Reorg Asia Highlights:
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The Hong Kong Court in its China Properties Group Limited, or CPG, decision ordered an ex-director of the Cayman Islands-incorporated company, which had been wound up in Hong Kong, to transfer control of the company's various BVI-incorporated subsidiaries to the Hong Kong liquidators, after the ex-director and others failed to cooperate;
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The ex-director has started proceedings in the BVI on the basis that that the Hong Kong liquidators’ attempt to replace them was invalid given the lack of recognition order from the BVI Court;
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The CPG decision declined to follow the Hong Kong Court’s previous thinking that a Hong Kong liquidator would be unable to take control of BVI incorporated subsidiaries, given a BVI Court would not recognize liquidators appointed in Hong Kong over a company incorporated in the Cayman Islands on the basis that it is a principle of BVI private international law that only a liquidator appointed by the court of the place of incorporation will be recognised and assisted;
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The Hong Kong Court found that given the shift to a center of main interests, or COMI, recognition regime in the jurisdiction, the common law in the area of cross-border insolvency contains “sufficient flexibility” to develop as to be consistent with commercial practice; and
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The Hong Kong Court was of the view that there was 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.
Relevant Documents:
China Property Group - Decision
Grand Peace Group Holdings Limited - Decision
Lamtex Holdings Limited - Decision
GTI Holdings Limited - Decision
The Hong Kong Court’s
decision in CPG looks to work around the difficulties often encountered by Hong Kong liquidators appointed over a Cayman incorporated holding company trying to take control of its British Virgin Islands intermediate subsidiaries, which form an integral part of the commonly used business group structure of the underlying mainland Chinese company.
The decision highlights the Hong Kong Court’s willingness to continue adopting a flexible and expansionist approach to insolvency related common law when trying to address impediments caused by cross-border recognition conflict between COMI and place of incorporation insolvency recognition regimes.
Recorder William Wong SC of the Hong Kong Court ordered an ex-director of Cayman Islands incorporated CPG to transfer control of the company's various BVI incorporated subsidiaries to the Hong Kong liquidators.
This order comes after the ex-director refused to execute resolutions transferring control of the BVI subsidiaries, despite the Registered Agent of the BVI subsidiaries updating the registers of the BVI subsidiaries by removing the ex-director and registering the liquidator’s representative as the sole director in his place.
The ex-director has commenced proceedings in the BVI Court. These have yet to begin and focus on contesting control over the BVI subsidiaries on the basis that the Hong Kong liquidators’ attempt to replace the ex-director was invalid, given the lack of formal recognition and assistance order from the BVI Court.
The decision is important. It goes to the utility of appointing Hong Kong liquidators over the offshore holdco of a mainland Chinese group utilizing the typical corporate structure involving BVI subsidiaries holding, via Hong Kong subsidiaries, mainland Chinese subsidiaries that ultimately own substantive assets.
It will be interesting to see the BVI Court’s view on Recorder William Wong SC's seemingly expansionist approach, especially given the Hong Kong Court’s previous position in
Re Grand Peace Group Holdings Limited, which has not been followed in the CPG decision.
In
Grand Peace Justice Harris didn’t think a Hong Kong liquidator would be able to take control of BVI incorporated subsidiaries, given that a BVI Court would not recognise liquidators appointed in Hong Kong over a company incorporated in the Cayman Islands.
This was on the basis that it
is a principle of BVI private international law that only a liquidator appointed by the court of the place of incorporation will be recognised and assisted.
Therefore, in
Grand Peace, Justice Harris noted that if “the BVI Registrar of companies was alerted to the fact that documents with which he had been presented had only been executed under the compulsion of an order made by a Hong Kong court on the application of a liquidator appointed in Hong Kong, the Registrar would refuse to effect the changes, because he might reasonably take the view that to do so would be substantively inconsistent with the principle of BVI law.” (emphasis added)
Justice Harris in
Grand Peace went further by acknowledging that “
[e]ven if the Registrar ignorant of the circumstances in which the documents came to be executed made the change presumably an application could be made to the BVI court by a disgruntled creditor or member for an order seeking rectification of the register and public records.” (emphasis added)
Justice Harris in
Grand Peace referred to his previous decision in
Re China Huiyuan Juice [2020] HKCFI 2940. See Reorg’s
legal analysis for further details.
In
China Huiyuan Justice Harris initially found, that in the context of a winding-up petition against Cayman incorporated China Huiyuan, the petitioning creditor had not demonstrated that there would be a benefit accorded to them if a winding-up order was granted against the company. This meant the Hong Kong court could not invoke its discretionary jurisdiction to wind up a foreign company.
Justice Harris found that the benefit requirement detailed above was not satisfied as a Hong Kong liquidator would be unable to take control of China Huiyuan’s BVI subsidiaries. These BVI subsidiaries held the group’s Mainland opcos, at which recovery value resided.
Justice Harris in
China Huiyuan referred to
GTI Holdings Limited FSD 102 2020, in which the Cayman Court highlighted in the context of a Cayman Islands incorporated company, a “
winding up order made by the Hong Kong Court would have limited effect on subsidiaries outside Hong Kong and that an order made by a court in the place of incorporation of the Company should be more effective internationally in accordance with well-established principles of private international law.” (emphasis added)
See Reorg’s
legal analysis on
GTI Holdings for further details.
The corporate structure fact pattern discussed by Justice Harris in
Grand Peace and
China Huiyuan matches that of CPG. However, Recorder William Wong SC, relying on Justice Harris’s commentary in
Re Lamtex Holdings Ltd., took the opposite position to
Grand Peace and
China Huiyuan, on the basis that:
- The Hong Kong Court should promote the effectiveness of its liquidations;
- It is not right that the liquidators should need to apply for fresh winding up orders to the BVI Courts;
- Given cross-border cooperation, the commercial practice and the corporate structure of listed companies in Hong Kong, it would not be cost effective that Hong Kong liquidators have to apply for a winding up order against the subject company in the place of incorporation and ask that court to appoint them (and a practitioner from that jurisdiction) to be liquidators; and
- In the area of cross-border insolvency the common law contains “sufficient flexibility” to develop so as to be consistent with commercial practice. This means that in addition to the spirit of comity and judicial cooperation in cross-border insolvency, nothing in principle prevents recognition of liquidators appointed in a company’s COMI or a jurisdiction with which it has a sufficiently strong connection to justify recognition.
Background
CPG is incorporated in the Cayman Islands and listed on the Hong Kong stock exchange. It is the holdco of various subsidiaries incorporated in the BVI, Hong Kong and the Mainland. The company’s COMI was found to be in Hong Kong and the court exercised its discretionary jurisdiction to wind up the Cayman company as a foreign company. The company did not contend the winding up.
The Registered Agent of the BVI subsidiaries agreed to the Hong Kong liquidators’ request and updated the registers of each of the BVI subsidiaries by removing the ex-director as the sole director and registering one of the liquidators as sole director in the ex-director’s place.
However, the Hong Kong liquidators were not able to get access to the books and records of the company and none of the directors had filed a statement of affairs. The ex-director refused to meet with the liquidators.
In addition to the Hong Kong liquidators having concern over this lack of cooperation, Hong Kong’s Official Receiver appeared before the Hong Kong Court and expressed “genuine concern that no progress has been made in relation to the present liquidation for about three months.”
To counteract the lack of cooperation, the liquidators took out an
inter-partes Hong Kong summons to give effect to the winding-up order. This sought orders against various directors and officers including the ex-director. The summons is returnable on Oct. 10.
The ex-director subsequently launched BVI proceedings. The ex-director is seeking declaratory relief that they are the sole director of the BVI subsidiaries and injunctive relief to restrain the Hong Kong liquidators from acting in contravention of the directors’ rights over the BVI subsidiaries, unless and until they have obtained orders of recognition and assistance from the BVI Courts. A hearing was set for Sept. 18.
If the ex-director is successful under the BVI Proceedings, they would have the power under Memorandum and Articles of Association of the BVI subsidiaries to appoint further directors to the BVI subsidiaries. This could make it challenging for the Hong Kong liquidators to take control of the BVI subsidiaries and their assets.
If this were to occur, according to Recorder William Wong SC, it could potentially render the Hong Kong hearing of the inter-partes summons “futile and nugatory.”
Therefore, the Hong Kong liquidators sought urgent assistance from the Hong Kong Court requesting interim relief. This relief included that the Hong Kong Court provide a mandatory order that the ex-director acknowledge, via ratification of written resolutions, their replacement by the liquidator as the sole director. The Hong Kong Court granted the order.
Hong Kong Court’s Thinking
The Hong Kong Court found that the ex-director was in the
in personam jurisdiction of Hong Kong Courts. It also found that the Court had a “duty to assist liquidators appointed by Hong Kong Courts to effectively and efficiently discharge their professional duties in the best interest of the general body of creditors[,]” Hong Kong appointed liquidators should be given “all statutory armory to facilitate an orderly, speedy and cost effective liquidation for the best interest of all stakeholders.”
Given this, Recorder William Wong SC was of the “firm view” that as a “matter of legal analysis and as matter of legal policy, there is no discernable reason as to why [the Hong Kong] Court should not render assistance to the Liquidators and direct the Respondent to sign the Resolutions so that they can get on with their jobs.”
Recorder William Wong SC noted that the case, which centered around the basic premise that once a company has been wound up its “directors’ powers would be taken over by the liquidators save and except a reserve power to conduct an appeal[,]” had nothing to do with recognition by courts of the place of incorporation, that being the BVI for the subsidiaries in question.
The Hong Kong Court thought that in the “spirit of comity and judicial cooperation in cross-border insolvency matters[,]” the BVI Court would “give assistance to liquidators appointed by the courts of a company’s COMI[,]” and would not “disturb the orders made by Hong Kong Courts to assist the Liquidators[.]” Especially as the Hong Kong winding up order had not been challenged.
Instead of following Justice Harris' position set out in
Grand Peace, the Hong Kong Court in CPG seems to have built on Justice Harris’ thinking in
Lamtex Holdings and moved further ahead.
Recorder William Wong SC, like Justice Harris in
Lamtex, was of the “view that the observations in
Re Grand Peace Group Holdings Ltd (supra) have to be
“analysed in view of the stage we have reached, at which this question needs to be reconsidered in favour of the view that the common law in this area contains sufficient flexibility to develop so as to be consistent with commercial practice.” (emphasis added)
In terms of that flexibility in common law, Recorder William Wong SC went on to note, seemingly rhetorically in reference to the BVI Court, that there was “
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.”
This is the opposite position taken by Justice Harris in
Grand Peace and
China Huiyuan and appears to cut across the Cayman Court’s position outlined in
GTI Holdings (discussed above).
Recorder William Wong SC also noted that, despite the ex-director being removed from the registers of each of the BVI subsidiaries he was still acting on behalf of the BVI subsidiaries to commence the BVI proceedings. This cut across the principle that the liquidators in control of China property Group could, with the company acting as the shareholder of the BVI subsidiaries, remove the directors of those BVI subsidiaries via shareholder resolutions.
The Hong Kong Court did not think that granting orders in favor of the Hong Kong liquidators usurped the BVI Court’s jurisdiction but that it would “not surprise” the Hong Kong Court if the ex-director sought “further declarations from the BVI Courts that the orders made by [the Hong Kong] Court are invalid and not binding on him unless there is a formal order of recognition of the Liquidators by the BVI Courts.”
In stating that that the Hong Kong Court should ensure it “discharges its own facilitative duties to promote the effectiveness and efficiency of liquidations” in Hong Kong and should not “pass on the burden to the BVI Courts”, Recorder William Wong SC noted that it would not be “right that the Liquidators should be ordered to apply for fresh winding up orders in the BVI Courts.”
This was on the basis that Recorder William Wong SC thought that in “these days of cross-border insolvency co-operation, in particular, in view of the commercial practice and the corporate structure of listed companies in Hong Kong, it will not be cost effective that, in every case, the liquidators have to apply for a winding up order against the subject company in the place of incorporation and ask that court to appoint them (and a practitioner from that jurisdiction) to be liquidators.”
Given this, Recorder William Wong SC was of the view that “judicial comity dictates that within the four corners of local laws, courts should offer mutual assistance to each other so that orders of courts (whether onshore or offshore) can be given their full effects in the best interest of cross-border liquidations[,]” and that given the
in personam jurisdiction over the ex-director it was right for the Hong Kong Court to make “suitable orders to both give effect to the liquidation and to assist the BVI Courts in resolving related litigation.”
Despite ordering the ex-director to sign the written resolution to cede control of the BVI subsidiaries to the Hong Kong liquidators, the Hong Kong Court declined to make an anti-suit injunction against the ex-director as “comity dictates that insofar as the BVI Proceedings are concerned, this Court will defer to the judgment of the BVI Courts.”
It will now be interesting to see how the BVI Court responds in the proceedings started by the ex-director.