLs the opportunity to restructure the debt.
Traditional approach – Recognition of foreign insolvency proceedings limited to a company’s place of incorporation
Recognition and assistance of foreign insolvency proceedings is a matter of common law in Hong Kong. Hong Kong Courts have previously followed the English law approach, which is that recognition and assistance should be limited to liquidators appointed in a company’s place of incorporation. This approach recognizes that generally matters concerning the constitution and management of the affairs of a foreign company are determined by the laws of the place of its incorporation and the domiciliary law of a company is the appropriate law and system under which to liquidate a company. The place of incorporation should generally be the system of distribution of assets of the company and a winding-up of the company’s assets in Hong Kong is ancillary to it.
Change of approach – Recognition of foreign insolvency proceedings in a company’s COMI
However, not all jurisdictions adopt the approach to recognition of foreign insolvency proceedings described above: for example, the Court noted that in the Singapore High Court decision of Re Opti-Medix Limited [2016] SGHC 108, it was held that:
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The traditional approach of limiting recognition to liquidators appointed in the place of incorporation did not sit well with the common commercial practice in jurisdictions like Hong Kong and Singapore of using companies incorporated in jurisdictions other than their COMI; and
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The common law in Singapore did permit recognition of insolvency proceedings in a company’s COMI if it is different from the place of its incorporation.
Problem identified – inconsistency between the Hong Kong position and the commercial practice in Hong Kong and the Mainland
The Court observed from the increasing number of applications in Hong Kong for recognition and assistance of foreign insolvency proceedings that it is common for business people in Hong Kong to use offshore companies despite the owners of such companies and the businesses they operate having no connection with the offshore jurisdiction. It has become a common feature of the corporate structure of Hong Kong and Mainland business groups that their holding companies are incorporated in an offshore jurisdiction with whom they have no connection other than registration – such jurisdictions are often described as “letterbox” jurisdictions. The COMI of such companies is likely to be in Hong Kong or the Mainland. The Court was thus of the view that the old, restricted view of recognition did not serve Hong Kong well. It was unrealistic to expect the Court not to have regard to the fact that the Company and others like it carry on business in the PRC which is also the location of a high proportion of their shareholders, creditors and assets.
How a dispute over which jurisdiction is to be the primary one to conduct an insolvency process is to be resolved
In view of the above, the Court considered that it was desirable and essential that Hong Kong Courts are able to deal with recognition and assistance using methods that are consistent with commercial practice in Hong Kong and the Mainland. The Court further noted that there was nothing in principle preventing recognition of liquidators appointed in a company’s COMI or a jurisdiction with which it has sufficiently strong connection to justify recognition. The Court considered that it was appropriate to extend the common law of Hong Kong to permit recognition of insolvencies in places other than a company’s place of incorporation, and in particular to the jurisdiction in which the company’s COMI or something similar is to be found.
In determining which jurisdiction was to be the primary one to conduct an insolvency process, the Court suggested that the correct approach was as follows:
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Generally, the place of incorporation should be the jurisdiction in which the company should be liquidated; in practice this means it will be the system for distribution to creditors;
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However, if the company’s centre of main interest (COMI) is elsewhere, regard is to be had to other factors:
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a. |
Is the company a holding company and, if so, does the group structure require the place of incorporation to be the primary jurisdiction in order effectively to liquidate or restructure the group; |
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The extent to which giving primacy to the place of incorporation is artificial, having regard to the strength of the COMI’s connection with its location; and |
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The creditors’ views. |
Ultimately, this means that the insolvency process which should be given primacy will depend on the circumstances of the case and will involve giving appropriate weight to the location of a company’s COMI. Acknowledging that the place of incorporation is not necessarily determinative is more consistent with both commercial practice and the common factual matrix, which commonly connect a company far more closely with Hong Kong than an offshore jurisdiction. The creditor’s views were also a major consideration.
In the present case, the Court held that the Company had not demonstrated a good reason to adjourn the Petition for the following reasons:
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It was undisputed that the Company’s COMI had been located in Hong Kong at all material times. The Company clearly had a close connection with Hong Kong and the Mainland;
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The information about the restructuring was scanty in the extreme. There was no evidence to suggest that the Company had a credible plan to restructure its debt. It looked considerably more likely that the application in Bermuda for appointment of the JPLs was an attempt to engineer a de facto moratorium, which could not be obtained under Hong Kong law, with a view to then searching for a solution to the Company’s financial problems; and
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The creditors of the Company were sceptical of the prospects of the Company’s unimpressive attempts at restructuring being successful. There was no good reason for the Court not to defer to their views in the present case.
The Court therefore made the normal winding-up order and adjourned the JPLs’ application for recognition and assistance to allow the JPLs to consider how it should be dealt with in light of the Court’s decision.
The Court added that going forward, it is anticipated that 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 after a winding-up petition has been presented in Hong Kong on papers.
Comments
There is sometimes a tension in recognition applications between the desire to assist foreign insolvency office holders and foreign courts in achieving an orderly winding up of a foreign company and to avoid a multiplicity of proceedings, and the desire of local creditors to have the winding up of a foreign company with a significant presence in Hong Kong to take place under Hong Kong law. It is submitted that this decision shifts the balancing exercise in favour of local creditors: we anticipate that the Hong Kong Courts will more readily give weight to the place in which a company’s COMI is located in determining which insolvency regime should be given primacy.
In cases involving Hong Kong listed companies whose place of incorporation and COMI are located in different jurisdictions, we expect the Hong Kong Courts to be less receptive to the widespread practice of appointing JPLs in the place of incorporation of the subject company and thereafter the JPLs seeking recognition and assistance in Hong Kong with a view to staying winding up petitions presented by creditors in the Hong Kong Courts and buying time to seek solutions to the company’s financial difficulties: the restructuring proposals presented with such an application will have to be credible and supported by detailed information, and the views of local creditors on such proposals will be of heightened importance.
Whilst the closer scrutiny of where a company’s economic interests lie is perhaps welcome, the downside is that this approach will make each case heavily fact dependant and there will be less certainty in relation to the likely outcome of cases of this nature.
For further information, please contact:
Richard Hudson, Partner, Deacons
richard.hudson@deacons.com.hk
