An Uncertain Future? Assessing The Hong Kong Court's Reception Of Cayman Insolvency Proceedings

• Published date: 09 March 2023
• Subject Matter: Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Arbitration & Dispute Resolution
• Law Firm: Collas Crill
• Author: Ms Jennifer Colegate, Tom Wright and Stephen Leontsinis

There has been increasing debate among Cayman Islands attorneys and insolvency practitioners about the Hong Kong High Court's (HK Court) ongoing preference for a company's Centre of Main Interest (COMI) over its place of incorporation when assessing whether and to what extent it should recognise and assist foreign insolvency proceedings. Discussions have ensued on the effect that modified approach will have on the HK Court's recognition of and assistance to Cayman-appointed provisional liquidators and (more significantly for future proceedings) restructuring officers¹.

Several panel sessions at the American Bankruptcy Institute's (ABI) Caribbean Insolvency Symposium, hosted in Grand Cayman on 6 and 7 February 2023, raised the HK Court's approach as a point of interest. The approach had been brought into greater focus following comments made by Mr. Justice Harris during an International Insolvency Institute (III) podcast about a week before.

A jurisdiction choosing COMI over the place of incorporation when determining whether to recognise a foreign liquidator and to what extent it should be assisted, is not in itself controversial. It is the criterion employed by jurisdictions signed up to the UNCITRAL Model Law, which includes England and Wales.

However, two factors render the HK Court's repositioning especially relevant for Cayman Islands attorneys and insolvency practitioners.

Firstly, as at June 2022, more than half of the companies listed on the Hong Kong Stock Exchange - approximately 1,195 entities - are incorporated in the Cayman Islands. Even if a modest percentage of these need to restructure their financial obligations, this equates to a significant number of companies that may wish to impose an extraterritorial moratorium on claims being made against them by appointing light-touch provisional liquidators or (more likely) filing for the appointment of a restructuring officer. If the success of a restructuring requires the recognition and assistance of the HK Court, a shift to a COMI-based test, and a more limited approach by the HK Court to the assistance it will provide light-touch liquidators, both cast a degree of uncertainty over the cross-border implementation of that restructuring.

Secondly, it remains to be seen, hopefully in the not too distant future, what treatment a Cayman-appointed restructuring officer will receive from the HK Court in light of recent decisions and the views expressed by members of its judiciary.

The emergence of COMI - from Z-Obee to Global Brands

When considering the HK Court's current approach to recognising foreign insolvency proceedings commenced in the place of incorporation, there is a consistent point of principle which emerges from the recent decisions when the restructuring plans presented to the HK Court are considered through the lens of viability. The relative ubiquity of that point of principle in the decisions between Z-Obee and Global Brands should give Cayman attorneys and practitioners hope that the outlook is not as negative as they may have initially thought.

The journey begins with what some may, unfairly, now consider the original sin; the case of Re Z-Obee Holdings Limited², which bequeathed the "Z-Obee technique", whereby companies (invariably incorporated in the BVI, Cayman Islands or Bermuda) would appoint light-touch provisional liquidators in the place of incorporation, then seek recognition and assistance from the HK Court with a view to...