Hong Kong - Recent Developments In Cross-Border Insolvency Law.

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Hong Kong - Recent Developments In Cross-Border Insolvency Law.

 

13 January 2021

 

Asia Pacific Legal Updates
 

Two recent decisions of the Honourable Mr Justice Harris are helpful additions to the growing amount of case law in this jurisdiction dealing with cross-border insolvency issues and are worthy of examination.
 

Hong Kong Companies Court appoints provisional liquidators for the purpose of seeking recognition in Mainland for the first time
 

Having granted an order recognising corporate insolvency proceedings from Mainland China for the first time in Joint and Several Liquidators of CEFC Shanghai International Group Limited [2020] HKCFI 167, Harris J’s decision Re Ando Credit Limited [2020] HKCFI 2775 in October 2020 considered the opposite situation. Whilst the basic principles relating to recognising foreign insolvency proceedings are now well settled in Hong Kong, Re Ando Credit Limited was the first application before the Hong Kong Companies Court where the appointment of provisional liquidators was sought for the purpose of seeking recognition in the Mainland.
 

Ando Credit Limited is a company incorporated in Hong Kong with substantial receivables located on the Mainland. In making his order, the Judge did not go into the nature of the underlying debt owed by the company or the background to the application, but noted that there has not yet been a case in which a Mainland court has granted formal recognition of a foreign liquidator. However, the Judge also commented that it is anticipated that a protocol will be entered into between Hong Kong and the Supreme People’s Court which will provide for such mutual recognition in the near future. Annexed to the judgment was an article written by three judges in the Shenzhen Bankruptcy Court which discussed three cases in which the Hong Kong Courts had recognised and assisted Mainland insolvency proceedings (the GuangxinHuaxin and Nianfu cases) and, talked about Mainland Courts recognising Hong Kong insolvency proceedings in the future, and stated that such recognition should be possible. The making of this order is a welcome development, as it will hopefully assist Hong Kong office holders with the sometimes difficult and complex exercise of recovering assets in the Mainland, although it of course remains to be seen whether the Mainland courts will actually be prepared to grant formal recognition and give assistance generally.
 

Power of foreign provisional liquidators and staying proceedings in Hong Kong in aid of foreign liquidations
 

Over recent years, the Hong Kong Companies Court has made a number of orders giving recognition and assistance to liquidators of companies incorporated in overseas jurisdictions to allow them to perform various tasks in Hong Kong or to take control of assets situated here. The recent case of Re FDG Electric Vehicles Limited [2020] HKCFI 2931 saw consideration of limits to the Court’s jurisdiction in this area.
 

FDG Electric Vehicles Limited, a Bermuda-incorporated company, was placed in provisional liquidation in Bermuda. The provisional liquidators (PLs) applied to the Hong Kong Court for an order of recognition and assistance. A subsidiary of the company opposed the PL’s application. The Honourable Mr Justice Harris clarified the following two issues in his judgment:-
 

(a) 

Foreign provisional liquidators have power to take control of subsidiaries incorporated in Hong Kong, but not subsidiaries incorporated in other jurisdictions; and

(b) 

The standard recognition orders granted by the Hong Kong Court do not purport to impose a stay of proceedings. Foreign provisional liquidators must make a specific application to stay proceedings if appropriate.

 

Regarding the first issue, the Judge stated that it would be impermissible judicial overreach to empower a foreign liquidator to take control of the company’s assets in another jurisdiction. The Judge explained that in doing so, two conflict of law rules would be overlooked. First, property and contractual claims to shares in a company is determined by the lex situs. Second, whether foreign liquidators are agents of the debtor company is governed by the law of a company’s incorporation.
 

Regarding the second issue of stay of proceedings, the Judge quoted the following paragraph which is contained in recognition orders that have recently been granted:
 

“For so long as the Company remains in liquidation in [relevant jurisdiction], no action or proceedings shall be proceeded with or commenced against the Company or its assets or affairs, or their property within the jurisdiction of this Honourable Court, except with the leave of this Honourable Court and subject to such terms as this Honourable Court may impose”.
 

The Judge held that this paragraph was only intended to be in the nature of a case management provision, and not a stay provision. The Judge also noted that this paragraph gives rise to two issues. First, if there are already proceedings on foot in Hong Kong, one would expect an application for a stay to be made in those proceedings. Second, whether or not it is appropriate to grant a stay in respect of unidentified prospective proceedings about which, necessarily, nothing is known. Therefore, the Court would grant a stay of proceedings only if appropriate, and modified the terms of the standard order as follows:
 

“If the Provisional Liquidators wish to apply for a stay or other directions in respect of proceedings in the High Court of any sort as a consequence of the recognition of their appointment by this order such application shall be listed before the Honourable Mr. Justice Harris or such other judge as he shall direct. The Provisional Liquidators shall write to the clerk to the Honourable Mr. Justice Harris seeking case management directions for the determination of any application that they wish to make pursuant to this order”.
 

The Judge also noted that it may not be appropriate to grant a stay in the context of recognition of a provisional liquidator appointed in respect of a foreign “soft touch” provisional liquidation for the purposes of restructuring, as that is arguably not a collective insolvency process which is usually required for a stay to be granted, but made no ruling on the point as it was not necessary in the present case.
 

The Judge also held that in deciding whether a stay of proceedings would be granted, the Court would look at whether the rule from the decision in Antony Gibbs & Sons v Societe Industrielle et Commerciale Des Metaux (1890) 25 QBD 399 was violated. The rule in Gibbs states that the discharge of liabilities under a contract is governed by the law of the contract, which means that a stay should not be granted in respect of an action to establish a right to payment under a contract governed by Hong Kong law in aid of foreign insolvency proceedings.
 

The Judge’s decision on both of the issues in FDG are welcome, but it remains to be seen how an application for a stay in the context of a “soft touch” provisional liquidation will be treated.
 

For further information, please contact:

 

Judy Wu, Deacons

[email protected]