The Court of Appeal decision in Re Legend International Resorts [2006] 2 HKLRD 192 had caused many to doubt if provisional liquidators appointed in Hong Kong could play a restructuring role at all. Twelve years later, in Re China Solar Energy Holdings [2018] HKCFI 555, Harris J has clarified that provisional liquidators need to be appointed on such conventional grounds as asset preservation. But where the circumstances warrant it, the provisional liquidators may be given restructuring powers and may pursue the company’s restructuring exercise to fruition.
The China Solar facts and decision
China Solar Energy Holdings Limited (“Company”) was incorporated in Bermuda and listed on the Hong Kong Stock Exchange (“HKSE”), but trading in the Company’s shares had been suspended since August 2013.
Since January 2015 the Company had given in various stages of the delisting procedure because of the Company’s failure to comply with the listing requirements. In August 2015, on the Company’s application, provisional liquidators (“PLs”) were appointed to the Company on the basis that the PLs were needed to: (a) safeguard the Company’s assets (including the Company’s listing status) which were in jeopardy, and (b) investigate certain suspicious transactions entered into by the Company.
The PLs’ terms of appointment included a power to pursue the Company’s restructuring. Thus from the outset, the PLs intended to procure a restructuring with a view to the Company resuming the trading of its shares. Together with a potential investor, the PLs had been working on various re-listing proposals to be submitted to HKSE.
In February 2017, however, the petitioner (a shareholder of the Company), who in fact supported the Company’s application for provisional liquidation and intended to invest in the Company’s restructuring, applied to the court to remove the PLs. The petitioner argued that, because the PLs had finished their asset preservation tasks, the PLs primary remaining role would be to pursue the Company’s restructuring. That, according to the petitioner, would not be permissible under Legend because Legend held that provisional liquidation must be for the purpose of a winding-up, and not for the purpose of avoiding a winding-up. A successful restructuring of the Company would avoid a winding-up.
Harris J dismissed the petitioner’s application. His Lordship reasoned and explained the effect of Legend as follows. The court may appoint provisional liquidators only on conventional grounds, such as the need to preserve the company’s assets. In other words, provisional liquidators may not be appointed solely for the purpose of restructuring. Where the circumstances so warrant, however, the provisional liquidators may be given restructuring powers. The provisional liquidators will be permitted complete the company’s restructuring, even if they have completed their other tasks, such as asset preservation. Terminating the provisional liquidators just because their remaining primary task concerns restructuring would be detrimental to the creditors’ collective interest. This would not be consistent with the statutory purpose underlying the appointment of provisional liquidators.
Comments
This decision is a much welcome clarification of Legend. For practitioners, the decision stands for the following propositions:
1. The Hong Kong court may appoint provisional liquidators only on conventional grounds, such as asset preservation and investigation.
2. In the right circumstances (such as the existence of strong creditor support), provisional liquidators may be given powers to restructure the company’s business and indebtedness.
3. Provisional liquidators with restructuring powers may focus on restructuring even if they have completed their tasks for which they were appointed.
4. Thus the Hong Kong provisional liquidation regime may sometimes help a foreign company achieve a restructuring, as the facts in China Solar demonstrate.
DVC members involved in this case are:
José-Antonio Maurellet SC, John Hui and Jonathan Chan for the petitioner
John Scott SC for the Company
Clifford Smith SC and Alexander Tang for the provisional liquidators
Patrick Chong for an investor
William Wong SC and Look-Chan Ho co-authored this Case Report.
