Company law — winding-up — distribution of assets — company had assets in Mainland China — under Mainland regulatory rules, Mainland assets could be distributed only in RMB and only to creditors holding Mainland bank accounts — whether liquidators unable to distribute Mainland assets — whether proposed method of distributing such assets violated pari passu principle
Company law — liquidation — distribution of assets — pari passu principle not inflexible — proposal consistent with pari passu — in any event proper case to depart from pari passu
Conflict of laws — cross-border insolvency — distribution of assets — pari passu principle not inflexible
C was a company in liquidation. Substantial dividends had already been paid to creditors. The remaining assets were HKD18 million in a HK bank (HK Funds) and RMB38.9 million in a Mainland Chinese account (Mainland Funds). Under Mainland regulatory rules, the Mainland assets could be distributed only in RMB and only to creditors holding Mainland bank accounts. The Mainland account had been frozen by Mainland authorities. Subject to conditions, the liquidators (Ls) would be able to operate the Mainland Funds. These included the RMB38.9 million not being converted to Hong Kong dollars and remitted to Hong Kong. In the circumstances, Ls sought an order under s.255 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32) that they be permitted to distribute: (a) the Mainland Funds to creditors who had Mainland bank accounts and were willing to accept RMB dividends, on a pari passu basis; and (b) the HK Funds to the remaining creditors on a pari passu basis.
Held, granting the order sought, that:
- Pari passu was a central but not an inflexible principle of the Hong Kong insolvency regime. It was replete with de jure and de facto exceptions. It did not apply to flawed assets. Creditors who were eligible fordistribution might decide not to participate in the distribution, just as creditors could validly subordinate their claims in a liquidation (Beluga Chartering v Beluga Projects (Singapore)  2 SLR 1035, JSC Bank of Moscow v Kekhman  1 WLR 3737, Re Lehman Bros International (Europe) (No 4)  AC 465 applied). (See paras.1, 5–18.)
- Pari passu was concerned with substantive pro rata division of assets among creditors. It was unconcerned with the precise procedural mechanisms to achieve that substantive result. Matters such as the precise date of valuation of debts and the currency of divided payments were mere procedural matters that did not detract from the substantial operation of pari passu (Re Bank of Credit and Commerce International SA (No 10)  Ch 213, Wight v Eckhardt Marine  1 AC 147, Re Lehman Bros Finance Asia  1 SLR 64 applied). (See 20–21.)
- The order sought was consistent with pari passu. For the Mainland Funds, the criterion of having a Mainland bank account was merely a procedural requirement that did not detract from the substance of pro rata division. (See para.26.)
- Alternatively, pari passu applied only to assets available for pari passu distribution. Under conflict of laws, the Mainland Funds were a chose in action governed by the lex situs, namely Mainland law. Under Mainland law, those funds were not available to Hong Kong creditors in the first place. Hong Kong insolvency law did not override the Mainland limitations, and creditors could not complain about a lack of pari passu (Bank of Credit and Commerce International (Overseas) Ltd v Bank of Credit and Commerce International (Overseas) Ltd, Macau Branch  HKLRD 304, Gertner v CFL Finance Ltd  EWCA Civ 1781 applied). (See paras.26–27.)
- In any event, pari passu was not inflexible and was capable of judicial departures. This was a proper case to do so. Ls had no other avenue to distribute the Mainland Funds. This would facilitate closure of a long-running liquidation. Doing so was consistent with the general principle that liquidation was an administrative process that did not expand or diminish the company’s substantive rights and obligations. Ultimately, liquidation was concerned with distribution of uncharged assets among unsecured creditors (Re Bank of Credit and Commerce International SA (No 8)  Ch 245, Parmalat Capital Finance v Food Holdings  1 BCLC 274 applied). (See para.31.)
This was an application by the liquidators for an order that their proposed distribution of the remaining assets of a company was consistent with pari passu. The facts are set out in the judgment.