In the recent decisions in Re The Joint and Several Provisional Liquidators of Agritrade Resources Ltd (in Provisional Liquidation in Bermuda)  HKCFI 1967 (HCMP 925/2020, 18 August 2020) (“Re Agritrade”) and Re The Joint and Several Provisional Liquidators of Rare Earth Magnesium Technology Group Holdings Ltd (in Provisional Liquidation in Bermuda)  HKCFI 2260 (HCMP 1274/2020, 3 September 2020) (“Re Rare Earth”), Justice Harris re-affirmed the Hong Kong Companies Court’s willingness to recognise foreign provisional liquidators appointed on a soft-touch basis for restructuring purposes. The two cases also provide a timely reminder that recognition of foreign provisional liquidators from other common law jurisdictions for restructuring purposes is considered an accepted and increasingly common occurrence in Hong Kong.
The Companies Court has developed the standard common law procedure and practice to establish an efficient, cost-effective and uncontroversial process for the recognition and assistance of foreign provisional liquidators. The decisions in Re Agritrade and Re Rare Earth, as well as our recent experience in successfully having the Bermuda-appointed soft-touch joint provisional liquidators of an SEHK-listed company recognised in Hong Kong, confirm the following:
- The applications for recognition of liquidators, provisional liquidators and soft-touch provisional liquidators are highly standardised.
- The court has made clear its emphasis on consistency and uniformity of the practice. The Companies Court expects its own officers, offshore legal practitioners and other common law courts to be familiar with the standard order granted in Hong Kong, with corresponding letters of request.
- Whilst it is permissible to deviate from the standard-form order, the applicants must carefully consider any variations and explain to the court why the proposed terms of the order are desirable or appropriate for the purposes of restructuring of the company.
- The language of the letter of request should follow the standard order.
In our past Alerts, we discussed the Hong Kong court’s willingness to accede to letters of request issued by foreign courts for the recognition and assistance of foreign liquidators in both compulsory liquidations and creditors’ voluntary liquidations In Re Joint Provisional Liquidators of Moody Technology Holdings Ltd  HKCFI 416 and Re The Joint and Several Provisional Liquidators of China Oil Gangran Energy Group Holdings Limited (In Provisional Liquidation In The Cayman Islands)  HKCFI 825, the practice was further extended to recognise foreign soft-touch provisional liquidators, which reflect the judicial sentiment acknowledging the heightened need for judicial assistance to cross-border restructuring, especially in the light of “the economic problems that COVID-19 is causing.” In a soft-touch provisional liquidation, the company remains in the day-to-day control of the directors. However, it is given protection from individual creditors’ action and breathing space to restructure its debts, and this has become an increasingly prevalent and widely accepted procedure in other common law jurisdictions, such as Bermuda, the BVI and the Cayman Islands. The Hong Kong court’s willingness to continue to expand the scope of recognition of foreign liquidators and provisional liquidators is an effort to overcome the limitations arising from Hong Kong’s lack of a corporate debt restructuring regime, despite the government’s previous attempt to introduce a new bill in 2001 and various consultation efforts. A new bill introducing a corporate rescue procedure and insolvent trading provisions is planned to be introduced to the Legislative Council in the legislative year 2020/2021.
In Re Agritrade, the court refused to grant the order in the form sought by the applicants on the ground that it was materially different from the standard forms. The case demonstrates that the Companies Court expects practitioners to follow the standard recognition order established as a matter of case law, and will readily dismiss variations that are provided without explanation. That said, in Re Rare Earth, Justice Harris demonstrated that the standard-form order for recognition of soft-touch provisional liquidators can and will be varied in appropriate circumstances where justified by the applicants. For instance, the court recognises that soft-touch provisional liquidation for restructuring in Bermuda does not result in “wholesale passing of control” to the provisional liquidators. Instead, the provisional liquidators often sit side by side with the board of directors, who remain in partial control of the company and its group, particularly its business operations and daily functions.
Accordingly, Re Earth introduced new model clauses in the standard order, recognising the provisional liquidators’ powers “with the consent of the Company” to draw and accept bills of exchange, discharge debts incurred after the provisional liquidation, and/or engage and remunerate staff to assist in the provisional liquidation. Justice Harris also expressly recognised the provisional liquidators’ powers to receive advance notice and materials, and be consulted on significant affairs of the company, namely the sale of business or significant assets, restructuring of the existing indebtedness, new investment, and borrowings or the granting of security. It thereby acknowledges the need for provisional liquidators to have express powers to access sensitive commercial information in a timely manner to discharge their duties.
The decisions in Re Agritrade and Re Rare Earth serve as a timely reminder to practitioners of the importance of following the established procedure and maintaining consistency with the standard forms. It also demonstrates the willingness of Hong Kong courts to recognise common law soft-touch provisional liquidators to facilitate cross-border restructuring and provide common law solutions in the absence of a statutory corporate restructuring regime.