Editor's note: Following is an article by Robin Darton of Tanner De Witt (an established, independent Hong Kong law firm), addressing issues in his home venue of Hong Kong. Robin is particularly well suited to the task,having practiced for over 20 years as a solicitor in Hong Kong in litigation and other contentious issues, with an emphasis on contentious insolvency and restructuring matters in the UK, Hong Kong and the Asia region. TAB
Although cross-border elements appear in insolvencies all around the globe, offering a view from Asia presents particular problems because it is not always easy to reach agreement on what constitutes “Asia.” On any view, however, Asia encompasses a vast area, consisting of many jurisdictions with diverse languages and cultures. This diversity is further reflected in the laws of the various jurisdictions, as well as their jurisprudential ancestry, which informs how the laws are interpreted and also how a judge or governmental authority considers events from overseas, such as the status and powers of an insolvency office-holder appointed elsewhere if assistance is sought.
All this makes for an interesting — but challenging — mix for insolvency professionals in this region. For this column, I will focus on my own jurisdiction, Hong Kong, although for any future editions, I will draw on the experiences of fellow professionals around Asia.
Notwithstanding the Reunification with the Peoples’ Republic of China (PRC) on July 1, 1997, Hong Kong maintains its own laws and legal system. From the perspective of insolvency matters, the starting point is the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap. 32). Unfortunately, the ordinance is based largely on a 1948 statute from the U.K., with the provisions of the U.K.’s Insolvency Act 1986 not being enacted in Hong Kong. Thus, there is no real statutory provisions for corporate rehabilitation and no statutory provision for giving assistance to foreign insolvency processes.
Hong Kong’s history from a commercial perspective as “the gateway to China” means that assignments will often involve the PRC, which will often take the form of a Hong Kong company being the holding company for an entity in the PRC, with the “real” assets being held there. Aside from the direct legal issues this raises (with the PRC laws, and approach adopted by its courts, being very different from Hong Kong), there are also other regulations that can complicate the ability of an office-holder from outside of the PRC to realize assets there, not in the least the foreign exchange controls and dealing with the State Administration for Industry and Commerce (SAIC). One needs to deal with the SAIC to replace the “legal representative” of a PRC entity. The legal representative is a post that holds particular importance in the PRC, vesting ultimate authority for an entity in an individual. Historically, it has been difficult to get the SAIC to register a change of a legal representative without the current incumbent's consent, which is often not forthcoming. However, a recent decision of the Supreme Court in Beijing will hopefully change this, with the court ruling that a foreign-appointed liquidator (appointed in that case in Singapore) does have the direct right to insist on a unilateral change of legal representative[1].
Furthermore, the Hong Kong “holding” entity will, in turn, commonly be owned by a holding company from another jurisdiction. This will often be a British Virgin Islands (BVI) company or Cayman Islands company, or both (a BVI company being the immediate parent and the Cayman Islands company being the ultimate parent). Even if the layer of a Hong Kong holding company is excluded, there could still be a Hong Kong connection, such as the management being operated from Hong Kong.
Due to the existence of BVI and/or Cayman holding companies, a topic of some interest to Hong Kong practitioners recently has been the consideration by the courts in those jurisdictions as to recognition or assistance to be given to office-holders appointed elsewhere. This has also been of considerable interest to U.S. practitioners given the common structure of funds being registered in the BVI or Cayman but sold to investors in the U.S.
In Hong Kong, the ordinance provides that “unregistered companies,” which includes foreign companies, can be wound up by the Hong Kong Court (section 327 of the ordinance). This provision will often be considered where a liquidator is appointed to a company elsewhere and the management of that company’s PRC business is conducted from here. Section 327(3) of the Ordinance provides:
(3) The circumstances in which an unregistered company may be wound up are as follows —
(a) if the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs;
(b) if the company is unable to pay its debts;
(c) if the court is of opinion that it is just and equitable that the company should be wound up.
Section 327(1) extends the powers of a domestic liquidator to a liquidator appointed over a foreign company pursuant to these provisions. This includes the powers to seek a court order to force those with information relating to the company to disclose (section 221). For this, the ancillary liquidation pursuant to section 327 is required, as such order is pursuant to a statutory power (although recent decisions in the Caribbean could call for this orthodox approach to be re-examined[2]).
The Hong Kong court has recently reaffirmed that only one of the criteria identified in section 327(3) needs be present for the jurisdiction to be exercised.[3] However, the court will then consider whether it should exercise its discretion to do so, with the starting point being that the court will consider it to be an exorbitant exercise of its jurisdiction to wind up a non-Hong Kong company. In this regard, the court has, in accordance with the common law that are in position in England, adopted a test whereby there are three “core requirements”:
(1) There is sufficient connection with Hong Kong … commonly the presence of assets, but this is not essential;
(2) There is a reasonable possibility that the winding-up order would benefit those applying for it; and
(3) The Court must be able to exercise jurisdiction over one or more persons interested in the distribution of the company’s assets.
In the China Medical decision, the court considered two issues: (1) whether the core requirements went to jurisdiction or were only factors for the Court to take into account when exercising its discretion and (2) whether the commonly cited third core requirement is in fact correct. The court determined that the core requirements go to the discretion such that jurisdiction is engaged if one of the elements specified in section 327(3) is present and the core requirements are then relevant to the exercise of discretion.
The court held that the third core requirement does properly exist and is not satisfied by simply presenting the petition. The judge described the third requirement as being satisfied where “there are persons with sufficient connection with the jurisdiction (other than by being the petitioner or a creditor who would become subject to the court’s jurisdiction if a winding-up order were to be made and he submitted a proof of debt) and sufficient economic interest in the winding up of the company to justify making an order which will engage the Hong Kong winding-up regime.” The judge held that a Hong Kong-based manager of the funds through which certain notes were held (funds that were undoubtedly for creditors) did not have a sufficient interest. Likewise, he was not prepared to take into account a Hong Kong-based creditor who had acquired the debt post-petition.
However, it is not always necessary for all of the core requirements to be satisfied in every case. Citing an earlier decision of his own, the judge stated that “[t]he significance of each requirement will vary from case to case. An exceptional case may arise in which the connection with Hong Kong is so strong and the benefits of a winding-up order for the creditors of a company so substantial that the Court will be willing to exercise its jurisdiction despite the third criteria not being satisfied.” Finally, the judge was not prepared to consider the position from the perspective of comity or assistance to a foreign liquidator, because the ancillary winding-up petition was presented by the company’s own foreign-appointed liquidator.
A detailed analysis of these issues is beyond the scope of this article, but it is hoped that this short introduction gives something of a taste of certain issues that arise in Asian insolvency matters.
[1] Sino-Environment Technology Group, decision of June 11, 2014.
[2] See, e.g., PricewaterhouseCoopers v. Saad Investments Ltd. and Others [2013] CA (BDA)7 Civ. (in Bermuda); Irving H. Picard and Bernard L. Madoff Investment Securities LLC (in Cayman), and Picard v. Madoff Investment Securities (in BVI).
[3] China Medical Technologies Inc., [2014] 2 HKLRD 997.