Li Yiqing v. Lamtex Holdings Ltd

HCCW 263/2020

[2021] HKCFI 622

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 263 OF 2020

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Before: Hon Harris J in Court

Date of Hearing: 28 January 2021

Date of Decision: 11 March 2021

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D E C I S I O N

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Introduction

1.The Petition before me, which was issued on 20 August 2020, 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.  The company which is the subject of the Petition, Lamtex Holdings Limited, (“Company”) is incorporated in Bermuda and listed on the Main Board   of The Stock Exchange of Hong Kong Limited (“SEHK”).  Until it encountered the problems that have caused its current financial difficulties, which it is not in dispute have rendered it insolvent, it carried on a series of unrelated businesses in the Mainland and Hong Kong: loan financing, securities brokerage, trading and manufacturing electronic businesses in the Mainland and Hotel operations also in the Mainland.

2.It is subject to two winding-up petitions.  The present Petition has been issued by Li Yiqing, whose undisputed debt of HK$10,200,000 as at 2 July 2020 arises under a series of bonds governed by Hong Kong law issued very largely to individuals resident in the Mainland.  The attraction of the bonds is that they satisfy Hong Kong Immigration’s investment requirements and are capable of supporting an application for the right to reside in the SAR.  Six other bond holders support Ms Li’s Petition for an immediate winding up order.  No creditors of the Company oppose Ms Li’s application.

3.On 30 October 2020 the Company presented a petition in Bermuda seeking a winding up order and also an order appointing Osman Mohammed Arab and Wong Kwok Keung of RSM as provisional liquidators for restructuring purposes.  On the same day the Company issued an application for Messrs Arab and Wong’s appointment as    soft-touch provisional liquidators (“JPLs”).  On 10 November 2020 the Chief Justice granted that application.  The application was unopposed, although given the short notice of the application given to the bondholders, who I am told by the JPLs constitute nearly the Company’s entire debt, and the fact that they are individuals resident in the Mainland, this is unsurprising particularly given the complications created by Covid-19.

4.A letter of request seeking the recognition and assistance of the JPLs by the High Court of Hong Kong was issued by the Chief Justice.  On 23 November 2020 I granted the application made by the JPLs for their recognition and assistance in progressing a restructuring of the Company’s debt.

5.What I am required to do is to determine whether to put the Company into immediate liquidation in Hong Kong or to adjourn the Petition in order to allow the Company and the JPLs the opportunity to restructure the debt.  In practice I understand that this is likely to involve the Company’s principal shareholder finding another investor who with him will subscribe for new shares in sufficient value to repay the bondholders.  I will explain how the attempts to achieve this have developed later in this Decision.

6.It is not in dispute that Ms Li and the supporting creditors are owed the sums they claim.  Neither is it in dispute that the Petition satisfies the three core requirements that guide the court in determining whether to exercise its discretionary jurisdiction to wind up a company incorporated in a foreign jurisdiction.  Ms Li is on the face of the matter entitled to a winding up order ex debito justitae unless the Company can demonstrate some relevant and persuasive reason to adjourn the Petition.  Various issues require consideration in order to determine the Petition:

(1)  The private international law principles governing recognition of a foreign winding up order.

(2)  The impact of a winding up order on a company’s assets and their distribution during a liquidation.

(3)  Recognition and assistance of a foreign insolvency process generally at common law.

(4)  How a dispute over which jurisdiction is to be the primary one to conduct an insolvency process is to be resolved.

(5)  The application of the principles applied to the facts of this case.

Recognition of a foreign winding up order

7.A winding up in a company’s country of incorporation will as a matter of Hong Kong rules of private international law be given extra-territorial effect in Hong Kong [1]. This is a consequence of the more general established principles of private international law that apply to foreign companies.  This is demonstrated by rules 175 to 179 in The Conflict of Laws, Dicey, Morris and Collins (15^th ed.,).  These rules recognise that, as one would expect, 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.  The authors of Conflict of Laws explain in [3-102] of the 2^nd volume that Rule 179 is justified because the law of the place of incorporation determines who is entitled to act on behalf of a corporation and in footnote 430 various authorities are cited as establishing this principle.  Consistent with this, as a general principle the domiciliary law of a company is the appropriate law and system under which to liquidate a company [2].  Section 327 of the Companies (Winding Up and Miscellaneous Proceedings) Ordinance, Cap 32 (“Ordinance”), which gives the Court of First Instance the jurisdiction to wind up a company incorporated in a foreign jurisdiction, is a statutory exception to this principle.  The authors of the Conflicts of Laws in [3-102] go on to explain in the same paragraph that “If under that law [the law of the place of incorporation] a liquidator is appointed to act then his authority should be recognised here”.

8.From this foundation the common law has developed a doctrine commonly referred to as “modified universalism”, which guides courts determining cross-border issues arising in transnational insolvencies.  Its principal feature is the requirement that so far as consistent with justice and public policy the courts in the local jurisdiction (in this case Hong Kong) cooperate with the courts in the country of the principal liquidation to ensure that all of a company’s assets are distributed to its creditors under a single system of distribution [3]. The present case requires consideration of the extent to which the principles of private international law and modified universalism require primacy to be given to a company’s place of incorporation in the process of determining which single system is to be recognised by courts in different jurisdictions dealing with transnational insolvencies.  The facts of this case require consideration of a refinement of that issue, namely, whether primacy is to be accorded to the proceedings in the place of incorporation if it is not a winding up, but a soft-touch provisional liquidation.  That issue itself requires further refinement as the local jurisdiction (Hong Kong) is the one which for the purposes of liquidation of the Company’s assets and distributions to creditors the Company has the closest connection.

Effect of a winding up order on a company’s assets

9.I have already explained that under Hong Kong rules of private international law a winding up in a company’s place of incorporation will be given extra-territorial effect in Hong Kong.  The effect extends to the distribution of a company’s assets to its creditors.

10.The making of a winding up order divests a company of its beneficial ownership of its assets and subjects to them to a statutory trust for their distribution in accordance with the rules of distribution in the Ordinance.  This applies to assets wherever they are located.  This follows from the language of section 197 of the Ordinance [4].  As Lords Sumption and Toulson explain in Stichting Shell[5] this “…reflects the ordinary principle of private international law that only the jurisdiction of a person’s domicile can effect a universal succession to its assets. They will fall to be distributed in the BVI liquidation pari passu among unsecured creditors and, to the extent of any surplus, among its members.”[6]

11.Their Lordships continue:

“15. The necessarily excludes a purely territorial approach in which each country is regarded as determining according to its own law the distribution of the assets of an insolvent company located within its territorial jurisdiction. The lex situs is of course relevant to the question what assets are truly part of the insolvent estate. It will generally determine whether the company had at the relevant time a proprietary interest in an asset, and if so what kind of interest. Thus, if execution is levied on an asset of the company within the territorial jurisdiction of a foreign court before the company is wound up, it will no longer be regarded by the winding up court as part of the insolvent estate. But short of a transfer of a proprietary interest in the asset prior to the winding up order, it is generally for the law of that jurisdiction to determine the distribution of the company’s assets among its creditors and members, at any rate where the company is being wound up in the jurisdiction of its incorporation. In England and the BVI the court may, and commonly does, assert dominion over the local assets of an insolvent foreign company by conducting an ancillary winding up. But it does so in support of the principal winding up, and so far as it can in such a way as to ensure that creditors and members are treated equally regardless of the location of the assets…”

12.As a consequence the court may intervene to enjoin a creditor who commences proceedings in another jurisdiction from continuing with them if they will achieve a result which will interfere with the statutory scheme for distribution of assets [7]. The court acts in such cases in the interests of the general body of creditors. Their Lordships continue “In protecting its insolvency jurisdiction, to adopt Lord Goff’s phrase, the court is not standing on its dignity.  It intervenes because the proper distribution of the company’s assets depends on its ability to get in those assets so that comparable claims to them may be dealt with fairly in accordance with a common set of rules applying equally to all of them. There is no jurisdiction other than that of the insolvent’s domicile in which that result can be achieved.  The alternative is a free-for-all in which the distribution of assets depends on the adventitious location of assets and the race to grab them is to the swiftest , and the best informed, best resourced or best lawyered” [8]. However in order for the court to be able to intervene the creditor must be subject to the in personam jurisdiction of the court of the place of incorporation and if the creditor is a foreign entity it will have to have taken some steps to submit to that jurisdiction.  In the present case there is no suggestion that the Petitioner has submitted to the jurisdiction of the Bermuda court and could be enjoined in Bermuda from taking action to interfere with the insolvency process in Bermuda.

13.This principle suggests that the place of incorporation should, viewed from the perspective of Hong Kong law, generally be the system of distribution and a winding up of a company’s assets in Hong Kong is ancillary to it.

Recognition of foreign insolvencies at common law

14.As Lord Collins explains in [21]–[22] of Rubin v Eurofinance SA[9] jurisdiction in international bankruptcy has been the subject of discussion and debate since the late 19^th century.  In the case of personal bankruptcy the significance of domicile was considered and determined as early as 1764 in Solomon v Ross [10], in which it was held that there should be one process of distribution of a bankrupt’s property, and that it should be administered by the bankrupt’s place of domicile.  The Privy Council’s decision in Singularis Holdings Ltd v PricewaterhouseCoopers [11] explains the significance of the place of incorporation when considering whether a foreign insolvency process should be recognised at common law.  In [19] Lord Sumption explains modified univeralism by quoting [29]–[33] of Lord Collins decision in Rubin v Eurofinance SA [12]:

“29. Fourth, at common law the court has power to recognise and grant assistance to foreign insolvency proceedings. The common law principle is that assistance may be given to foreign office-holders in insolvencies with an international element. The underlying principle has been stated in different ways: ‘recognition … carries with it the active assistance of the court’: In re African Farms Ltd [1906] TS 373, 377; ‘This court … will do its utmost to co-operate with the US Bankruptcy Court and avoid any action which might disturb the orderly administration of [the company] in Texas under ch 11’: Banque Indosuez SA v Ferromet Resources Inc [1993] BCLC 112, 117.

30. In Crédit Suisse Fides Trust v Cuoghi [1998] QB 818, 827, Millett LJ said:

‘In other areas of law, such as cross-border insolvency, commercial necessity has encouraged national courts to provide assistance to each other without waiting for such co-operation to be sanctioned by international convention… It is becoming widely accepted that comity between the courts of different countries requires mutual respect for the territorial integrity of each other's jurisdiction, but that this should not inhibit a court in one jurisdiction from rendering whatever assistance it properly can to a court in another in respect of assets located or persons resident within the territory of the former.’

31. The common law assistance cases have been concerned with such matters as the vesting of English assets in a foreign office-holder, or the staying of local proceedings, or orders for examination in support of the foreign proceedings, or orders for the remittal of assets to a foreign liquidation, and have involved cases in which the foreign court was a court of competent jurisdiction in the sense that the bankrupt was domiciled in the foreign country or, if a company, was incorporated there…

33. One group of cases involved local proceedings which were stayed or orders which were discharged because of foreign insolvency proceedings.  Thus in Banque Indosuez SA v Ferromet Resources Inc [1993] BCLC 112 an English injunction against a Texas corporation in Chapter 11 proceedings was discharged; cf In re African Farms Ltd [1906] TS 373 (execution in Transvaal by creditor in proceedings against English company in liquidation in England stayed by Transvaal court), applied in Turners & Growers Exporters Ltd v The Ship ‘Cornelis Verolme’ [1997] 2 NZLR 110 (Belgian shipowner in Belgian bankruptcy: ship released from arrest); Modern Terminals (Berth 5) Ltd v States Steamship Co [1979] HKLR 512 (stay in Hong Kong of execution against Nevada corporation in Chapter 11 proceedings in United States federal court in California), followed in CCIC Finance Ltd v Guangdong International Trust & Investment Corpn [2005] 2 HKC 589 (stay of Hong Kong proceedings against Chinese state-owned enterprise in Mainland insolvency). Cases of judicial assistance in the traditional sense include In re Impex Services Worldwide Ltd [2004] BPIR 564, where a Manx order for examination and production of documents was made in aid of the provisional liquidation in England of an English company.”

15.In Lord Collins own judgment in Singularis his Lordship in explaining how local statutory powers and the common law may be used in aid of foreign insolvencies also says this:

“52. In my judgment in Rubin v Eurofinance SA, at para 29, I quoted what Millett LJ had said in Crédit Suisse Fides Trust v Cuoghi [1998] QB 818, 827:

‘In other areas of law, such as cross-border insolvency, commercial necessity has encouraged national courts to provide assistance to each other without waiting for such co-operation to be sanctioned by international convention… It is becoming widely accepted that comity between the courts of different countries requires mutual respect for the territorial integrity of each other's jurisdiction, but that this should not inhibit a court in one jurisdiction from rendering whatever assistance it properly can to a court in another in respect of assets located or persons resident within the territory of the former.’

…

54. Most of the cases fall into one of two categories. The first group consists of cases where the common law or procedural powers of the court have been used to stay proceedings or the enforcement of judgments. Several of these cases were mentioned in Rubin v Eurofinance SA [2013] 1 AC 236, para 33. They include (subject to what is said below) In re African Farms Ltd [1906] TS 373, where execution in Transvaal by a creditor in proceedings against an English company in liquidation in England was stayed by the Transvaal court, which was applied in Turners & Growers Exporters Ltd v The Ship ‘Cornelis Verolme’ [1997] 2 NZLR 110 (Belgian shipowner in Belgian bankruptcy: ship released from arrest); and Banque Indosuez SA v Ferromet Resources Inc [1993] BCLC 112, where an English injunction against a Texas corporation in Chapter 11 proceedings was discharged; and two cases in Hong Kong: Modern Terminals (Berth 5) Ltd v States Steamship Co [1979] HKLR 512 (stay in Hong Kong of execution against Nevada corporation in Chapter 11 proceedings in United States federal court in California), followed in CCIC Finance Ltd v Guangdong International Trust & Investment Corpn [2005] 2 HKC 589 (stay of Hong Kong proceedings against Chinese state-owned enterprise in Mainland insolvency).

…

58.  A second group of cases is where the statutory powers of the court have been used in aid of foreign insolvencies.  The best known example is the use of the long-standing power to wind up foreign companies which are being wound up (or even have been dissolved) in the country of incorporation.  In In re Bank of Credit and Commerce International SA (No 10) [1997] Ch 213 Sir Richard Scott V-C conducted an exhaustive analysis of the cases on ancillary liquidations, and concluded (at p 246): (1) Where a foreign company was in liquidation in its country of incorporation, a winding up order made in England would normally be regarded as giving rise to a winding up ancillary to that being conducted in the country of incorporation.  (2) The winding up in England would not be ancillary in the sense that it would within the power of the English liquidators to get in and realise all the assets of the company worldwide: they would necessarily have to concentrate on getting in and realising the English assets.  (3) Since in order to achieve a pari passu distribution between all the company’s creditors it would be necessary for there to be a pooling of the company’s assets worldwide and for a dividend to be declared out of the assets comprised in that pool, the winding up in England would be ancillary in the sense, also, that it would be the liquidators in the principal liquidation who would be best placed to declare the dividend and to distribute the assets in the pool accordingly.  (4) None the less, the ancillary character of an English winding up did not relieve an English court of the obligation to apply English law, including English insolvency law, to the resolution of any issue arising in the winding up which was brought before the court.”

16.These decisions establish that so far as the common law in England is concerned recognition is limited to liquidators appointed in a company’s place of incorporation.  This is consistent, in my view, with the principles I have described in [7]–[13] and the significance they give to a collective insolvency process commenced in a company’s place of incorporation. However, not all jurisdictions adopt the same approach to recognition as the English courts and are willing to countenance recognition of liquidations commenced in jurisdictions other than that of the place of incorporation.  This is a consequence of local statutory provisions, in particular the incorporation of the UNCITRAL Model Law on Cross-Border Insolvency (“Model Law”) into the law of the local jurisdiction, and partly the common law developing differently: in particular in Singapore.

17.Prior to Singapore adopting the Model Law, which generally treats a company’s centre of main interest (“COMI”) as the determinant of whether or not a liquidation should be recognised as the relevant foreign main proceedings for the purposes of recognition and enforcement, the courts of Singapore had to rely on the common law in order to grant orders assisting foreign liquidators.  In Opti-Medix Limited [13] Abdullah JC considered whether the court’s recognition and assistance of foreign liquidators should be limited to office holders appointed in a company’s place of incorporation.  Abdullah JC acknowledges that the English position limits recognition to liquidators appointed in the place of incorporation [14].  However, the Judge goes on to suggest in the following paragraphs that this approach does not sit well with the common commercial practice in jurisdictions like Hong Kong and Singapore of using companies incorporated in jurisdictions other than their COMI citing Lord Hoffmann in Re HIH Casualty and General Insurance Ltd [15], whose views were later rejected in Rubin v Eurofinance.

“19. In HIH [2008] 1 WLR 852, para 30, Lord Hoffmann said:

‘The primary rule of private international law which seems to me applicable to this case is the principle of (modified) universalism, which has been the golden thread running through English cross-border insolvency law since the 18th century. That principle requires that English courts should, so far as is consistent with justice and UK public policy, co-operate with the courts in the country of the principal liquidation to ensure that all the company’s assets are distributed to its creditors under a single system of distribution.’

And in Cambridge Gas Transportation Corporation v Official Committee of Unsecured Creditors of Navigator Holdings plc (‘Cambridge Gas’) [2007] 1 AC 508, para 16 he said, speaking for the Privy Council:

‘The English common law has traditionally taken the view that fairness between creditors requires that, ideally, bankruptcy proceedings should have universal application. There should be a single bankruptcy in which all creditors are entitled and required to prove. No one should have an advantage because he happens to live in a jurisdiction where more of the assets or fewer of the creditors are situated.’

20. The US Bankruptcy Court accepted in In re Maxwell Communication Corpn (1994) 170 BR 800 (Bankr SDNY) that the United States courts have adopted modified universalism as the approach to international insolvency:

‘the United States in ancillary bankruptcy cases has embraced an approach to international insolvency which is a modified form of universalism accepting the central premise of universalism, that is, that assets should be collected and distributed on a worldwide basis, but reserving to local courts discretion to evaluate the fairness of home country procedures and to protect the interests of local creditors.’”

18.Abdullah J agreed with passages from Cross-Border Insolvency by Tom Smith QC that the authorities do not support the restrictive approach to development of the common law to permit recognition of insolvency proceedings taking place in jurisdictions other than the place of incorporation and concluded that in Singapore the common law did permit recognition of insolvency proceedings in a company’s COMI [16] if it is different from the place of its incorporation.

19.As the increasing number of applications in Hong Kong for recognition and assistance illustrate it is common for business people in Hong Kong to use offshore companies [17].  The owners of such companies and the businesses they operate have no connection with the offshore jurisdiction.  Their COMI is likely to be in Hong Kong or in the Mainland.  In my view it is becoming increasingly clear that the restricted view of recognition and assistance explained in the judgments of Lord Sumption and Lord Collins does not serve Hong Kong well. It is a common feature of the corporate structure of Hong Kong and Mainland business groups that their holding companies are incorporated in an offshore jurisdiction with whom they have no connection other than registration.  These jurisdictions have been described by various courts as "letterbox” jurisdictions reflecting the common absence of any connection other than registration with the offshore jurisdiction.  As far as I am aware the term was first used by the European Court of Justice in In re Eurofood IFSC Ltd [18]in the context of an assessment of whether or not the presumption in the Community legislation that COMI is in the location of registration had been  rebutted and also the process of determining COMI under the EU Insolvency Regulation. The relevant passages are at page 542 [34]-[35]:

“It follows that, in determining the centre of the main interests of a debtor company, the simple presumption laid down by the Community legislature in favour of the registered office of that company can be rebutted only if factors which are both objective and ascertainable by third parties enable it to be established that an actual situation exists which is different from that which locating it at that registered office is deemed to reflect. That could be so in particular in the case of a ‘letterbox’ company not carrying out any business in the territory of the member state in which its registered office is situated.”

20.We find a similar characterisation of an offshore company by the US Bankruptcy Court in the context of determining COMI under Chapter 15 of the US Bankruptcy Code.   In Creative Finance Ltd [19]Judge Gerber of the United States Bankruptcy Court for the Southern District of New York refers to the British Virgin Islands as a “letterbox jurisdiction”, and consequently not normally eligible for recognition under Chapter 15.  The relevant passages are at page 5:

“And while a COMI can (and not infrequently does) change from the jurisdiction in which a foreign debtor actually did business to a ‘letterbox’ jurisdiction, it can do so only where material activities have been undertaken in the jurisdiction in which the foreign proceeding was filed—thus providing a meaningful basis for the expectations of third parties …….. Though they did most of their business in the U.K. and suffered entry of a judgment there, and though their operations were directed out of Spain and Dubai, the Debtors were organized under the law of a letterbox jurisdiction—the British Virgin Islands—though they did not do business there...”

21.In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd.[20], Judge Lifland denied recognition because the insolvency practitioners of the company, which was incorporated in the Cayman Islands by whose court they were appointed, failed to demonstrate that the company’s COMI was located there.  Subsequent to Bear Stearns, In re Basis Yield Alpha Fund (Master[21]), Gerber J. similarly rejected an application for recognition by insolvency practitioners appointed in Cayman where the company was incorporated, finding material issues of fact as to the propriety of foreign “main” recognition (notwithstanding the section 1516 presumption) with respect to Cayman liquidation proceedings where recognition was sought virtually immediately after the filing of the proceedings in the Cayman Islands.  In each of these cases, the Cayman Islands is characterised as a letterbox jurisdiction. The evidence showed (or at least strongly suggested) that the foreign debtors had been organized under Cayman law for tax or regulatory reasons, had principal places of business elsewhere in the world before their Cayman filings and had done little or no business in the Cayman Islands before U.S. recognition was sought thus impairing the U.S. courts’ ability to find that the debtors’ COMIs had shifted from the nations where they previously did business to the Cayman Islands. I understand that since Bear Stearns and Basis Yield were decided, foreign representatives from jurisdictions such as the Cayman Islands and BVI have increasingly frequently filed their U.S. chapter 15 cases only after they have undertaken substantial work in the offshore jurisdictions in order to address this problem.

22.It is becoming increasingly apparent that it is desirable, and it might reasonably be suggested essential, that the Hong Kong courts are able to deal with recognition and assistance using methods that are consistent with commercial practice in the SAR and the Mainland.  In response to suggestions for legislation to address this subject, it has been the Government’s position that for the time being it is a matter for the courts of Hong Kong to address using the techniques available at common law.  The current position in Hong Kong is that the court recognises only insolvency practitioners appointed in the place of incorporation.  In my view we have reached the stage at which this question needs to be reconsidered at there is much in my view to be said in support of Abdullah J’s conclusion that the common law in this area contains sufficient flexibility to develop so as to be consistent with commercial practice and there is nothing in principle preventing recognition of liquidators appointed in a company’s COMI or a jurisdiction with which it has a sufficiently strong connection to justify recognition, just as the Hong Kong court will exercise its discretion to wind up a foreign incorporated company if the connection between it and Hong Kong is substantial and the other core requirements are satisfied [22].  It might, I appreciate, be objected that there is a material difference in the case of the jurisdiction to wind up a foreign incorporated company, namely, the power is expressly conferred by statute.  This takes me back to Singularis [23].

23.In Singularis [24] the Privy Council considered the limits on the proper development of the common law to address issues arising in cross-border insolvency.  As Lord Sumption states in [19] “The question how far it is appropriate to develop the common law so as to recognise an equivalent power does not admit of a single, universal answer. It depends on the nature of the power that the court is being asked to exercise.”

24.Lord Collins in the introductory section of his judgment says this in [38]:

“In my judgment the answer to the present appeal is to be found in the following propositions. First, there is a principle of the common law that the court has the power to recognise and grant assistance to foreign insolvency proceedings. Second, that power is primarily exercised through the existing powers of the court. Third, those powers can be extended or developed from existing powers through the traditional judicial law-making techniques of the common law. Fourth, the very limited application of legislation by analogy does not allow the judiciary to extend the scope of insolvency legislation to cases where it does not apply. Fifth, in consequence, those powers do not extend to the application, by analogy ‘as if’ the foreign insolvency were a domestic insolvency, of statutory powers which do not actually apply in the instant case.”

25.Lord Collins expands on this summary in [65]–[69].  In [70] Lord Collins notes that how, if at all, the common law as it applies to recognition and assistance of foreign liquidators should be developed was not the issue on the part of the appeal under consideration, which as summarised in the first holding in the headnote was “…that there was a power at common law to assist the officers of a foreign court of insolvency jurisdiction or equivalent public officers by ordering the production of information in oral or documentary form which was necessary for the administration of a foreign winding up, but the power was not available to enable them to do something which they could not do under the law by which they had been appointed; and that, although the fact that express provision was made in Bermuda for the powers exercisable on the winding up of companies to which the Companies Act 1981 applied did not exclude the use of common law powers in relation to other companies which lay outside the scope of the statute altogether it was not a proper exercise of the power of assistance for the Bermudan court to make the order sought by the liquidators since the material which they sought in Bermuda was not obtainable under the domestic law of the court which had appointed them”.  As Lord Collins notes in [70] the issue before the court was “… whether, as the liquidators argue, legislation may be extended by the judiciary to apply to cases where the legislature has not applied it.  It raises a much more radical question than the familiar question whether a common law rule should be extended or developed or whether the extension or development should be left to Parliament.”

26.As I have already observed Hong Kong has no legislation dealing with recognition of foreign insolvencies.  Issues such as recognition of foreign soft-touch provisional liquidation do not involve using the common law to extend legislation.  In Hong Kong it is purely a matter of common law.  Singularis is authority that the common law generally permits recognition and assistance of foreign liquidations.  The issue I am currently considering is whether the common law of Hong Kong should be extended to permit recognition of insolvencies in places other than a company’s place of incorporation and in particular in which its COMI or something similar is to be found.  I can see no doctrinal reason why it should not be.

27.This, I recognise, is tangential to the issue I am considering, but if circumstances justify, as in my view they probably do, accepting the location of COMI as a basis for recognition it suggests that where, as in the present case, there is a contest for recognition between insolvency proceedings in the place in which a company’s COMI is located and in the company’s place of incorporation there is less reason to give primacy to the place of incorporation than the principles of private international law and the effect of a winding up order on the distribution of a company’s assets might suggest.  I have already illustrated in [20] that in a jurisdiction (New York), which applies the Model Law such a contest is likely to be resolved in favour of the place in which COMI is located.  If the place of incorporation is an offshore jurisdiction in most cases this is likely to better reflect the reality, namely, that a company’s assets, management and creditors have little connection with the place of incorporation and it is more efficient and effective for an insolvency process to be managed out of the location of COMI.

28.Ms Cheung suggested that the principles of modified universalism militated in favour of staying local (Hong Kong) proceedings in favour of foreign proceedings opened in the place of incorporation in order to preserve unitary global proceedings.  This may be so in many cases, but not so where the foreign proceedings are soft-touch provisional liquidation of the type in the present case, which involves a technique developed in Hong Kong to circumvent the problems caused by the Hong Kong Court of Appeal’s decision in Re Legend International Resorts Limited [25] and the soft-touch provisional liquidation is managed out of Hong Kong.  In other words, we are not here considering, which of two jurisdictions, in both of which are located a company’s creditors and assets, should be the jurisdiction controlling the system for distributions to creditors.  There is no dispute that any restructuring will involve a Hong Kong scheme of arrangement to which any scheme in Bermuda will in practice be ancillary.  The reality will be that if I adjourn the Petition and grant the JPLs the recognition and assistance they request the work that they undertake will take place in Hong Kong.  This is apparent from the fact that two of the three JPLs are Hong Kong liquidators and it is clear from their evidence that their work is being undertaken here and involves prospective investors from Hong Kong or the Mainland.

29.In a recent judgment of in the Financial Services Division of the Grand Court of the Cayman Islands in Re Sun Cheong Creative Development Holdings Limited[26] Chief Justice Smellie sets out the principle applicable under Cayman Law to recognition and assistance.  They can be summarised as follows:

(1)  All other things being equal, the jurisdiction to assume the role of primary insolvency proceeding will generally be presumed to be the place of incorporation of the company.  As such, the starting point would be for the company to be wound up by, or reorganized under the supervision of the court of the place of incorporation, unless there are compelling reasons justifying the displacement of the court of the place of incorporation as the primary jurisdiction: [6].

(2)  The Cayman court had acknowledged foreign courts to have assumed the role of primary insolvency proceedings in respect of the Cayman Islands incorporated companies in the limited situations where (i) there is a “particularly strong nexus” between the company and the foreign jurisdiction such that the legitimate expectation of interested parties as to the locus of the primary insolvency proceedings has shifted to that foreign jurisdiction; (ii) the foreign court had already appointed officer seeking to effect a restructuring for the benefit of stakeholders; and (iii) there were no competing proceedings in the Cayman Islands: [7].

(3)  It is not the practice of the Cayman court to defer automatically to winding up proceedings begun in a foreign jurisdiction simply because a petition was presented there first in time.  Instead, the Cayman court will consider on a case by case basis whether it is satisfied that there is a genuine intention on the part of the company to present a plan of   reorganisation in the Cayman Islands for the benefit of the company’s body of creditors: [8].

(4)  The Cayman court will be slow to give primacy to pure foreign winding up proceedings in respect of a Cayman Islands company where it is satisfied that there is an intention on the part of the company to present a plan of reorganisation in the Cayman Islands for the benefit of its creditors.  On the other hand, the Cayman court will be more likely to recognise foreign insolvency proceedings over a Cayman Islands company where the purpose is to facilitate a restructuring or otherwise avoid the need to wind up the company: [56].

30.The 3^rd and 4^th principles suggest that the Cayman court’s readiness to recognise a foreign insolvency processes may be limited to a foreign restructuring process.  With the limited exception discussed in Re China Solar Energy Holdings Ltd (No 2)[27] involving provisional liquidators appointed on conventional asset protection grounds being granted after appointment additional powers to restructure a company’s debt normally through a scheme of arrangement, there is no insolvency process in Hong Kong for reorganisation, to use the Chief Justice’s term.  Occasionally attempts at reorganisation are made after winding up has been ordered using a scheme of arrangement, but currently this is rare.  Either debt can be restructured before an order to wind up a company is made or liquidation takes place.  This is largely a consequence of nearly all restructuring in Hong Kong, which involves the court involving listed companies.  It was the practical imperative of restructuring listed companies out of provisional liquidation that drove the development of what is referred to as the “Z-Obee”[28] technique.

31.A reluctance on the part of an offshore jurisdiction to recognise a Hong Kong winding up order if the company is in local soft-touch provisional liquidation might, depending on the circumstances, seriously impede a Hong Kong liquidation of a company, which sits, as is common, at the apex of a group, whose principal assets and operations are in the Mainland and owned by Mainland subsidiaries, which are in turn owned by intermediate subsidiaries incorporated in other offshore jurisdictions.  A common structure is a Cayman incorporated holding company, which owns intermediate subsidiaries incorporated in the British Virgin Islands, which own the Mainland subsidiaries.  As I discuss in detail in China Huiyuan [29], 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.  If this is a material consideration it would normally be appropriate for the place of incorporation to be the primary insolvency jurisdiction.

32.Another consideration is the principles of comity. Generally, the courts of Hong Kong are slow to ignore the express requests of other courts particularly in the present context a request from the court of the jurisdiction of the company’s incorporation.  It is but one factor to which regard is to be had.  It is, however, a weighty one, which requires careful scrutiny of the reasons advanced by a party asking the Hong Kong court not to comply with a request.

33.It was also submitted by Ms Cheung that the Petitioner cannot sensibly argue that there is something unfair to the Petitioner in restricting her right to wind up the Company in Hong Kong, because she must be taken to have understood that she was investing in a foreign company.  As the Privy Council pointed out in [43] of Stichting Shell [30], where an   anti-suit injunction was granted against a creditor seeking via Dutch proceedings to attach the assets of a company that had gone into liquidation in its place of incorporation (namely the BVI) thereby obtaining prior access to the insolvent estate, there was “nothing to suggest that allowing Shell an advantage over other comparable claimants would be consistent with the ends of justice.  Nor, in the circumstances, should Shell find this surprising.  It invested in a company incorporated in the British Virgin Islands and must, as a reasonable investor, have expected that if that company became insolvent it would be wound up under the law of that jurisdiction.”

34.I accept that it is not sufficient for the Petitioner to object that it is unfair for her to have to pursue recovery of the debt through a winding up in the Company’s place of incorporation. Conversely, if the three core requirements are satisfied it is not in my view sufficient for the Company simply to point to insolvency proceedings commenced sometime after the Hong Kong Petition was presented in its place of incorporation and request in the face of objection from local creditors this court simply to defer to that of its place of incorporation.  It seems to me unrealistic to expect the court not to have regard to the fact that companies such as the present conduct businesses in the People’s Republic of China which commonly is also the location of a high proportion of their shareholders, creditors and assets.  What appears to have happened over the course of the last 20 years or so is that many Mainland businesses have been permitted to list in Hong Kong using corporate vehicles incorporated in jurisdictions which have no connection with either Hong Kong or the Mainland.  Little regard appears to have been had by the SEHK or the regulators to the jurisdictional problems that this might cause in the event of a company running into financial problems.  It might also be thought surprising that the Mainland regulators have been willing to allow Mainland business groups to list using offshore incorporated companies rather than Hong Kong ones thus potentially ceding judicial supervision at the holding company level to a jurisdiction outside Hong Kong.  The increasing number of problems with which the court is having to deal arising from what appears to be a poorly considered acceptance of the use of holding companies incorporated in offshore jurisdiction justifies consideration being given to whether changes are required.

How a dispute over which jurisdiction is to be the primary one to conduct an insolvency process is to be resolved

35.The principles that emerge from the authorities that I have considered, which explore and identify the common law principles that guide the court in determining how to deal with the types of issues that arise in cross-border insolvency do not point clearly to how the court should resolve the present dispute.  However, I would suggest that they do support the following approach to its determination:

(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.

36.Ultimately, this means that which insolvency process should be given primacy will depend on the circumstances of the case and involve giving appropriate weight to the location of a company’s COMI.  In my view, acknowledging that the place of incorporation is not necessarily determinative is more consistent with both commercial practice and the common factual matrix, which commonly connect a company far more closely with Hong Kong than an offshore jurisdiction.

37.The views of creditors are also a major consideration. In the present case the dispute is about whether or not the Company should be wound up immediately or the Petition adjourned in order to allow the JPLs time to attempt a restructuring of the Company.  It has not been argued that if the Company is to be wound up, this should take place in Bermuda and liquidators appointed in Bermuda recognised in Hong Kong in order that they can carry out the liquidation in Hong Kong.

38.The principles that guide the court when determining whether or not to accede to an application for an adjournment to permit a company to progress a restructuring are explained by me in [50]–[51] of China Huiyuan [31].

“50. As the New Zealand Court of Appeal has recently observed ‘Insolvency law is a mix of principle and pragmatism. The [insolvency legislation] is to be used in a practical way. It does not require liquidation when that will not serve any useful purpose’[32]. The way in which the courts assess applications by financially distressed companies that seek adjournments of petitions reflects this.

‘When the court considers the possibility of benefit resulting from an order, the normal starting point is to consider any possible benefit to the petitioner, whether it be a debtor or a creditor. In many cases, showing benefit to the petitioner will be sufficient to persuade the court to make the order… I do not see why a consideration of benefit should be restricted to the possibility of benefit to the petitioner; benefit to others should also be relevant. Conversely, disadvantages or unfairness to others may also be relevant. After all, the court is exercising a discretion and is surely required to consider the effect of the proposed order on all relevant persons. In such a case, as is normal, the court will consider the effect of making the order and the effect of not making the order and will then consider what to do, having regard to all relevant considerations, including the legitimate aspirations of all potentially affected persons.’[33] (emphasis added)

‘I accept that as a general proposition, in the absence of good discretionary grounds to the contrary, an applicant for winding up who has proved its debt and has proved insolvency ought to achieve a winding up order. However, … the discretion can be exercised in favour of granting a stay where the refusal of a stay would be likely to work a substantial injustice.’[34] (emphasis added)

51. I summarise how this balancing exercise is to be approached when, as in the present case, creditors take differing views about what is in their best interests in Re Chase On Development Ltd [35]:

‘In cases in which a company is clearly insolvent and a petitioner’s debt is not in dispute an important consideration, when a court it being asked to adjourn a petition by a Company in order to allow it to attempt to restructure its debt, are the views of its unsecured creditors.

If the creditors are taking different views the Court will normally take into account all the circumstances including the following considerations:

(a) A qualitative assessment of the number of creditors for and against a winding-up order. It is not just a matter of counting the number of creditors in favour and those against or the proportion of the value of the debt they hold.

(b) The reasons proferred by the supporting and opposing creditors.

(c) The feasibility of the proposed restructuring.’”

Application of the principles to the facts of this case

39.It is not disputed by the Company or the JPLs that the Company’s COMI has been located at all material times in Hong Kong.  Clearly, the Company has a close connection with Hong Kong and the People’s Republic of China more generally.  As I mention in [2]–[3] the Petitioner and nearly all the other creditors of the Company are Chinese nationals, who are resident in the Mainland.  The Petitioner has obtained affirmations from five creditors resident in the Mainland and one in Malaysia, who support the Petition. No creditor has appeared to oppose the Petition.  The Petitioner also obtained a report from an experienced insolvency practitioner, Yuen Tsz Chun, pointing out what Mr Yuen says are shortcomings in the current restructuring proposal and the JPLs’ evidence.

40.The evidence of the JPLs is contained in the affirmations of Wong Kwok Keung of RSM Corporate Advisory in Hong Kong dated 4 and 26 January 2021.  The first affirmation describes the financial state of the Company to the extent that the Liquidators can assess it from the limited financial information that they obtained at the time the first affirmation was made, which was limited.  It would appear the current management of the Company had not been able to obtain most of the books and records of the Company.  Mr Wong says that on the limited information that he has available that the JPLs’ estimate the return on a liquidation of 5.9 cents in the dollar.  He then goes onto to describe two terms sheets (the first dated 20 November 2020 and immediately replaced with a new one dated 27 November 2020, which was terminated on 9 December 2020) and memorandum of understanding dated 12 December 2020 with potential investors.  These are short and vague.  Mr Wong’s 2^nd affirmation takes issue with some of Mr Yuen’s criticism and adds nothing to the evidence concerning a restructuring.

41.I do not consider it necessary to comment in any greater detail on Mr Wong’s evidence.  What appears to have happened is that sometime after the Petition was presented in Hong Kong, the Company came into contact with RSM and the possibility of avoiding a winding up in Hong Kong was discussed.  This resulted in the presentation of a petition in Bermuda on 30 October 2020 and an application on the same day to appoint soft-touch provisional liquidators, which was granted on 10 November 2020.  This resulted in evidence being filed by a director of the Company dated 16 November 2020 seeking an adjournment of the Hong Kong Petition at its first hearing before me on 23 November 2020 on the grounds that the JPLs had been appointed.  At that hearing I ordered that both the application for recognition and assistance that I was told would be forthcoming, and the Petition be listed for hearing on 28 January 2021.  The more substantial evidence I have described was filed in the intervening period.

42.It does not seem to me that the Company has demonstrated a good reason to adjourn the Petition.  The information about the restructuring is scanty in the extreme.  The evidence that was filed by a director of the Company for the purposes of the application to appoint soft touch provisional liquidators in Bermuda refers in [94]–[101] to a restructuring proposal contained in a term sheet dated the 10 June 2020. The information about the restructuring was sparse and the term sheet was promptly terminated and replaced with the November terms sheets to which I have referred, which were also promptly terminated.  The evidence does not suggest that at the time of the appointment of soft-touch provisional liquidators the Company had, or has now, a credible plan to restructure its debt.  It looks considerably more likely that the application in Bermuda was an attempt to engineer a de facto moratorium, which could not be obtained under Hong Kong law, with a view to then searching for a solution to the Company’s financial problems.  Viewed from a Hong Kong perspective this is a questionable use of soft-touch provisional liquidation and one, which will encourage the court to view with care similar applications for recognition in the future.  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.

43.The Petitioner and the other creditors who support a winding up are quite understandably sceptical of the prospects of the Company’s unimpressive attempts at restructuring being successful.  The court will normally defer to the creditors on matters of commercial judgment unless there is a difference between them, which requires determination.  In the present case I can see no good reason not to defer to their views.

44.In conclusion it seems to me 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 because of factors such as those discussed in [31]. Essentially the contest in the present case would appear to be between some of the shareholders and the creditors.  I can see nothing in the principles that I have discussed or the facts of the present case, which necessitate or justify refusing to grant the order that the Petitioner seeks.  I will, therefore, making the normal winding up order.  I shall adjourn the application for recognition and assistance in order that the JPLs can consider how it should be dealt with in the light of my decision.

Mr Leung Sze Lum, instructed by Au Yeung, Cheng, Ho & Tin, for the petitioner

Ms Elizabeth Cheung, instructed by Wilkinson & Grist, for the respondent

Mr Michael Lok and Ms Sharon Yuen, instructed by Chungs Lawyers, for the joint provisional liquidators

The attendance of the Official Received was excused