In the recent decision of China Solar Energy Holdings Limited  HKCFI 555, Mr. Justice Harris dismissed a winding-up application and attempts to discharge the Company’s provisional liquidators, holding that provisional liquidations appointed in Hong Kong for the purposes of preserving the Company’s assets, may also be granted powers to explore and facilitate the restructuring of the Company’s debts and liabilities.
The decision concerned China Solar Energy Holdings Limited (the Company), a company listed on the Hong Kong Stock Exchange (HKSE), with the trading of its shares suspended since 13 August 2013. On 21 August 2015, joint provisional liquidators (JPLs) were appointed to the Company with asset preservation and restructuring powers. The JPLs subsequently procured an investor to inject a profit-making business into the Company and submitted various resumption proposals to the HKSE.
Ankang Ltd, a creditor and shareholder of the Company, subsequently commenced proceedings to wind-up the Company and sought to discharge the JPLs on the basis that it does not support the current restructuring proposal on the table.
Ankang argued that (i) Re Legend International Resorts Ltd  2 HKLRD 192 is authority that the appointment of provisional liquidators cannot be permitted if their sole function is to carry out a business or debt restructuring; given the JPLs sole or primary concern is the restructuring of the Company, their appointment is a misuse of the provisional liquidation regime, (ii) the JPLs cannot say that they are needed to protect the Company’s asset in the form of its listing status because a company’s listing status is not an asset.
In Re Legend, the Court of Appeal held that the appointment of provisional liquidators must be “for the purposes of winding up”, not avoiding winding up; and that restructuring a company “is an alternative to a winding-up”.
Mr. Justice Harris held that Ankang’s arguments amounted to a misreading of Re Legend, does not comport with the Hong Kong statutory regime and appears to be inconsistent with post-Legend case law.
- In stating “for the purposes of winding up” [argued by Ankang], the Court of Appeal in Re Legend must not have meant that the intended result of any provisional liquidation must be winding up. This would contradict the Court of Appeal’s own endorsement of the practice to appoint provisional liquidators to preserve assets with restructuring powers.
- The law has never been that provisional liquidation is meant to lead to a winding-up, but rather that it ensures that a winding-up will not be frustrated.
- When the Court of Appeal said provisional liquidation cannot be “solely for the purpose of enabling a corporate rescue to take place” and“[r]estructuring a company is an alternative to winding-up”, the Court of Appeal was merely emphasizing that, where the matters associated with a winding-up are absent, in particular where the company’s assets are not in jeopardy, it would not be appropriate to order a provisional liquidation, despite the company’s general need for a restructuring.
- The result of Ankang’s interpretation leads to a counter-intuitive scenario where provisional liquidators must abandon their restructuring efforts once they have completed their preservation efforts. This approach is not in the best interest of creditors.
- There is no hint in the statutory regime that appointment of the JPLs must be restricted in the manner suggested by the petitioner in order to increase the likelihood of a winding-up.
- Post – Re Legend case law demonstrates that even after the provisional liquidators have secured the company’s assets, they may continue to exercise their restructuring powers pending the resolution of the winding-up petition.
- A company’s listing status is akin to a non-transferable stock exchange membership which is nonetheless an asset of the member.