Through a trio of decisions, Mr Justice Harris has opened a new and commendable era for Hong Kong’s cross-border insolvency regime. The position under this new era is in brief thus:
First, the Hong Kong court is likely to use the debtor’s centre of main interests (“COMI”) as a yardstick to determine eligibility for recognition and assistance.
Secondly, proceedings opened in offshore jurisdictions are less likely to receive extensive insolvency assistance in Hong Kong in the future. That is because debtors are not likely to have their COMI in their jurisdiction of incorporation offshore. Often, other than their offshore registration, the debtors have zero connection with the offshore jurisdiction. For that reason, in international insolvency parlance, offshore jurisdictions are described as “letterbox jurisdictions” (eg In re Creative Finance Ltd., 543 BR 498 (Bankr SDNY 2016)).
Thirdly, offshore soft-touch provisional liquidation (“PL”) designed to frustrate legitimate Hong Kong winding-up proceedings might not be recognised at all.
Background to the new era
The new era is partly the result of the Hong Kong court witnessing an increasing amount of unscrupulous insolvent offshore companies listed in Hong Kong resorting to offshore soft-touch PL to frustrate legitimate Hong Kong winding-up proceedings.
These companies would obtain a soft-touch PL order in their jurisdiction of incorporation, often literally on the eve of the Hong Kong winding-up petition hearing. They would then argue that the Hong Kong court should defer to the offshore court, respect the offshore court’s letter of request as a matter of comity, and thus stay or adjourn the Hong Kong petition. This is notwithstanding the companies’ lack of realistic restructuring prospect.
In Re FDG Electric Vehicles Ltd [2020] HKCFI 2931; [2020] 5 HKLRD 701, Mr Justice Harris held that when the Hong Kong court recognised an offshore PL order, there would not be an automatic stay on proceedings in Hong Kong. And thus an offshore PL order could not serve to stay a Hong Kong winding-up petition. A previous commentary on FDG is available here.
Nevertheless, the tactic of using an offshore soft-touch PL order to oppose a Hong Kong petition continued unabated, as demonstrated in Re Lamtex Holdings Ltd [2021] HKCFI 622 and Re Ping An Securities Group (Holdings) Ltd [2021] HKCFI 651. A previous note on Lamtex is available here.
The facts and decision in Lamtex and Ping An
In both cases, the Bermuda-incorporated debtors listed in Hong Kong were insolvent and faced with winding-up petitions in Hong Kong. They subsequently obtained Bermuda soft-touch PL orders and the Bermuda court’s letter of request in order to oppose the Hong Kong petitions.
In Lamtex, the Court wound up the debtor because it had no restructuring prospects.
In Ping An, the Court adjourned the petition for two months, only because it appeared that the debtor might be able to show restructuring progress then.
In both cases, the Court made clear that using the Bermuda soft-touch PL order alone to oppose the Hong Kong petition was not an acceptable tactic because the debtors had in Bermuda only a letterbox presence, while the debtors’ COMI was in Hong Kong; and therefore the soft-touch PL order might not be recognised.
In Lamtex, the Court held thus:
“[I]f the three core requirements are satisfied it is not in my view sufficient for the Company simply to point to insolvency proceedings commenced sometime after the Hong Kong Petition was presented in its place of incorporation and request in the face of objection from local creditors this court simply to defer to that of its place of incorporation. It seems to me unrealistic to expect the court not to have regard to the fact that companies such as the present conduct businesses in the People’s Republic of China which commonly is also the location of a high proportion of their shareholders, creditors and assets …
The evidence does not suggest that at the time of the appointment of soft-touch provisional liquidators the Company had, or has now, a credible plan to restructure its debt. It looks considerably more likely that the application in Bermuda was an attempt to engineer a de facto moratorium, which could not be obtained under Hong Kong law, with a view to then searching for a solution to the Company’s financial problems. Viewed from a Hong Kong perspective this is a questionable use of soft-touch provisional liquidation and one, which will encourage the court to view with care similar applications for recognition in the future” (at [34] and [42] (emphasis added)).
In Ping An, the Court applied Lamtex and held thus:
“I conclude that faced with a Hong Kong petition to wind up a foreign incorporated company… whose COMI is located in Hong Kong and an attempt by the company, which is in soft-touch provisional liquidation in its place of incorporation, to adjourn the petition in order to have time to formulate a restructuring and introduce a scheme of arrangement, primacy is not automatically to be given to soft-touch provisional liquidation in the place of incorporation. If a petition has already been issued in Hong Kong and the Petitioner and such other creditors as support it, do not agree to an adjournment the Company is still required to satisfy the criteria by reference to which the Hong Kong court assesses applications on similar grounds by companies incorporated in Hong Kong. If the Company cannot do so it will be wound up and an application for recognition of the soft-touch provisional liquidation will not be granted” (at [20] (emphasis added)).
Commentary
The FDG decision punctured a long-standing myth that, because the Hong Kong court could recognise offshore provisional liquidation, obtaining an offshore PL order was a convenient tool to stay and stall Hong Kong winding-up petitions.
Lamtex and Ping An are a continuation and application of FDG.
From the perspective of international insolvency standards – namely, modified universalism and forum shopping – these decisions are eminently correct and commendable.
Modified universalism is premised on the primacy of insolvency proceedings in the ‘home’ jurisdiction with which the debtor maintains a substantial connection (such as COMI), which is distinct from a mere letterbox presence. Thus where the debtor maintains only a letterbox presence offshore, the offshore PL order is not entitled to extensive insolvency assistance.
Indeed a PL order from a letterbox jurisdiction would not be eligible for recognition under the UNCITRAL Model Law on Cross-Border Insolvency which is also premised on modified universalism. See for instance In re Creative Finance Ltd., 543 BR 498 (Bankr SDNY 2016) holding that the application for recognition of the debtors’ BVI liquidation proceedings must be denied. The US Bankruptcy Court reasoned thus (at p. 502):
“Though they did most of their business in the U.K. and suffered entry of a judgment there, and though their operations were directed out of Spain and Dubai, the Debtors were organized under the law of a letterbox jurisdiction – the British Virgin Islands – though they did not do business there.”
Therefore, Mr Justice Harris rightly rejected the debtors’ argument that “the principles of modified universalism militated in favour of staying local (Hong Kong) proceedings in favour of foreign proceedings opened in the place of incorporation in order to preserve unitary global proceedings” (Lamtex at [28]). Such argument stood modified universalism on its head.
International insolvency practice permits forum shopping, that is good forum shopping – where “what is being attempted is to achieve a position where resort can be had to the law of a particular jurisdiction, not in order to evade debts but rather with a view to achieving the best possible outcome for creditors” (Re Codere Finance (UK) Ltd [2015] EWHC 3778 (Ch) at [18]).
But resorting to proceedings in letterbox jurisdictions to stonewall creditors and stall legitimate collective insolvency proceedings in the COMI jurisdiction would seem to be the opposite of good forum shopping (cf. Budniok v The Adjudicator, Insolvency Service [2017] EWHC 368 (Ch); [2017] BPIR 521 at [82]).
It is thus only right that the Hong Kong court refuses to lend its recognition regime to assist in such forum shopping.
Finally, developing the Hong Kong common law recognition regime to recognise insolvency proceedings opened in a jurisdiction where the debtor has its COMI is not only a healthy step in the right direction, but it also gives full effect to the doctrine of modified universalism.
Look-Chan Ho authored this article.
