In Li Yiqing v Lamtex Holdings Ltd [2021] HKCFI 622, the Companies Court considered whether to put a Bermuda-incorporated company into immediate liquidation in Hong Kong or to adjourn the local winding-up petition to allow restructuring to proceed with the involvement of joint provisional liquidators appointed in Bermuda.
Harris J refused the adjournment application and made the normal winding up order. His Lordship recognised at the outset of the Judgment that the case “gives rise to an issue of some importance in the development of the principles, which guide the Hong Kong court in dealing with cross-border insolvency, and, in particular, cross-border debt restructuring” (at para. 1).
The Facts, Briefly Stated
Lamtex Holdings Limited (“Company”) is incorporated in Bermuda and listed on the Main Board of the Stock Exchange of Hong Kong. Prior to the Company’s financial difficulties, it carried on a series of business in the Mainland and Hong Kong: loan financing, securities brokerage, trading and manufacturing electronic businesses in the Mainland and hotel operations in the Mainland.
On 30 October 2020, the Company presented a petition in Bermuda seeking a winding up order and an order of appointment of provisional liquidators for restructuring purposes. The Company also issued an application for the appointment of ‘soft-touch’ provisional liquidators (“JPLs”). On 10 November 2020, the Chief Justice of Bermuda granted the application.
Common law power to recognise and assist: Place of incorporation
Unlike some other jurisdictions which have enacted local statutory schemes governing the issue of recognition and assistance of foreign insolvency process, this issue is solely governed by common law in Hong Kong.
The orthodox approach under the English common law is that “recognition is limited to liquidators appointed in a company’s place of incorporation” (at para. 16), following the UK Supreme Court decision of Rubin v Eurofinance SA [2013] 1 AC 236 and the Privy Council decision of Singularis Holdings Ltd v PricewaterhouseCoopers [2015] AC 1675.
Harris J identified the relevant private international law principles underlying this orthodox approach as follows:
“[Generally] matters concerning the constitution and management of the affairs of a foreign company are determined by the laws of the place of its incorporation.” (at para. 7) Consistently, as a general principle, the law of the place of incorporation is the appropriate law and system under which to liquidate a company. Thus, “a winding up in a company’s place of incorporation will be given extra-territorial effect in Hong Kong” (at para. 9).
The extra-territorial effect extends to the distribution of a company’s assets to its creditors. The ordinary principle of private international law is that only the jurisdiction of a person’s domicile can effect a universal succession to its assets. Thus, in the cross-border insolvency context, the place of incorporation should “generally be the system of distribution and a winding up of a company’s assets in Hong Kong is ancillary to it” (at para. 13).
Consistent with the English orthodox approach, “[the] current position in Hong Kong is that the court recognises only insolvency practitioners appointed in the place of incorporation” (at para. 22).
A more flexible approach: Company’s centre of main interest (COMI)
However, while the orthodox approach is consistent with private international law principles, Harris J opined that “we have reached the stage at which this question needs to be reconsidered” (at para. 22).
The primary reason underlying his Lordship’s ruling is the “commercial practice in the SAR and the Mainland” (at para. 22). It is a common feature for business people in Hong Kong to use holding companies incorporated in an offshore jurisdiction with whom they have no connection other than registration, often described as “letterbox” jurisdictions (at para. 19). A strict application of the orthodox approach would mean that the Hong Kong court would lose the flexibility to recognise the insolvency process in some other jurisdictions which have a stronger connection with the company. Therefore, “the restricted view of recognition and assistance … does not serve Hong Kong well” (at para. 19).
His Lordship cited the Singaporean High Court decision of Re Opti-Medix Limited [2016] SGHC 108, where Abdullah JC concluded that the common law in Singapore permits the recognition of insolvency proceedings in a company’s centre of main interest (“COMI”) if it is different from its place of incorporation. Abdullah JC put weight on the limitation of the orthodox approach in light of the common commercial practice in Singapore of the use of offshore holding companies.
Therefore, while Hong Kong has not adopted the UNCITRAL Model Law on Cross-Border Insolvency (“Model Law”), Harris J was content to recognise under Hong Kong common law the concept of COMI from the Model Law and the Singaporean common law prior to Singapore’s adoption of the Model Law. His Lordship concluded that “[there] is nothing in principle preventing recognition of liquidators appointed in a company’s COMI or a jurisdiction with which it has sufficiently strong connection to justify recognition” (at para. 22). The recognition of insolvency proceedings in a company’s COMI “is likely to better reflect the reality” and “it is more efficient and effective for an insolvency process to be managed out of the location of COMI” (at para. 27).
Future Approach
Following the above discussion, Harris J helpfully set out the approach which is to be adopted by the Hong Kong Court when there is a potential contest for recognition between insolvency proceedings in which a company’s COMI is located and in the company’s place of incorporation, at para. 35, as follows:
“(1) Generally, the place of incorporation should be the jurisdiction in which a company should be liquidated; in practice this means it will be the system for distributions to creditors.
(2) However, if the COMI is elsewhere regard is to be had to other factors:
(a) Is the company a holding company and, if so, does the group structure require the place of incorporation to be the primary jurisdiction in order effectively to liquidate or restructure the group.
(b) The extent to which giving primacy to the place of incorporation is artificial having regard to the strength of the COMI’s connection with its location.
(c) The views of creditors.”
The Present Case
Harris J referred to his Lordship’s earlier decision in Re China Huiyuan Juice Group Limited [2020] HKCFI 2940 on the principles of the determination of an application for an adjournment to permit restructuring. In the present case, his Lordship refused to adjourn the winding-up petition in the present case for the reasons, inter alia, that the Company’s COMI has been located at all material times in Hong Kong (at para. 39); there is insufficient information about the restructuring exercise (at para. 42); and the creditors of the Company are sceptical of the prospects of the restructuring exercise and the “court will normally defer to the creditors on matters of commercial judgment unless there is a difference between them, which requires determination.” (at para. 43)
On the issue of adjournment of local winding up petitions for the recognition and assistance of foreign soft-touch provisional liquidators, Harris J reiterated the high threshold that needs to be satisfied for such applications:
“Going forward I anticipate that unless the agreement of a petitioner and supporting creditors have been obtained in advance the court will not deal with recognition and assistance applications made by soft-touch provisional liquidators after a winding up petition has been presented in Hong Kong on the papers.” (at para. 42)
Michael Lok and Sharon Yuen acted for the joint provisional liquidators.
