“Scanty in the extreme restructuring proposal” not recognized - Hong Kong Court re-casts common law recognition
In a recent case by the Hong Kong High Court in the matter of Li Yiqing v. Lamtex Holdings Ltd, Mr Justice Harris wound-up a foreign Bermudian company, listed on the HKEX, that had already been placed into “light touch” provisional liquidation in Bermuda, and adjourned the decision to recognise the provisional liquidators.
In his decision, Mr Justice Harris questioned whether the current practice in Hong Kong to only recognise insolvency practitioners appointed in the place of incorporation should be changed so as to allow for recognition of insolvency practitioners that have been appointed by a foreign Court, for example, in a company’s COMI (applying UNITRAL Model Law analogous principles) or a jurisdiction with which it has a “sufficiently strong connection” (applying the common law "sufficient connection" test for exorbitantly winding up a foreign company). This is consistent with the obiter dicta of Chief Justice Smellie of the Grand Court of the Cayman Islands in Re Sun Cheong Creative Development Holdings Limited, as to cooperation between the Grand Court and the Hong Kong Court.
It was held that the following approach should determine which jurisdiction should be the primary jurisdiction to conduct a company’s insolvency process:
- The place of incorporation should be the jurisdiction in which a company should be liquidated - following the private international law rule that the status of a company is determined by its place of incorporation. In cases in which a listed company’s business is in the Mainland it may be necessary because of the common structure of such groups for the holding company, if it is incorporated in an offshore jurisdiction, to be wound up in its place of incorporation in order for liquidators to have any prospect of obtaining control of Mainland subsidiaries, however;
- If the COMI of a company is elsewhere, then regard should be had to other factors:
- Is the company a holding company, if so, does the group structure require the place of incorporation to be the primary jurisdiction for an effective liquidation or restructuring of the group?
- 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.
- The views of creditors.
It was held that “the facts of this case justify the court making the order sought by the creditors who have come forward to express a view on the present controversy. The COMI of the Company is in Hong Kong and it has not been argued before me that if the Company is to be wound up this should be done in Bermuda or that a winding up order in Hong Kong would be futile”.
The decision is clearly analytically sound, and correct on the facts. It may even be said to always have been the better interpretation of the common law of Hong Kong, in that forum shopping seeking to deny creditors their legal rights, relying upon “scanty in the extreme” restructuring proposals, is undesirable. In such a case, a winding up should follow. It is a timely reminder that in filing restructuring proposals through the use of light touch provisional liquidation, practitioners should ensure that the offshore court can be satisfied that the proposals are truly better for the creditors as a whole.
