23 November 2018
(This article first appeared on the GRR Live website and was authored by GRR’s Deputy Editor, Douglas Thompson. It is reproduced with the GRR’s kind permission.)
Opening this year’s GRR Live Hong Kong, the Judge in charge of Hong Kong’s company and insolvency portfolio, Mr Justice Jonathan Harris, has called for a mutual recognition protocol for insolvency orders between mainland Chinese courts and their Hong Kong counterparts, and raised scepticism over the cross-border moratorium provisions in Singapore’s recent restructuring reforms, which were the subject of his recent decision in CW Technologies.
Opening the event in Hong Kong’s Lan Kwai Fong district on 6 November, Harris J said in his keynote he saw no reason “in principle” why such a protocol should not be introduced, allowing Hong Kong schemes to compromise both offshore and domestic debt – and urged practitioners to lobby Hong Kong’s authorities in support of one.
While Hong Kong’s lack of a statutory cross-border regime for recognition and assistance of foreign officeholders is the subject of much commentary, Harris J said the same question between the mainland and Hong Kong potentially engages different considerations to those that commonly apply in more conventional situations.
The latter is “not in a conventional sense a cross-border matter at all”, given that Hong Kong is part of the People’s Republic. Its relationship with mainland China is “fundamentally different” to that with sovereign states like the United States or Singapore.
“One might reasonably assume that recognition will be readier and more extensive,” he said. But this is not currently the case, reflecting the fact that the two jurisdictions have very different legal systems, and Hong Kong enjoys administrative independence.
Despite that autonomy, the two jurisdictions are inextricably linked economically, and both face the “significant challenge” of the high – but unknown – level of non-performing debt that has built up in the mainland’s economy.
“Hong Kong is part of China and one would expect a more engaged approach to recognition and assistance with both sides trying to leverage the situation to the maximum for the mutual benefit,” he said.
If Hong Kong and the mainland could agree to a protocol, it would be a constructive way for Hong Kong to help the mainland with its NPL problem, but could also have “significant benefits” for Hong Kong itself, he argued.
Mainland China still does not have any distinct legal mechanism available for restructuring debt and capital, so Hong Kong with its scheme of arrangement was “the obvious place for the mainland to look for a fully operational model”, Harris J said, both in actually assisting the restructuring of debt and also informing its consideration of suitable mechanisms.
Hong Kong courts normally have jurisdiction to accept a scheme with both international and domestic components, he observed, though a mainland company with only limited connection with Hong Kong might not pass this test. But Harris J said it should be “quite easy” to amend Hong Kong’s companies ordinance to allow its courts to sanction schemes of companies incorporated anywhere in China.
The judge said that he did not contemplate schemes being recognised automatically. “Consideration would need to be given to consistency between the terms of any scheme and substantive mainland law,” he said. “One would not expect a scheme to be recognised that contained terms inconsistent with mainland law.”
He also suggested that any protocol could include terms to this effect, allowing mainland courts to give a preliminary review of whether a scheme might be objectionable. The judge likened this to New York bankruptcy judge Martin Glenn’s preliminary view in the 2016 restructuring of coking coal supplier Winsway, of whether the company’s Hong Kong scheme of arrangement was capable of recognition.
Harris J added that Hong Kong practitioners should not be concerned about the potential for unwelcome mainland decisions finding their way into Hong Kong law in the other direction. “I don’t think we need to be concerned about their justice system, and we’re not going to get far with recognition that only goes one way,” he said.
“If something came to Hong Kong with something very, very odd, which we would find objectionable, we wouldn’t recognise the order.”
He urged practitioners who agreed with him to “make their views known” to Hong Kong’s department of justice and financial services bureau. “My impression is that, certainly in the mainland, they would listen to sensible proposals along these lines.”
CW Technologies and forum shopping
Harris J also used the keynote to address what he called “the rather unhelpful notion” of forum shopping. He called attention to his own recent decision in CW Technologies, in which he agreed to the appointment of provisional liquidators over an engineering group headquartered in Singapore, listed on Hong Kong’s stock exchange, and with a topco registered in the Cayman Islands. While its notes under a multicurrency debt programme were all governed by Singapore law, its Hong Kong subsidiary’s bank debt was governed by Hong Kong law.
The group obtained a moratorium in Singapore, and Harris said the case “could have been even more interesting” had the parties asked him to recognise that moratorium in Hong Kong, as he said he had expected. “There were opponents lined up to argue the moratorium should not be recognised but unfortunately the company didn’t want to argue that, so I didn’t get the kind of debate that justified me considering and deciding some of the issues I thought the facts gave rise to,” he said.
But CW’s facts provided an answer to questions that he had been considering for some time: “Why was I reading articles in journals like GRR suggesting that Singapore might be an alternative forum for the restructuring of mainland business debt?”
Although Singapore’s new regime had helpful mechanisms, particularly the cross-border moratorium, the judge said there was “ rather obviously a large elephant in the room which nobody seemed to want to talk about, which is recognition”.
“There’s no point trying to avail yourself of a Singapore moratorium if you’ve got creditors in Hong Kong who are going to ignore it.”
He said he understood Hong Kong’s financial services bureau had concluded that a debtor-in-possession (DIP) regime is not suitable for Hong Kong generally. “Banks in particular don’t like it,” he said. He said it would be “slightly surprising if you didn’t get significant pushback” from Hong Kong’s official receiver upon an application to recognise a moratorium originating in a DIP system.
Harris J also said recognition would raise questions of degree of connection with the subject matter of the scheme or the debt. He said in his experience it was “rare” for mainland companies to have debt with a sufficiently significant connection to jurisdictions other than Hong Kong, the mainland itself, the United States or London.
“You can’t simply create on a blank piece of paper what looks like an ideal system, and think that because it looks good on paper, and on the face of it may be attractive to debtor companies, that those companies are going to be able to avail themselves of that system and get it recognised in other jurisdictions.”
Introducing Mr Justice Harris, Des Voeux Chambers barrister Look Chan Ho, who co-chaired GRR Live Hong Kong with Maples & Calder’s Aisling Dwyer, described him as “one of the most forward-looking, pragmatic and creative companies judges Hong Kong has ever had”.
Ho reflected on the last decade of insolvency and restructuring law development in Hong Kong, much of which he attributed to the “oracle” of Jonathan Harris.
“With Lehman coming to an end things have suddenly become very interesting in this part of the world, and we have seen a lot of landmark developments,” he said. “It’s not just that we have seen seminal developments here in Hong Kong, we have also seen a lot of innovation.”
GRR Live Hong Kong took place at the Townhouse in central Hong Kong on 6 November in association with Hong Kong Restructuring Week 2018. It was sponsored by venue partner Des Voeux Chambers, conference supporter Walkers, and supporting organisations IWIRC and the Company and Insolvency Law Society (COINS*).