Hong Kong: Common law regime for recognizing and assisting foreign insolvency officeholders reconsidered

In brief

On 6 May 2022, the Honorable Madam Justice Linda Chan granted a petition for the winding-up (in Hong Kong) of Up Energy Development Group Limited, which was incorporated in Bermuda.

Her Ladyship held, among other things, that if a foreign company is not ordered to be wound up in Hong Kong, the Hong Kong court does not have power under the common law to confer any powers on the company’s liquidator appointed in another jurisdiction, or make any provisions under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) available to the company.


Contents

Key takeaways

In a line of authorities in Hong Kong, including cases such as Joint Official Liquidators of A Company v B [2014] 4 HKLRD 374, the court has granted recognition and assistance to foreign insolvency proceedings and officeholders, such that:

  • It has become usual for a foreign insolvency officeholder to obtain an order of the Hong Kong court giving recognition and assistance in standard terms, by means of an ex parte application.
  • The Hong Kong court has granted further, specific assistance to foreign insolvency officeholders on certain occasions – for instance, by making an order for the production of documents.
  • Specifically with regard to bankruptcy administrators appointed in Mainland China seeking recognition and assistance in Hong Kong, the above practice has been formalized in a framework – now often referred to as the Cooperation Mechanism – agreed between the two jurisdictions on 14 May 2021.

Given this latest decision ([2022] HKCFI 1329), a foreign insolvency officeholder intending to seek recognition and assistance in Hong Kong should be prepared to make submissions to satisfy the court that it has the power to grant the relief sought.

In more detail

The facts

Up Energy Development Group Limited ("Company") was incorporated in Bermuda, where it only had a letterbox presence. The Company was registered under Part 16 of the Companies Ordinance (Cap. 622) and listed in Hong Kong until its delisting on 5 January 2022. It had some assets and carried on most of its financing activities in Hong Kong, although its group’s major assets were located in Mainland China.

A creditor petitioned the Hong Kong court on 29 March 2016 for the winding-up of the Company based on an unsatisfied statutory demand. Another creditor presented a winding-up petition to the Bermuda court on 18 May 2016. The Bermuda court appointed provisional liquidators (PLs) to the Company by orders dated 7 and 28 October 2016. Upon the PLs’ ex parte application, the Hong Kong court made an order on 16 August 2017 recognizing their appointment.

The Bermuda court sanctioned a scheme of arrangement between the Company and all its creditors on 1 November 2019. However, the scheme lapsed because the Company was unable to secure resumption of trading of its shares. The Bermuda court made a winding-up order against the Company on 11 March 2022. Meanwhile, after multiple adjournments, the petition in Hong Kong was substantively argued on 14 February 2022 and 1 April 2022.

The submissions against a winding-up order

As the Honorable Madam Justice Linda Chan remarked, the case was “somewhat unusual” in that the Company was insolvent, but the PLs opposed the making of a winding-up order on the ground that there was “no benefit in the court making such an order”. The PLs and an opposing creditor focused on four submissions at the hearing on 1 April 2022:

  1. The Hong Kong court should give primacy to the Bermuda court and decline to wind up the Company.
  2. The Honorable Mr. Justice Harris in a decision of 31 August 2021 found that the second of the three core requirements (for the Hong Kong court to exercise its discretionary jurisdiction to wind up a foreign company) was not satisfied.
  3. If there were matters which needed to be dealt with in Hong Kong, the liquidators to be appointed in Bermuda ("Bermuda Liquidators") could seek recognition and assistance, or a winding-up order, in Hong Kong. There was no present need to seek such assistance.
  4. An ancillary winding-up order would lead to additional time and costs, and add to the burden of the estate rather than benefit it.

The court’s rulings

Her Ladyship rejected the above submissions and made a winding-up order. Addressing the submissions in turn, it was held as follows:

  1. The mere fact that the Company had been wound up in Bermuda was not a ground against winding up the Company in Hong Kong.
  2. There was a reasonable possibility of benefit to the creditors if a winding-up order was made – the second core requirement was satisfied.
  3. Absent a winding-up order, the court did not have power under the common law to confer any powers on the Bermuda Liquidators, or make any provisions under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (CWUMPO) available to the Company.
  4. Winding up the Company would be in the interests of the creditors as it would avoid the need for the Bermuda Liquidators to make successive applications to the court for recognition and powers under the CWUMPO, even assuming the court had power to do so (which the learned Judge did not think there was).

Potential impact of the decision

Among the four rulings, ruling 3 potentially has the most significant impact on subsequent cases. It can be contrasted with the approach in, for example, Re BJB Career Education Co Ltd [2017] 1 HKLRD 113 which suggests that when the Hong Kong court assists a foreign liquidator by (in that case) ordering the oral examination of a director, the court is exercising a common law power – neither invoking the CWUMPO directly, nor applying the statutory powers by analogy.

Further judicial guidance on the principles is keenly awaited. As things stand, a foreign insolvency officeholder who would like to obtain recognition and assistance in Hong Kong would be well advised to prepare for the possibility that the court might require submissions on whether it has the power to grant the relief sought and, if it does, the extent of the power.


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