Hong Kong’s approach to cross-border insolvency

Hong Kong is not a signatory to the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (Model Law). There is as yet no statutory corporate re-structuring in Hong Kong.

Accordingly, recourse had to be made to common law as to whether the Hong Kong courts would recognise and assist a foreign insolvency officer (ie an administrator, liquidator and provisional liquidator).

Recognition is concerned with accepting the status of a foreign insolvency process including the insolvency officer appointed thereunder. Assistance on the other hand is the granting of express powers to the foreign insolvency officer to act in the local jurisdiction.

In corporate winding up cases, there is no automatic vesting of the assets of the foreign company in the local jurisdiction in the foreign liquidators. Accordingly, an application would be required by a foreign liquidator for an order to vest in the said liquidation with the title to the local assets: The Joint Official Liquidators of A Company v B & Ors [2014] 4 HKLRD 374 at 378.

The company in liquidation is likely to have assets in various countries and not just in the jurisdiction of its incorporation. It is common for companies listed on the Hong Kong Stock Exchange to be incorporated offshore while conducting operations elsewhere through subsidiaries.

It is not uncommon for organisations like financiers not recognising nor acting on the requests of the foreign insolvency officers. Hence, foreign insolvency officers would need to seek recognition and an assistance order from the court.

Common law

Hong Kong courts have adopted modified universalism. Hong Kong courts have generally acknowledged that an office holder appointed by the courts of the country of a company’s incorporation so as to facilitate the distribution of assets under a single system so long as it is consistent with the domestic legal framework. This is also to avoid starting parallel insolvency proceedings in the jurisdictions where the company has assets.

However, it still remains at the court’s discretion as to whether or not recognition and assistance would be granted to foreign insolvency officers.

Hong Kong does not permit the appointment of provisional liquidators solely for the purpose of corporate rescue, that is ‘soft-touch liquidation:’ Re Legend International Resorts Limited [2006] 2 HKLRD 192.

Under ‘soft-touch liquidation,’ insolvency officers are appointed to advise and formulate a corporate rescue plan, while the company’s directors still have control of the company’s operations. In the interim, no legal proceedings can be commenced against the company.

The decision of Re Legend has led to applications for corporate restructuring through the appointment of provisional liquidators outside of Hong Kong. These applications seek recognition and assistance in Hong Kong on the principle of modified universalism.

To be eligible for recognition and assistance in Hong Kong, a foreign insolvency proceeding would need a collective insolvency process and to be commenced in the company’s country of incorporation.

Collective insolvency

Collective insolvency process is the process where the company’s assets are collected and then distributed among its creditors.

Hong Kong’s insolvency law is not required to be identical to that of the foreign insolvency law. Hence, recognition may be given, for example, an administrator appointed outside Hong Kong when there is no such concept in Hong Kong: Re CEFC Shanghai International Group Limited [2020] 4 HKC 62.

However, recently Hong Kong court introduced the company’s centre of main interest (COMI) as a criterion to replace the place of incorporation. In Re Global Brands Group Holdings Ltd (in Liq) [2022] 3 HKLRD 316., a Bermuda incorporated company listed in Hong Kong was wound up by the Bermuda Court in November 2021. The provisional liquidators appointed by the Bermuda Courts sought recognition and assistance from the Hong Kong Courts to obtain cash balances held by the company in Hong Kong.

Besides showing that the foreign insolvency proceedings are a collective insolvency process, the foreign insolvency officers would need to show they were appointed by the courts in COMI.

COMI is similar to establishing a company's domicile. The idea is that offshore incorporated companies are just holding companies with subsidiaries doing business elsewhere. So, it is therefore unnecessary to consider the place of incorporation as the suitable jurisdiction for the primary liquidation location.

The exceptions, that is COMI is not relevant, are:

·       if the foreign insolvency officers appointed by the place of incorporation are seeking only a recognition that they have authority to act or represent  the company and nothing more.

·       where the location of the COMI is unclear and assistance is provided as a “matter of practicality.”

The COMI is determined by the following rules;

·       The date on which the foreign liquidators apply for recognition and assistance in Hong Kong would be the date for determining the COMI.

·       Relevant factors in determining a company’s COMI include the location of the company’s principal office, principal place of business, principal  assets, clients and creditors, place where the board meetings were held and the place where its books, records and bank accounts were kept.

Even if an order for recognition is made, courts may not necessarily grant an order for assistance. In Re Joint Provisional Liquidators of China Bozza Development Holdings Limited [2021] 4 HKC 560, the court granted a recognition order in relation to the liquidation commenced in the Cayman Islands, the place of its incorporation, but refused to grant assistance because the joint provisional liquidators had failed to satisfy the court that they were protecting the creditors’ interest with no details of restructuring being provided.  

The limits to granting assistance to a foreign insolvency officer by a local court in Singularis Holdings Ltd v PricewaterhouseCoopers [2015] AC 1675 have been modified. Accordingly, Hong Kong courts would grant recognition and assistance to foreign liquidators appointed under foreign voluntary liquidation as opposed to compulsory or court liquidation.

Hong Kong courts still adopt the following limits to assistance:

·       assistance is only available when it is necessary for the performance of the functions of the foreign insolvency officers.

·       the order sought by the foreign insolvency officers must be consistent with the substantive law and public policy of the assisting court.

Assistance for companies

In Re Seahawk China Dynamic Fund [2022] 3 HKLRD 469, the provisional liquidators appointed by the Cayman Court in a members’ dispute of a solvent company sought recognition and assistance from the Hong Kong court.

Justice Harris opined that modified universalism has no application to solvent liquidations. The principles that are relevant are those of conflict of laws, that is, the constitution and management of the affairs of a company are determined by the laws of the place of its incorporation.

As the company was incorporated in the Cayman Islands and the Cayman Court has appointed the provisional liquidators, the Hong Kong court ought to recognize that the provisional liquidators are able to act as the agent of the company in Hong Kong to make certain requests and to take certain action on behalf of the company. COMI is irrelevant given that it is not an application of an insolvent liquidation process.      

The orders that a Hong Kong court may grant include the following:

·       to locate, protect, secure and take into possession and control of all the company’s assets, property, books and records within Hong Kong

·       to bring legal proceedings and make applications in Hong Kong for ancillary relief including freezing orders, search and seizure orders, disclosure and production of documents, examination of third parties to facilitate the investigations into the assets and affairs of the company.

Winding-up proceedings

The appointment of a foreign insolvency officer would not lead to an automatic stay of the winding-up proceedings if there is a winding up petition presented against the company in Hong Kong.

Should there be a winding-up petition filed in Hong Kong before or after the appointment of the foreign insolvency officer in the place of incorporation but prior to the holding of a creditors’ meeting, the Hong Kong court would need to be satisfied and be provided with details of the debt re-structuring plan that would appear to be in the best interest of the general body of unsecured creditors before the court would consider in its discretion to stay or adjourn the winding-up petition filed in Hong Kong.

Notwithstanding the absence of a statutory framework for cross border insolvency, the Hong Kong courts have adopted a pragmatic approach through the principle of modified universalism in granting recognition and assistance of foreign insolvency process. 

In order to promote Hong Kong as an international financial centre, a formal corporate restructuring regime by statute is highly desirable to facilitate effective cross-border insolvency management.

Anthony Chow is a partner at Nixon Peabody CWL in Hong Kong nixonpeabodycwl.com