Cross-Border Insolvency Recognition – A Hong Kong Common Law Model Law?

The recent decision by the Hong Kong Court in Re Lamtex Holdings Limited[1]  represents a significant milestone in the development of the Court’s approach to cross-border insolvencies.

The case concerned a Bermudan-incorporated company listed on the Hong Kong Stock Exchange with its centre of main interests (COMI) in Hong Kong and operations in Mainland China and Hong Kong. The Court was faced with an application for adjournment of a Hong Kong winding-up petition because soft-touch provisional liquidators had been appointed by the Bermudan court for the purposes of pursuing a restructuring.

The Court decided to wind up the company in view of the limited evidence that any proposed restructuring would be successful. 

THE COMMON LAW AND COMI

To put the Lamtex decision in context, in Hong Kong the issue of recognition and assistance of foreign insolvency process is governed by common law.  Based on the principle of comity, the Courts of Hong Kong will be slow to ignore the express requests of other courts, particularly a request from the court of the jurisdiction of the company’s incorporation.

In cross-border insolvencies, Hong Kong has similarly looked to apply the concept of modified universalism, which provides that it is generally desirable for a company’s assets to be distributed to its creditors under a single system of distribution.  In consequence, the Hong Kong Courts have generally given primacy and recognition to insolvency proceedings commenced and to officeholders appointed in the courts of the place of incorporation. 

However, it is very common for companies listed on the Hong Kong Stock Exchange to be incorporated offshore (most commonly in Bermuda or the Cayman Islands) but for the COMI to be in Mainland China or Hong Kong.

This has created a disconnect with primacy of the jurisdiction of incorporation and, through a series of cases culminating in Lamtex, the Court has moved the focus to COMI, and to utility: to identify the best forum for assistance to companies in distress, irrespective of place of incorporation, in order to facilitate cross-border restructurings.

So in a restructuring scenario the key question facing the Court is how to navigate the different common law systems in play to achieve, wherever possible, a common objective: to offer the best platform to support companies in distress. In an ideal Model Law[2] world much of this would be clear, but in Hong Kong, Cayman, Bermuda and indeed the BVI, we do not live in that world.

THE DECISION IN LEGEND AND THE RISE OF SOFT-TOUCH PROVISIONAL LIQUIDATION

The genesis of the Lamtex decision is the Court of Appeal decision in Re Legend International Resorts Ltd[3]. An essential element in any restructuring is stability and, while this can be achieved consensually with creditor support, that is never guaranteed. So, the availability of a statutory moratorium or stay of proceedings can be crucial, and the appointment of provisional liquidators (PLs) gives rise to this: an automatic stay.

But what the Legend case decided is that under Hong Kong law, PLs cannot be appointed on the grounds that a company requires the stay to facilitate a restructuring. Instead, the traditional grounds such as evidence of fraud or assets in jeopardy must be proved, and once appointed[4] the Hong Kong ‘hard-touch’ PLs will displace the board although, almost counterintuitively, they can then be empowered to promote a restructuring. 

In comparison, when it comes to companies listed in Hong Kong but incorporated in Bermuda or Cayman, both jurisdictions allow for the appointment of soft-touch PLs for restructuring purposes. This coupled with Hong Kong’s historical approach to cross border insolvency has meant that the Hong Kong Court has recognised, and given assistance in the form of a stay of proceedings to offshore soft-touch PLs.

From the company’s perspective, the appointment of an offshore soft-touch PL looks like a near-perfect solution. It offers the prospect of a stable platform for restructuring and has the added advantage for a listed company that the company’s directors remain in day-to-day control of the company so that, unlike with a hard-touch appointment, a soft-touch appointment will not, of itself, affect the company’s listed status.

COMPETING FOR PRIMACY

The rationale behind soft-touch provisional liquidation is to facilitate and encourage a restructuring culture for creditors to support companies in distress: but it should operate as a shield for companies to work with their creditors in restructuring and not as a sword with which to fend off their creditors.

As a result, where a winding-up petition has already been presented in Hong Kong, and the company applies for soft-touch PLs who then seek recognition in Hong Kong primarily to obtain a stay, or adjournment, of the winding-up, the Hong Kong Court may view this as inappropriate forum shopping. Indeed, the Lamtex authorities indicate the court may simply decline to recognize, or grant assistance to, soft-touch PLs,[5] and the mere appointment of soft-touch PLs will not be sufficient to persuade the Court not to order a Hong Kong winding-up,[6] if there is insufficient evidence of creditor support of a credible restructuring proposal.

THE ROLE OF A CHIEF RESTRUCTURING OFFICER (CRO) AND COURT UNDERTAKINGS

Where the COMI is clearly in Hong Kong, the Lamtex line of authority indicates a need to rethink the merits of appointing soft-touch PLs. Soft-touch provisional liquidation offshore will not guarantee recognition and a stay in Hong Kong. So, even if appointed with the support of the creditors, soft-touch PLs might be best advised only to apply to the Court for recognition and a stay if litigation is commenced, or a winding-up petition is presented in Hong Kong that threatens the restructuring. Indeed, to take one step further, once a Hong Kong petition has been presented the difference between soft-touch PLs applying for an adjournment of a winding-up petition, or a stay of litigation, and the company itself doing this seems marginal.

Arguably, a restructuring could just as conveniently be pursued by a specialist CRO appointed for the purpose, and appointing a CRO would seem to have several advantages. It avoids much of the legal complexity associated with appointing provisional liquidators. Companies do not need to consider the legal powers that will be granted to a PL or apply for recognition in other jurisdictions, but the debtor company can still benefit from the expertise of an external restructuring professional. Creditor oversight would be required, so the CRO would need both the authority and the obligation to report to creditors and, as would be required in any event, the creditors would expect compliance with other restructuring-related milestones and undertakings.

Indeed, Court oversight could be provided if a petition had already been presented, as the appointment of a CRO might not only facilitate adjournments with the support of creditors but that support could in turn be conditioned on the CRO and the company providing undertakings to the Court as to the conduct of the restructuring. There is increasing precedent for undertakings in the context of an adjournment of a winding-up petition and also precedent in the context of the adjournment of an application for a hard-touch Hong Kong PL appointment.

LEGISLATING TO OVERCOME LEGEND AND INVITING RECIPROCITY

To establish a Hong Kong soft-touch provisional liquidation regime can be done by a simple amendment to section 193(1) of the Companies (Winding-up and Miscellaneous Provisions) Ordinance to read:

 ‘Subject to the provisions of this section, the court may appoint to appoint a liquidator provisionally at any time after the presentation of a winding-up petition and before the making of a winding-up order in respect of a company, on such grounds as the Court thinks fit, including on the grounds that the company intends to present a compromise or arrangement to its creditors.’

This proposed amendment (emphasis added) has already been submitted to the Financial Services and the Treasury Bureau by the Company and Insolvency Law Society.

However, amending section 193 alone may not be sufficient unless PLs appointed in Hong Kong are recognized offshore, and that is perhaps why Harris J appears to have gone out of his way in Lamtex to note that that there is:

‘nothing in principle preventing recognition of liquidators appointed in a company’s COMI or a jurisdiction with which it has a sufficiently strong connection to justify recognition, just as the Hong Kong court will exercise its discretion to wind up a foreign incorporated company if the connection between it and Hong Kong is substantial and the other core requirements are satisfied’.[7]

That he is saying the Hong Kong Court will consider recognition of liquidators appointed in a company’s COMI is of itself of very considerable note. But perhaps he is going further than that. As the Lamtex authorities make clear, the Court will only order a winding-up of an offshore company if this would be of utility: the Hong Kong liquidators will need to be recognized offshore.  So of yet greater interest is that in Lamtex, Harris J is - and not of course for the first time - inviting reciprocity. 

So maybe Lamtex is not so much about the development of the Hong Kong common law, as the Hong Kong Court’s invitation to the Bermudan, Cayman and BVI courts to develop, together with Hong Kong, a common-law Model Law approach to cross-border insolvency recognition.


[1] [2021] HKCFI 622.

[2] The UNCITRAL Model Law on Cross-Border Insolvency (1997).

[3] [2006] 2 HKLRD 192.

[4] See Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) s 193(1).

[5] Indeed, since this article was prepared and very shortly before publication, the Hong Kong court took a further significant step down this path when in Re China Bozza Development Holdings Ltd [2021] HKCFI 1235, Harris J granted an order limited to the recognition of offshore soft-touch provisional liquidators, but without assistance, because the Court had concerns about the protection of creditors’ interests.

[6] See Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) s 327.  The three core requirements for a Hong Kong winding-up order to be made are: (i) there has to be a sufficient connection with Hong Kong; (ii) there must be a reasonable possibility that the winding-up order will benefit those applying for it; and (iii) the court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets.

[7] Lamtex (n.1), [22]

Partner Restructuring & Recovery Group, Allen & Overy

Ian has over three decades of frontline experience assisting banks and bondholders on many of the most complex and high profile restructurings in the Asia Pacific region.
 
Ian has an enviable track record of restructuring publicly-owned and private companies across the region, dealing extensively with multi-bank restructurings of multi-national debtor groups. He also has considerable experience in advising on cross border and distressed debt situations generally, including as to settlement; recovery and enforcement strategies; business and asset reorganization; distressed debt and NPL disposals; and receivership and liquidation administrations.
 
From 2004 to 2010, Ian was appointed by the HKSAR Chief Executive to the Deposit Protection Board established under the Deposit Protection Scheme Ordinance to formulate and implement procedures to protect small depositors in case of bank failure in Hong Kong.

Partner, Restructuring & Recovery Group, Allen & Overy

Viola has experience in advising on restructurings, insolvencies and workouts in a wide range of industries and jurisdictions.

She advises and assists debtors, secured and unsecured creditors, coordinating committees, creditors’ committees, debtors and insolvency practitioners on all aspects of financial restructuring and insolvency cases. Viola is highly experienced in advising steering committees of creditors on complex, cross-border financial restructurings involving PRC elements, and has particular experience in bankruptcy and insolvency litigation. Viola was voted Rising Star of the Year at the 2020 IFLR Asia Pacific Awards.

Of Counsel, Litigation, Allen & Overy

Karen’s practice focuses on financial regulatory investigations, bankruptcy and insolvency litigation and commercial disputes of significant financial or reputational risk for corporations, financial institutions and high net worth individuals.

She has extensive experience in handling cross-border regulatory investigations in relation to market misconduct, commercial fraud, bribery and corruption and FCPA issues resulting in criminal prosecutions or regulatory enforcement actions brought by the Securities and Futures Commission, the Hong Kong Monetary Authority, the Hong Kong Independent Commission Against Corruption and regulators in China, US, UK and other European countries. She handles disputes arising from bankruptcy and insolvency, debt and asset recovery, cyber-crimes and disputes relating to financial products and mis-selling.