The Court may not exercise its statutory power to appoint soft-touch provisional liquidators, but the Court routinely exercises its common law power to recognise foreign soft-touch provisional liquidators. Is this common law development legitimate?
According to DHCJ William Wong SC in Re Joint Provisional Liquidators of Moody Technology Holdings Ltd [2020] HKCFI 416, the answer is a resounding ‘yes’.
This judgment provides the most detailed reasons yet reaffirming and explaining the soundness of Harris J’s practice in this area. The judgment also answers any concerns in relation to the Hong Kong recognition regime which may be raised based on the Court of Appeal’s decision in Re Legend International Resorts [2006] 2 HKLRD 192.
Legal backdrop
Legend held that the Court could not appoint provisional liquidators for the sole purpose of granting them restructuring powers.
Nevertheless, Harris J held in a number of cases (eg Re Joint Provisional Liquidators of Hsin Chong Group Holdings Ltd [2019] HKCFI 805) that the Court could recognise foreign soft-touch provisional liquidators for the sole purpose of granting them restructuring powers.
Indeed Harris J used this creative solution of recognition to facilitate the restructuring in Re Z-Obee Holdings Ltd [2018] 1 HKLRD 165.
One might doubt if this development of the recognition regime is legitimate in light of Legend.
In Moody, DHCJ William Wong SC concluded that any such doubt is unwarranted.
The facts and decision in Moody
The subject-matter company is a company registered in Bermuda and listed in Hong Kong. In October 2019, due to financial distress, the company went to provisional liquidation in Bermuda on a soft-touch basis in the sense that the provisional liquidators (“PLs”) were appointed for the purposes of restructuring only.
The PLs then applied for recognition and assistance in Hong Kong to progress their functions. The Court duly granted the recognition order, in line with the precedents set by Harris J. It was therefore a routine application followed by a conventional recognition order.
The Court’s reasoning in Moody
Granting a routine recognition application would not ordinarily merit a detailed judgment. Nevertheless, the Court saw fit to provide detailed reasons because the Court had in mind two matters pertinent to the development of the Hong Kong recognition regime, namely (i) the many recent cross-border insolvency developments in Hong Kong and elsewhere, and (ii) the increasing peculiarity of Legend in the common law world.
Thus the Court’s detailed reasoning takes note of the many international developments, clarifies the scope of Legend, and rationalises the Hong Kong recognition regime.
In brief, the Court reasoned as follows:
First, on a proper understanding of the notion of recognition, the fact that the Hong Kong Court may not appoint domestic soft-touch provisional liquidators cannot constitute a bar to recognising and assisting foreign soft-touch provisional liquidators. This is because foreign provisional liquidators recognised in Hong Kong will not be acting as, acting in the capacity of, or having the status of provisional liquidators appointed by the Hong Kong Court. This is supported by the English Court of Appeal decision in Candey Ltd v Crumpler [2020] EWCA Civ 26 where the English Court of Appeal held that foreign insolvency officeholders recognised by the English court under the British implementation of the UNCITRAL Model Law on Cross-Border Insolvency would not be acting as, acting in the capacity of, or having the status of English insolvency officeholders. The reasoning in Candey applies mutatis mutandis to the common law recognition regime.
Second, since the Hong Kong recognition regime subscribes to the notion of modified universalism, the Court approved the proposition that the logical conclusion of universalism is that “recognition may be given even though there does not exist under local insolvency law a procedure equivalent to the foreign insolvency proceeding” (Look Chan Ho, Cross-Border Insolvency: Principles and Practice (Sweet & Maxwell, 2016), p. 142).
This proposition finds support in the Jersey decision in Tacon v Nautilus Trust Company Limited [2007] JRC 107 and the English decision in Banque Indosuez SA v Ferromet Resources Inc [1993] BCLC 112. In Tacon, the Jersey court recognised a provisional liquidator appointed by the BVI court even though Jersey law did not have a provisional liquidation procedure. In Banque Indosuez, the English court was prepared to assist the operation of Chapter 11 proceedings even though English law did not have a debtor-in-possession regime.
Third, as soft-touch provisional liquidation and Hong Kong provisional liquidation differ only on the scope of the provisional liquidators’ powers, they differ only in degree, not in kind. Both are species of collective insolvency proceedings. Refusing to recognise foreign soft-touch provisional liquidation on the basis that Hong Kong domestic law does not have soft-touch provisional liquidation will create discriminatory consequences:
“This is demonstrated in Re Joint Liquidators of Supreme Tycoon Ltd [2018] HKCFI 277; [2018] 1 HKLRD 1120 which held that a BVI voluntary liquidation is eligible for recognition in Hong Kong. In the course of his Lordship’s reasoning, Harris J. (at §16) approved the following proposition in Look Chan Ho, Cross-Border Insolvency: Principles and Practice (Sweet & Maxwell, 2016), p. 230:
“It is suggested that the discrimination against non-court appointed officeholders is unhelpful. Insolvency representatives may be officers of the court without court appointment and they need the same information for the performance of their functions as their court-appointed counterparts.”
In other words, Supreme Tycoon stands for the proposition that, in determining whether recognition and assistance should be granted to foreign officeholders, Hong Kong Courts would not countenance any discrimination based on the mode of their appointment abroad. Just as it would be wrong to discriminate against foreign officeholders appointed out-of-court, so it would be wrong to discriminate against foreign provisional liquidators appointed on a soft-touch basis.”
Fourth, in recognising foreign provisional liquidators appointed in the company’s country of incorporation and granting them restructuring powers, the Hong Kong Court is merely recognising the provisional liquidators’ status as agents of the company, and giving effect to their management and governance powers under the law of the company’s incorporation. This is orthodox and in accordance with well-established principles of private international law.
Therefore, recognising and assisting foreign soft-touch provisional liquidators are fully consistent with Hong Kong domestic insolvency law, private international law and cross-border insolvency policy.
Commentary
Many an applicant issuing a standard recognition application may take for granted the recognition practice developed by Harris J and no longer be concerned about its underlying premise. The Court’s detailed and extensive reasoning in the present case is therefore a most welcome reaffirmation that the recognition regime developed by Harris J is intellectually sound, pragmatic, and makes perfect policy sense.
In a way, this decision is yet another clarion call for urgent insolvency reform in Hong Kong. It is as much astonishing as it is disquieting that Hong Kong-run companies often need to leverage offshore regimes to conduct debt restructuring in Hong Kong.
Terrence Tai acted for the applicants
Look-Chan Ho authored this Case Report
