Since the landmark decision in Lamtex[1]early last year in Hong Kong, there has been a flurry of Hong Kong cases in which the Hong Kong Court has wound up a debtor company (incorporated offshore), despite “light-touch” provisional liquidators being appointed to those companies for restructuring purposes in the place of incorporation.
Until Lamtex, the position in Hong Kong (at least for the last 10 years or so) was largely (but not entirely) one of deference to the place of a company’s incorporation and to recognise and assist provisional liquidators appointed in those jurisdictions to try to facilitate the restructuring of those companies.
In Lamtex, and the cases that followed in Hong Kong[2], the Companies Court shifted its focus from place of incorporation to the location of a company’s centre of main interests (COMI) in determining the insolvency process that should be given primacy. In doing so, it has also limited the circumstances in which it will grant (and in some instances has refused to grant) recognition and assistance to “light-touch” provisional liquidators, particularly where the appointment is being used in what Justice Harris has described as “letterbox” jurisdictions as a tactic to oppose a Hong Kong winding up petition.
The main concerns identified by Justice Harris in these decisions can be summarised as follows: (i) if the company’s COMI is somewhere other than the place of incorporation, regard is to be had to other factors to determine which jurisdiction should be the primary one to conduct an insolvency process, including creditors’ views; (ii) a Company should have a credible plan to restructure its debt if an adjournment to a winding up petition presented in Hong Kong is to be considered; and (iii) the Company should have creditor support for any proposed restructuring.
The Cayman Court recently considered these issues in the decision of Silver Base Group Holdings[3], wherein Justice Doyle emphasised the importance of the laws of a company’s place of incorporation on all matters concerning the company’s existence and the international recognition of light-touch provisional liquidators appointed by the Cayman Court for restructuring purposes. Justice Doyle said he endeavoured to communicate his message about similar cases with connections in both jurisdictions to the Hong Kong Court through the judgment.
Silver Base
Silver Base Group Holdings Limited (the “Company”) is an investment holding company incorporated under the laws of the Cayman Islands. Its shares are listed on the Hong Kong Stock Exchange and its main business (the distribution of liquor and cigarette products) is conducted through its subsidiaries in Hong Kong and elsewhere within the People’s Republic of China.
Throughout 2021, several of the Company’s bondholders made demands against the Company seeking repayment of outstanding bonds the Company had issued. In October 2021, two winding up petitions were filed against the Company with the Hong Kong Court relating to the unpaid bonds (the “Hong Kong Proceedings”). The Company then presented a petition for its own winding up to the Cayman Court on 17 November 2021 in circumstances where, inter alia, it accepted that the amounts owed to various of its bondholders were due and owing and the Company was currently unable to pay these (and other) debts. On the same day, the Company filed with the Cayman Court an application for the appointment of joint provisional liquidators for restructuring purposes (the “PL Application”).
The Cayman Court initially adjourned the petition and PL Application due to a concern over the lack of notice to creditors and comity concerns in respect of the Hong Kong Proceedings. In particular:
- With respect to notice to creditors, although Justice Doyle accepted the PL Application could be made “ex-parte”, he noted that the developing case law stresses the importance of the court taking into account the position of creditors when a company is in the zone of insolvency. He was of the view that creditors should be given more time within which to communicate their views and that the Company should positively and constructively engage with all creditors with respect to the petition and PL Application (including as to whether they supported, opposed or took a neutral stance with respect to the Company’s application to appoint provisional liquidators for restructuring purposes); and
- With respect to comity, Justice Doyle confirmed that he would be reluctant to in effect stay the Hong Kong Proceedings without further detailed consideration.
The petition and PL Application were therefore adjourned in order for creditors to receive notice of the adjourned hearing and to permit the Company to file additional evidence to provide an update on the Hong Kong Proceedings and provide further details in relation to the Company’s proposed restructuring plan.
Appointment of “light-touch” provisional liquidators
At the adjourned hearing, the Cayman Court appointed “light-touch” provisional liquidators for restructuring purposes notwithstanding the extant winding up proceedings before the Hong Kong Court. However, it did not do so without specifically noting and considering the concerns of Justice Harris expressed in the various Hong Kong decisions before making the appointment order. In particular, Justice Doyle was of the view that the concerns had been addressed in circumstances where:
- creditors were given an opportunity to be heard;
- an order was made that the documents filed in the Cayman proceedings be filed with the Hong Kong Court;
- the Board of the Company had taken professional advice and sought the assistance of experts;
- there was a plan and information had been provided about the past and potential future of the Company and an order was made to report to the Cayman Court on the feasibility of the restructuring;
- the Board were well aware that as the Company has entered into the zone of insolvency focus moves to the best interests of the creditors; and
- the joint provisional liquidators would be able to consult with the creditors and endeavour to take matters forward in their best interests.
The appointment order was also modified such that the Hong Kong Proceedings were specifically carved out of the statutory moratorium. Justice Doyle said:
The appointment will not stop the winding up proceedings in Hong Kong if the Hong Kong Court decides not to recognise the statutory moratorium in respect of any proceedings in Hong Kong. It will, of course, be entirely a matter for the Hong Kong Court as to what order it makes in respect of any active proceedings before it involving the Company. Looking at the matter through Cayman Islands’ eyes, in the judgment of this court, it would be sensible and appropriate for the Hong Kong Court to recognise and give assistance to the [joint provisional liquidators] which this court has appointed over a company incorporated under the laws of the Cayman Islands.
Far from being a “letterbox” jurisdiction, Justice Doyle observed that the Cayman Islands was plainly a jurisdiction of substance which legitimately facilitates world trade and develops the common law to the great economic benefit of many jurisdictions worldwide. He further noted the importance, in international insolvency cases, of respecting and having full regard to the laws of a company’s place of incorporation.
Justice Doyle went on to say that it may be that in the future a detailed protocol can be arrived at for appropriate communications between the Cayman and Hong Kong courts when dealing with similar cases involving companies with connections to both jurisdictions, but for the moment he endeavoured to communicate his messages to the Hong Kong Court through the judgment. Whilst not referred to by Justice Doyle in his judgment, the foundation for such a protocol could be found in the Guidelines for Communication and Cooperation between Courts in Cross-Border Insolvency Matters, also known as the JIN Guidelines, which were established in 2016 to promote communication and cooperation amongst courts, insolvency representatives and other parties involved in cross-border insolvency proceedings, including the conduct of joint hearings, and adopted by sixteen jurisdictions including the Cayman Islands and Hong Kong.
Comment
The decision emphasises the importance of comity and cooperation between courts dealing with international insolvency cases, and in particular, between the Cayman Islands and Hong Kong. Indeed, the courts of both jurisdictions have a long and successful track record of cooperation, and have overseen the successful restructuring of many companies.
Whilst the considerations for determining which insolvency process should be given primacy is currently different between the jurisdictions (i.e. place of incorporation vs COMI), the Silver Base decision will hopefully serve to alleviate some of the concerns identified by the Hong Kong Court in similar cases in the future and prevent the risk of a “light-touch” provisional liquidation route being used as a means to abuse the system and delay the inevitable winding up of offshore companies.
The decision is a useful reminder to companies that have a genuine desire to restructure to positively and constructively engage with their creditors and seek timely professional advice from experts when putting together realistic and viable restructuring proposals before seeking the appointment of light-touch provisional liquidators.
Where the Cayman Court appoints light-touch provisional liquidators (or restructuring officers)[4] in appropriate cases in the future, it is hoped the Hong Kong Court will respect and have regard to the importance of the place of incorporation and recognise and give assistance to those officers appointed for restructuring purposes for the reasons set out in the Silver Base decision.
[1] Re Lamtex Holdings Ltd [2021] HKCFI 622
[2] Re Ping An Securities Group (Holdings) Ltd [2021] HKCFI 651, Re China Bozza Development Holdings Limited [2021] HKCFI 1235, Victory City International Holdings Limited [2021] HKCFI 1370 and China Oil Gangran Energy Group Holdings Limited [2021] HKCFI 1592.
[3] Cause No. FSD 329 of 2021, Justice David Doyle, 8 December 2021
[4] An Act to amend the Companies Act (2021 Revision) to permit a company to restructure under the supervision of a “Restructuring Officer” was passed by parliament on 15 December 2021. Its enactment is subject to a commencement order which is expected by March 2022.
