The Hong Kong Companies Court Recognises And Gives Assistance In Relation To A Mainland Liquidation For The First Time.

 

20 March, 2020

 

 

In recent years the Hong Kong Companies Court has dealt with a large number of applications for recognition and assistance from the Courts of various overseas jurisdictions in relation to cross border insolvency matters. The Court will now routinely grant orders of recognition and assistance to liquidators of companies incorporated in Commonwealth jurisdictions such as the Cayman Islands, Bermuda and the British Virgin Islands, which are all common law jurisdictions which have insolvency law regimes which are in many ways similar to Hong Kong’s own regime. 

 

Having granted an order recognising corporate insolvency proceedings in a civil law jurisdiction for the first time in Re Kaoru Takamatsu [2019] HKCFI 802, the Court has recently recognised insolvency proceedings from another civil law jurisdiction, namely Mainland China, in Joint and Several Liquidators of CEFC Shanghai International Group Limited [2020] HKCFI 167. This is a significant decision, given the extensive connections between Hong Kong and Mainland China and given that the Mainland operates a significantly different economic and legal model to that in Hong Kong. 

 

The Court also considered whether a garnishee order nisi should be made absolute when, after the service of the garnishee order nisi, a foreign bankruptcy order is made in relation to the garnishee.

 

Background

 

CEFC Shanghai International Group Limited (the “Company”) is a Mainland-incorporated investment holding company. The Company went into insolvent liquidation pursuant to the Shanghai Court’s order under the Enterprise Bankruptcy Law, and administrators (“Administrators”) were appointed by the Shanghai Court. The Company’s assets in Hong Kong included a claim against its Hong Kong subsidiary (the “HK Subsidiary”), which was in liquidation in Hong Kong. The Administrators discovered after their appointment that a default judgment had been obtained by Right Time Global Investment SPC-Right Time Value Investment Fund SP (“Right Time Fund”) against the Company in Hong Kong. A garnishee order nisi to enforce the default judgment was obtained on 12 August 2019, and the garnishee hearing was scheduled for 11 December 2019. In view of the upcoming garnishee hearing, the Administrators sought urgent recognition and assistance. Upon the request of the Administrators, the Court adjourned the garnishee proceedings to 8 January 2020.  The Shanghai Court issued a letter of request to facilitate the Administrators’ recognition application. 

 

The Criteria

 

The Honourable Justice Harris noted that the principles in relation to recognising foreign insolvency proceedings are well settled in Hong Kong, and such applications are now normally made in writing. The Judge summarised in his judgment the criteria which need to be satisfied in order for the Companies Court to recognise foreign insolvency proceedings as follows:

 

1. The foreign insolvency proceedings are collective insolvency proceedings; and

 

2. The foreign insolvency proceedings are opened in the company’s country of incorporation.  

 

The Judge also stated that the Companies Court does not grant a foreign liquidator whose appointment it has recognised all of the powers available to a liquidator appointed by it pursuant to the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32). He summarised the principles that circumscribe the limits of the common law power of assistance as follows:

 

1. The power of assistance exists for the purpose of enabling foreign courts to surmount the problems posed for a world-wide winding up of the company’s affairs by the territorial limits of each court’s powers;

 

2.  The power of assistance is available only when it is necessary for the performance of the foreign officeholder’s functions; and

 

3.  An order granting assistance must be consistent with the substantive law and public policy of the assisting court.

 

Compliance with the Criteria

 

The Judge found that the Company’s Mainland liquidation encompassed all of the Company’s assets, and the Administrators made the recognition application consistently with the Companies Court’s existing practice, namely, the application was supported by the Shanghai Court’s letter of request, to maintain the principle of collectively and pari passu distribution. The Judge found that the Mainland liquidation was a collective insolvency proceeding. The Judge also noted that the powers sought by the Administrators were consistent with Mainland insolvency law and with the standard recognition order granted by the Companies Court, and accordingly the Judge made an order of recognition and assistance in the conventional terms, including an order that no proceedings may be brought against the Company in Hong Kong save with the leave of the Court. 

 

The Judge commented that the Mainland courts had not so far recognised a foreign insolvency proceeding pursuant to the Enterprise Bankruptcy Law. However, he was of the view that the Enterprise Bankruptcy Law envisaged that there would be recognition of foreign liquidators, as one would expect to be the case given the transnational business nature of many Mainland businesses.

 

Foreign Bankruptcy Order vs Local Garnishee Order Nisi

 

In considering the issue of whether a garnishee order nisi should be made absolute when a foreign bankruptcy order had been made after the service of the garnishee order nisi, the Judge considered Galbraith v Grimshaw (1910) AC 508, a case in which a creditor obtained a monetary judgment against a debtor in Scotland, and the judgment was subsequently extended to England.

 

The creditor served a garnishee order nisi on a firm who owed a debt in England to the judgment debtor, who was adjudicated bankrupt after the service of the garnishee order nisi. The House o Lords held that where a Scottish bankruptcy occurred after an English garnishee order nisi, the judgment creditor prevailed over the Scottish trustee in bankruptcy.

 

The Judge pointed out that the decision in Galbraith had been subject to much academic criticism. Having considered more recent authorities (most notably the influential Privy Council decision in Cambridge Gas (2007) 1 AC 508), the Judge found that the analysis in Galbraith was narrow and inconsistent with contemporary cross-border insolvency law. Accordingly, the Judge refused to follow Galbraith, and declined to make absolute the garnishee order nisi obtained before the commencement of the Company’s Mainland insolvency proceedings. 

 

Conclusion

 

The decision is a welcome one in that it provides further evidence of the Court’s willingness to assist foreign office holders from civil law jurisdictions and to try to achieve consistency in the treatment of creditors across different jurisdictions. The Judge reminded us that the extent to which greater assistance can be provided to Mainland administrators in the future remains to be determined on a case by case basis, and is dependent on whether the Mainland, like Hong Kong, promotes a unitary approach to transnational insolvencies.

For further information, please contact:

 

Judy Wu, Deacons

judy.wu@deacons.com.hk